'Make in India’ needs an ‘Invest in India’ environment

By Nimesh Shah
Managing Director & CEO
February 26, 2015
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Boosting manufacturing and laying the foundations for a better infrastructure go together

At the root of economic development lies a robust manufacturing economy. Over the years, global economic development has been driving on vigorous innovation and on sustainable industrialization of the advanced economies.

It started off with the steam engine and progressed on to advanced chipsets and technology that are now remotely controlled

Good manufacturing practices has seen the most productive agricultural farms across the world use the best farm machinery, and critical sectors such as healthcare use sophisticated medical equipment.

India missed the power of having a strong manufacturing base in its economic history as software leaped to the centre stage and steered the economy for much of the past two decades.

As a result, manufacturing has been stagnating at around 16-18% of the gross domestic product (GDP), despite the liberalization in the 1990s, while services sector has ballooned to around 55% of GDP.

With renewed initiative on manufacturing, the Indian government is planning to boost the share of manufacturing to about 25% of GDP in the next decade. With a host of follow-up initiatives such as liberalizing foreign direct investment (FDI) to a large extent (100% in sectors such as rail transportation), it has opened the gates for more business and investment opportunities in the country.

As a result, India’s manufacturing share could accelerate to 25-30% of GDP, and touch $1 trillion in value in the next decade, as per a McKinsey report.

Manufacturing is also important for creating jobs. India will have one of the largest working age populations in the world over the next two decades, and a robust manufacturing sector is a must for creating skilled workers in labour intensive industries. According to the International Labour Organization, countries with a high share of employees in industry usually have people earning regular wages in skilled jobs against holding temporary, informal jobs.

With the “Make in India” initiative, the country could add 40-60 million jobs over the next decade, adding 8-12% to the current employment base.

Questions about whether India can become a manufacturing powerhouse should be laid to rest. Aside from cheap, abundant and skilled labour, and a technologically savvy workforce, India also has an abundance of natural resources.

That Indians can harness the strengths of technology has been proved over the years. This advantage will prove vital as India improves its manufacturing process along with bringing in efficiency.

Boosting manufacturing and laying the foundations for a better infrastructure go together. Infrastructure spend has been largely stagnant at 5.0-5.5% of GDP over the past decade compared with, say, China which has been spending close to 15% of GDP on infrastructure.

To boost global competitiveness, infrastructure plays a critical role as it streamlines movement of goods. With a good manufacturing base, investments in infrastructure will improve.

One area that needs to be addressed is smooth movement of goods in the country. The cost of logistics eats into the effort that can make India a manufacturing powerhouse.

With the introduction of goods and services tax (GST), productivity can improve tremendously, which will, in turn, reduce costs in the manufacturing process.

It can boost India’s manufacturing image globally as a producer of quality goods at considerably lower costs

A strong manufacturing sector also needs a robust investment environment. The Indian investment rate has decreased to around 34% in financial year (FY) 2013, and needs a strong recovery in the coming years. Capital availability is the biggest factor that can lead to investments into the manufacturing sector. India has to not only improve the investment rate, but also improve the utilization of capital so that the most productive and priority sectors get the right capital funding.

However, new manufacturing capacities may take a little while to get started as the balance sheets of many companies are stretched with the weight of loans. The banking system, too, is facing high amounts of non-performing assets, which includes restructured assets, and tots up to nearly 12% of gross advances.

For now, manufacturing can be revived through FDI (which has picked up) and through the fiscal consolidation of the government as it helps save resources that can be used for productive purposes.

As announced in the recent budget, the government has committed to bringing down the fiscal deficit to 3% of GDP by FY18

Another area that can help is household savings. Indian households had been hit by high inflation and had moved to physical assets as choice of investing. They are now gradually being drawn to financial assets. Real rates have become positive after many years of being negative.

It is essential that the government’s “Make in India” manufacturing initiative is linked to a strong investment environment as this is one of the ways to attract households and other segments of society to play a part, and a crucial one at that

This article was also published in Mint on 28th April 2015