Panel discussions

Reviving the Manufacturing Sector

Read Time:13 Minute

Every time there is a talk of boosting the nation’s economy, the contribution of the Manufacturing sector gets an undeniable mention and for right reasons. However, the idea of manufacturing has changed over the past decades. These were also the decades when the nation shifted gears, moving away from manufacturing to the multi-disciplined Services sector, starting from IT/ITES to hospital, hospitality and much more, as the mainstay of economic recovery in the Reforms era. What does manufacturing entail now?

We need to move at a transformational growth pace

Mr Sanjeet Singh

IRS, Senior Adviser, Trade & Commerce Economics Finance & Disinvestment, G- 20 Coordination (NITI Aayog)

Manufacturing in India is not only a necessity but also provides a golden opportunity for the country to emerge as a manufacturing powerhouse. We are incredibly fortunate to be in the Amrit Kal, the golden period leading up to the 100th anniversary of India’s independence. A recent study on the multidimensional Poverty Index has revealed that 13.5 crore people have emerged from extreme poverty. Through the provision of drinking water, housing, sanitation, and healthcare facilities, we have overcome the challenges of the past century. Now, we are looking at the challenges of this century and beyond, on a global scale. How can India emerge as a manufacturing powerhouse?

Managing the Skewedness: In the past three decades, we saw a revolution in the services sector, which propelled the country’s growth. Many economists contend that India has progressed from agriculture to services and somehow bypassed the manufacturing phase. This assertion is supported by numbers too. As of 2022, the services sector contributes 55% to our GDP, while the manufacturing sector contributes only 17%. This skewedness was brought into sharp focus when we were hit by the pandemic. The services sector was the very first to be affected, leading to shutdowns and remote work arrangements. Productivity plummeted, particularly in hospitality and travel services. This situation made us realise the necessity of strengthening India’s manufacturing base, all the more.

Securing Jobs: Today, manufacturing contributes around $0.5 trillion, approximately 17% of the GDP. The target we should strive for is $4.5 trillion, equivalent to 22% of the GDP, by 2047. Achieving this goal entails a series of essential steps. If we are to ensure jobs for our people, the manufacturing sector must grow. With a working population of 800 million people, India is projected to add 200 to 250 million people by 2047. While the manufacturing sector currently employs about 50 million people, achieving the $4.5 trillion manufacturing target by 2047 would require an employment potential of 90 million in the manufacturing sector alone. Hence, India must transform into a manufacturing powerhouse.

Bridging the Trade Gap: India’s trade gap has expanded significantly post-pandemic. One primary factor is petroleum products, as India does not produce enough petroleum domestically. Moreover, with the expansion of the Indian economy, a huge consumer boom happened. People needed more televisions, refrigerators, and washing machines. As we did not have sufficient manufacturing capacity, we had to import them, leading to an increase in import bills. Therefore, the manufacturing sector plays a pivotal role in addressing the persistent trade deficit. Achieving self-sufficiency, especially in critical sectors, is crucial.

Electronics constitute a major import category for India. The call for Atmanirbhar Bharat (self-reliant India) by the Prime Minister is not only timely, but also essential. Measures like GST and the production linked incentive (PLI) scheme, which are focused on 14 critical manufacturing sectors, have been implemented to enhance the ease of doing business. Incentives totalling $26 billion have been announced for these sectors, and the results will be seen over the next five to six years.

Focus on Core Areas and 4Ds: India should concentrate on its core strengths in manufacturing, specifically pharmaceuticals, textiles, chemicals, and automation. We must upskill and enable these industries to go big.  Challenges related to infrastructure and large-scale export policies need to be addressed. Additionally, emerging areas should not be ignored.

A report from one of the renowned consulting firms highlights that four Ds—demographics, decarbonisation, decoupling, and deglobalisation—will drive India’s growth in the future. Decarbonisation and digitization present substantial opportunities. The shift toward green manufacturing processes opens up numerous possibilities. We have already made ambitious commitments in our Nationally Determined Contributions (NDCs) toward COP 26 and 27. We have allocated Rs 19,500 crore for green hydrogen mission. Solar and other renewable sectors also offer significant opportunities for the manufacturing industry.

Need for Manufacturing Stack: As the world moves toward greater connectivity, India should seize opportunities in areas like aerospace and high-tech semiconductors. Integration with global supply chains, technology transfers, and increased in-house R&D investments are necessary. Our focus on Free Trade Agreements (FTAs) is a pivotal part of India’s growth story. We need to move at a transformational growth pace and not at business-as-usual pace.

Similar to the digital stack, can we envision a manufacturing stack? Establishing smart industrial clusters and interconnected factories can yield high productivity assets with end-to-end value chains and real-time tech-enabled interventions. These factors can substantially differentiate our manufacturing processes.

