Indian Manufacturing: Getting to 25 Percent

Financial Express, May 16, 2013

Indian Manufacturing: Getting to 25 Percent


India’s manufacturing sector has played an unusual role in the national growth experience, compared to many other developing countries. In 1950-51, manufacturing was about 9% of GDP. By 1979-80, this ratio came very close to 15%, but thereafter has barely increased. In this context, the National Manufacturing Policy’s (NMP) goal of increasing manufacturing’s share to 25% by 2022 is ambitious indeed. 

One of the motivations for focusing on manufacturing growth is, of course, its potential to generate employment for the unskilled or semi-skilled. South Korea provides a striking example, having increased the manufacturing sector’s share of employment from 1.5% in 1960 to 26.9% in 1990. The NMP states, in fact, that “over the next decade, India has to create gainful employment opportunities for a large section of its population, with varying degrees of skills and qualifications. This will entail creation of 220 million jobs by 2025 in order to reap the demographic dividend.” 

Recent assessments about achieving this goal are pessimistic. The Economist magazine titles its article on the subject with “What a waste: How India is throwing away the world’s biggest economic opportunity.” This article goes on to list the well-known case for reforms in labour markets, infrastructure, education and governance, and there is no need to go over them here. With respect to manufacturing, it is also helpful to understand the state of play at the ground level. 

In 2002, Pankaj Chandra and Trilochan Sastry summarised the findings of the previous year’s National Manufacturing Survey (NMS), which focused on the organised manufacturing sector, representing less than 1% of the country’s firms at the time, but employing 19% of its industrial workers and contributing almost 75% of gross value added. They concluded, “Manufacturing strategy of most firms is still not addressing certain fundamental issues of competition: need to change product mix rapidly, need to introduce new products based on indigenous R&D, need to use process innovation and quality improvement process to reduce cost of operations and consequently price of product.” They also noted the lack of spending on R&D, and the relatively small numbers of employees with advanced degrees, as well as pervasive supply chain weaknesses. 

In 2009, Pankaj Chandra analysed the next NMS, which was conducted in 2007. Supply chain management remained a key weakness in the later survey, and investments in R&D remained low, despite perceptible benefits to innovation. The firms surveyed indicated a focus on quality, and of trying to achieve that through process improvement, but large scale and low cost were not major goals of the surveyed managers. Chandra’s report also argued that management weaknesses contributed to lack of innovation, as well as to inefficiencies in plant location and supply chains. 

My own reading of the evidence presented suggested that there was under-investment in both physical and human capital, reflecting high financial costs as well as an unfriendly policy environment. At the same time, Indian manufacturing firms were able to make strong profits in this period, despite their inefficiencies, suggesting a lack of adequate competition in manufacturing. In other words, a lack of competitiveness was partly traceable to a lack of competition. 

A 2010 joint study by the National Manufacturing Competitiveness Council (NMCC) and the National Association of Software and Services Companies (NASSCOM) focused more specifically on information technology use, but it made several similar points as the two NMS studies, with newer survey data to back them up. It concluded, “ICT adoption levels in manufacturing firms were primarily influenced by their management team. More than three-fourth of the companies especially in the micro and small firms category are strongly influenced by the owner/management team for their ICT investments.” 

All of these analyses point to a somewhat neglected aspect of the deficiencies of Indian manufacturing, namely the lack of adequate specific human capital in management. The NMCC-NASSCOM report focuses on increasing IT adoption in Indian manufacturing, but its general recommendations for a systemic approach are more generally applicable. The key is broad participation from many parts of the business ecosystem. The report emphasizes the potential role that can be played by national and local industry associations in developing best-practice business process re-engineering guidelines to cope with the organisational changes that are often needed to benefit from investment in innovations. Human capital development to overcome lack of appropriate skills can be addressed through improving the quality of government provided training programs, and tax incentives for firms to spend on this training. In fact, the latter approach of incentivising the private sector might be the most efficient. 

The bottom line is that creating employment requires having enough people with the skills to manage employees in situations of competition and innovation. There are many larger issues of economic reform, across the board, which affect productivity and employment. Indian managers operate in a difficult environment. It is a long haul to change that environment, but a more immediate impact may come from promoting managerial skill development.