With a nearly 80 per cent weightage in the country’s industrial production, manufacturing growth rate has doubled from six per cent in 2002-03 to a record 12.3 per cent in 2006-07.

The rising investor confidence in India can be attributed to its rise in position from rank 50 to 43 in the Global Competitive Index. 

Manufacturers across the globe — ABB, Honeywell, Siemens, Cummins, DaimlerChrysler, Piaggio, Toyota, Degussa and Rohm & Hass, are setting up operations in India. The country has all the required skills in process, product, and capital engineering, owing to its manufacturing history and quality education system.

Advantage India

India has a vast domestic market and a relatively low-cost skills base, which can enable it to become a manufacturing powerhouse within the next 5-10 years. The current surge in investments into India may be attributed to an unprecedented domestic demand spurred by rising incomes and savings.

As India’s middle class is growing, which is larger than the population USA, so is its buying power. With all the demand drivers in place, more MNCs are setting up manufacturing facilities in India not only for exports but to meet the growing domestic market.

It is expected that if the country’s consumer market continues growing at this rate, India will soon be propelled from the position of 12th to the fifth-largest consumer market in the world, behind the United States, Japan, China and Britain, displacing Germany.

Many incentives

The world’s top five mobile manufacturers — Nokia, Motorola, Samsung, Sony Ericsson and LG —have all set up manufacturing facilities in India. India has become the second-largest market for Nokia in volume terms, displacing the USA. Nokia has gone ahead and set up a Special Economic Zone (SEZ) near Chennai along with many of its vendors.

The incentives provided by SEZs have the potential to contribute to further growth in India’s manufacturing activity. SEZs will have excellent manufacturing facility and also offer an attractive package of incentives, including several fiscal concessions for the developers. Other factors contributing to the country’s manufacturing success story are the following:

*Cost efficiency: The manufacturing cost in India is about 30-40 per cent lower than that in the US and Europe, making it a preferred sourcing hub for MNCs.

*Rich talent pool: India has a vast pool of talented engineers and management professionals. The output of trained human power at the degree and diploma level has been consistently increasing since 1985 and touched a figure of 1,30,000 during the 2000. 

From a base of 6,800 knowledge workers in 1985-86, the number increased to 814,000 by 2004-05.

*Labour pool: The labour pool in India is exceptionally rich, with 71 million new entrants set to join the working age population by 2010. It takes fewer days to fill skilled job vacancies in India than in either China or Brazil; remuneration costs are also at the low end. India is marginally costlier than China but is significantly cheaper than other emerging economies such as Brazil and Mexico.

  Since India has a young work force, with the median age being 25 years, the concerns of an aging population is far less than many other countries.


*Highest returns on investments: India offers the highest relative return on investment through high value-added manufacturing. As against China, which is good in high volume and relatively low technology manufacturing, India has the upper hand in lower-volume manufacturing, where technology use is more intensive.


*Fiscal sops: Government offers several tax-related industrial incentives for the manufacturing sector, including tax holidays, 100 per cent deductible R&D and capital expenses, accelerated depreciation and exemptions or deferral of state sales taxes. SEZ Acts also provide for substantial fiscal benefits for units operating in SEZ. Investments in the infrastructure and IT sector enjoy larger benefits.

Manufacturing boom

Defying the traditional view that India is good only for services, the manufacturing sector in India has been moving up the value chain. While Hyundai is setting up a second car plant to export half the production, Toyota is exporting transmission systems from a new plant in Bangalore.

The world’s largest auto parts’ maker, Delphi Corp, has relocated several product lines to India. So has Bosch, another auto parts giant. The phenomenon is not restricted to auto and auto-component firms alone.

Companies like Unilever, Kodak, Whirlpool, Timex Watches, Cummins, Tecumseh, GE, ABB and Siemens are already sourcing products in a big way from their Indian plants for their global markets. And companies like Nokia and Elcoteq Network Corporation are considering setting up plants in India to meet their global demand for mobile phones.