All these call for skill enhancement. Government schemes for skilling, reskilling, and upskilling have been introduced, but private sector involvement is equally vital, just like we saw in the IT revolution.

Logistics: We cannot discuss manufacturing without addressing logistics.  India’s logistic costs in double digits erode industry profitability, efficiency, and productivity. The Prime Minister’s initiative to reduce logistics costs to below 10% (our target is 8%) is commendable. The Gati Shakti initiative, another flagship program, is designed to propel the advancement of India’s manufacturing sector.

ESG Opportunities: ESG sector also holds many opportunities for our manufacturing. Our predecessors and other economies have made the mistakes of polluting the environment while they developed. India doesn’t have to do that. India has committed itself to the green pathways of development. We can now become an example for the world in ESG practices like adopting green bonds and water neutrality. We must take Corporate Social Responsibility in true spirit and create a safe and healthy workplace which protects all stakeholders’ interests. India can become a model for most of the global South, while showing the light to the global North.

Taking companies moving out of China lightly would be a mistake

Mr. A Viswanathan

President, Delphi TVS Technologies Ltd 

The topic for discussion is reviving the manufacturing sector. In the last two decades, manufacturing has consistently ranged from 13% to 17% of GDP. So, I would like to focus on revving up the manufacturing sector, aiming to accelerate it to even greater heights.

Capitalize now: Thanks to the geopolitical situation, we find ourselves in a unique position to leverage the current environment. However, many experts feel that this window may not remain open for too long. We need to quickly capitalize on the significant opportunity before us, without assuming that everything will naturally come to India. We face competition from countries in Asia, Mexico, and Eastern Europe for the opportunities emerging from China’s shifting landscape. Taking companies moving out of China lightly would be a mistake, as many are rapidly establishing their presence in various countries.

Learning from other sectors: First and foremost, we must explore how we can manufacture and export more value-added products. Certain sectors are successfully exporting a substantial number of value-added products, and we can apply lessons from these sectors. I’m well-acquainted with the auto components sector, which stands out as one of the export stars among all sectors. We export 25% of our production, primarily to advanced regions like Europe and North America, serving demanding Original Equipment Manufacturers (OEMs) with top-notch quality. This journey has spanned the last two decades for the auto components sector.

An influential factor that propelled the auto sector was the collaboration between the Auto Component Manufacturers Association, leading auto component units, and OEMs. This entire ecosystem dedicated considerable time to this endeavour. They enlisted Japanese experts in lean manufacturing and Total Quality Management (TQM) to educate our employees and workers on the latest and best manufacturing practices. This transformation greatly enhanced the sector’s competitiveness. We must extrapolate insights from the auto components sector and apply them across other sectors.

During my recent visit to Israel, I observed the close collaboration between academia, industry, and the government in driving innovation. Israel, though small in size, excels in producing some of the best technologies. While they don’t manufacture cars in Israel, they are at the forefront of cutting-edge technologies in the automotive sector. If they can achieve it, so can India.

Activating Overseas Missions: Whenever we announce capital investments through press releases, a dozen overseas embassies contact us to inquire about the equipment we intend to purchase and how companies in their respective countries can collaborate with us. Similarly, I believe Indian missions abroad can play a more proactive role in promoting Indian exports.

Anti-Dumping: Significant dumping occurs across various sectors by Chinese companies. In India, we must furnish sufficient information to the government to support anti-dumping measures. The European Union has recently altered its approach. Upon receiving preliminary information, the burden of proof now shifts to the exporting company. Chinese exporters must now substantiate that their actions do not amount to dumping.

A universal solution doesn’t apply to every sector. We must approach each sector individually, examining its specific challenges and opportunities, to facilitate its growth.

The government deserves recognition for its efforts over the past five to ten years in improving the ease of doing business. However, work remains to be done in areas such as environmental clearances and the Factories Inspectorate. Addressing these aspects will further enhance the ease of doing business.

The prime thrust area for us should be the Total Factor Productivity

Mr Easwaran Subramanian

Partner, Deloitte Touche Tohmatsu India Pvt Ltd

The intriguing aspect of the manufacturing sector is its 3x multiplier impact. If anyone invests 100 crores, it potentially generates downstream investments across all elements of the value chain, amounting to approximately 300 crores. This sector has the capability to create both economies of scale and economies of scope. All other sectors create only one of these, either scale or scope.

Total Factor Productivity: The prime thrust area for us should be the Total Factor Productivity, currently ranging from 2 to 2.5%. In contrast, China’s rate is double this figure. Total factor productivity can enable us to leverage the dimensions of digital maturity present in India. One must make a visit to the US to appreciate how digitally mature we are! Total factor productivity encompasses not only labour but also all assets and resources at our disposal.