The Indian Electronics Industry is a burgeoning one, where in June 2007, India added over eight million new wireless phone users, the highest growth rate in the world. 

FDI push

Foreign investment up to 100 per cent is permitted under the automatic route in manufacturing with the exceptions being Aerospace & defence equipment manufacturing (which requires an Industrial licence).

In order to promote exports of Electronics Hardware by entrepreneurs from India, the Government of India has initiated several schemes such as self certification of all import/export operations of units within the SEZs, statutory services and facilities such as high speed data connectivity to electronic hardware technology parks.

However, obstacles to India’s growth as a Electronics & Hardware destination remain. There is lack of awareness at the global level of investment opportunities in India. Poor infrastructure is cited by investors as the main barrier against foreign investment.

In an attempt to attract investments into the sector, in March 2007, the government announced the Semiconductor Policy, providing special incentive packages for setting up of semiconductor fabrication and other micro and nanotechnology manufacturing industries. However, the delay in announcing regulations caused many MNCs to defer their investment plans.

Though the top five growth industries in manufacturing in India have been recognised as gems and jewellery, cement, steel, pharma, and engineering goods, a huge potential can also be seen in other fast growing knowledge based industries such as the outsourcing of Engineering, Design and R&D Services.

Though engineering services outsourcing was a slow starter, since sharing product development details required more trust in vendors and involved intellectual property rights issues, improvements in bandwidth capabilities and engineering collaboration tools have helped open up the field.

What the future holds

According to UN ESCAP, India is emerging as a force in manufacturing exports. Manufacturing exports have surged, growing 37.3 per cent year-on-year in US dollar terms between April and September 2006.

Manufactured exports are dominated by capital intensive engineering, chemical and petroleum products. The main engineering products iron and steel are feeding large global demand, especially from China. India’s automotive sector is also expanding rapidly.

Growth in manufacturing exports, along with growth in domestic demand, is likely to create 25-30 million new jobs in manufacturing and add one per cent to India’s annual GDP growth rate.

Infrastructure challenges

India has the worst infrastructure amongst the emerging economies. This is affecting the manufacturing sector’s ability to attract more business. Major  issues that need urgent attention are:

*Electricity: Unreliability of power supply is by far the most significant infrastructural constraint. On an average, a company can expect nearly 17 significant power outages per month, against one per month in Malaysia and fewer than five in China. At the same time, the cost of power is high — about 50 per cent higher than in China.

*Transport: The high turnaround time at ports, the deterioration in rail system and the poor plight of roads and highways costs companies dearly. India has very few four-lane highways and the bad condition of its roads affect the competitiveness of Indian companies.

They need to maintain higher inventories, spend more on transportation and face delays in shipping of their export consignments.

*Water: The cost of water is 40 per cent higher in India than in Thailand.
nNatural gas: India’s piping networks for gas in key manufacturing locations is very poor forcing companies to use more expensive alternative fuels.

Rigid Labour laws: India’s archaic and rigid labour laws prevent companies from adopting flexible hiring policies. In contrast, labour regulations in other countries allow greater flexibility in business operations while protecting worker interests. In many countries contractual employment system allows   employment termination at the discretion of the employer, provided statutory norms are observed.

Multiplicity of taxes: Business becomes cumbersome by multiple taxes levied on Indian manufacturing companies, such as octroi, corporate tax, entry tax, VAT, customs duty etc. Some of these taxes can be set off, others cannot. Though corporate tax  rates have significantly come down to 30 per cent now, it is still higher than many countries.

Conclusion

India has a significant competitive advantage in the skill-intensive industries. Over the next decade, the global trend to manufacture and source products in low-cost countries is likely to gather strength. Taking advantage of this trend, India’s manufacturing exports could increase from $40 billion in 2002 to approximately $300 billion by 2015.

For this quantum jump in manufacturing exports, industry needs to adopt a global mindset and carefully select the product segments. The government should aid by implementing key reforms in taxation, infrastructure, SEZs, labour and skill development.

Source: Building Strong Partnerships, a PricewaterhouseCoopers’ report.