Our government aspires for our Global Value Chain (GVC) participation to reach 10%. At present, we stand at just one-fifth of that from a trade perspective. A higher target implies heightened competitiveness on the global stage. Simultaneously, this approach provides us with the benefits of interacting with global customers and gaining deeper insights into their needs. It’s not merely about internal efficiencies but also about learning from the best in the market.

Look end-to-end: Often, we fail to examine matters from an end-to-end value chain perspective. For instance, we think that semiconductors are entirely new to us. But a closer look reveals that nearly every global semiconductor company maintains an R&D center in India, employing thousands of people. Every Indian software services company plays a role in the value chain. In essence, we possess the entire ecosystem in several critical dimensions of the value chain. Our next step is to extend this influence further downstream. Our policies are conducive to this progression. Our companies must shift their focus towards end-to-end solutions instead of niche products and innovations.

A change in mindset is also needed. While the government has undertaken numerous actions, it’s equally crucial that the broader industry ecosystem comes together, similar to what the automotive sector has accomplished. Industries must involve themselves in the complete value chain. Every sector must consider the end-to-end value chain and derive benefits accordingly.

Q&A Session

How do you rate the competitiveness of Indian companies compared to the rest of the world over the last few years?

Sanjeet Singh: Let me put it differently. When we seek greater market access through RFPs and consult the industry, the first reaction we often encounter is, “Don’t do it. There’s no need for this agreement.” The second reaction is, “Don’t allow foreign players in.” Of course, there are a few aggressive players who encourage competition and market access for others, but this third category remains small. How can we find a way out of this? Is it a matter of changing our mindset? Is there over-dependence on government support across sectors? We’re reaching out to trading partners like UAE, Australia, Japan, Korea, and G7 nations. The government’s goal is clear: aggressive engagement. We want industries and associations to share technical or other barriers they face and how we can assist them.

Regarding engagement with our overseas missions, our Prime Minister has given clear directives that they should proactively seek opportunities and convey them down the line.

Our import duties are lower than in many advanced manufacturing countries. If duties are rationalised, won’t this significantly boost local manufacturing?

Sanjeet   Singh: I’m unsure which specific sectors you refer to. However, we receive inputs from a diverse range of people. Some want reduced duties, while others favour increased duties. For instance, take the steel sector. When a steel export duty was imposed, many sectors immediately requested its removal, claiming it was too high. However, MSMEs urged against its removal. We must discern whether we discuss a manufacturing intermediate product or a final product. What’s the volume of import and export? How much value addition is involved? The government will evaluate these aspects. I fully agree that transparency and uniformity in approach are crucial—whether to retain, increase, or decrease duties.

What support, do you think, MSMEs need?

Viswanathan: MSMEs require two things. First, expert inputs and association support. In the automobile sector, we supported MSMEs through capability enhancement programs. Over time, they’ve scaled up. Second, they need help with capital funding, which remains a major concern for many MSMEs.

Easwaran Subramanian: The PLI benefits large companies but has a multiplier effect on MSMEs. Large companies can align with MSME clusters, irrespective of the sector they are in.

When discussing PLIs, are we violating WTO rules?

Sanjeet Singh: No, PLI was designed to be WTO compliant, and it is. It would only violate WTO rules if we stated we support exports. We promote production. What companies do with their production is their choice. If exporting yields a better price, they’re welcome to do so. There’s no restriction on that. Thus, there’s no question of violating the WTO.

How can we enhance the quality of our manufacturing in the coming years?

Viswanathan: Generalizing quality issues across the manufacturing sector isn’t correct. Some areas require quality improvements. This journey requires time; it’s not an overnight process. First, we need the mindset for superior quality and a commitment to achieve world-class standards. After management commits, training everyone down to the workers is vital. Gradually, with training, quality will improve.

Is the manufacturing sector prepared to adapt to changing consumer demands and preferences effectively?

Easwaran Subramanian: Consumers now demand instant gratification, influenced by last-mile companies. Flexible supply chains are necessary to meet this demand. Transparency, especially in end-use pricing, is growing. The next evolving trend is consumers perceiving products as their own from order to delivery. Traceability is the key. Companies must explore end-to-end product tracing, which requires technology for scalable implementation.

Why should we learn from China in managing our capacities and capabilities?

Sanjeet   Singh: I’m not labelling anyone as a devil, but we can learn even from the devil and those we might not fully agree with. I’ve interacted with China during my tenure in the commerce ministry. They possess commendable practices that we can adopt. For instance, about 15 years ago, China decided to gain control over IPs, well after integrating into global supply chains. Presently, in 29 out of 36 fields, including computer technology, electronic machinery, and digital communication, China leads in filed IPs in 21-22. Their patent filings surpass the rest of the world. While debate exists about their patents representing true innovation, should we not learn something from China?