<p>It is difficult, at times, to define what troubles Indian manufacturing. Is it suffering from a problem of plenty or of deficiency? Stock market valuations continue to climb. IPOs are running riot; they are not only getting massively oversubscribed but are also opening at higher than initial issue prices. Yet, fresh project investment announcements in manufacturing remain, to put it mildly, insipid. It is not as if the corporates are not growing. They are, and quite rapidly. However, other sectors, especially the realty and financial sectors, are benefiting from their energy but not core manufacturing. This, despite a plethora of unprecedented incentives and subsidies on offer for incentivising investment into manufacturing. The annual budgetary commitments to promoting investment presently exceed Rs 2 lakh crore.</p>.<p>The fresh annual manufacturing project announcements are still below the nominal peaks touched during 2007/09. It needs noting that the size of the economy has tripled and the rupee-dollar conversion rate has doubled in the past two decades. Our annual manufacturing project announcements ought, thus, to have at least doubled or tripled but instead, is stagnating. This is significant, considering a growing global recognition that Indian economic growth rates are behaving much better than the global averages. In consequence, the sectoral share of manufacturing to GDP shows a continuous fall. Our merchandise trade deficits keep rising, so also our import dependence on Chinese goods.</p>.<p>Some policy commentators attribute this to the RBI repo rate being at a high of 6 per cent. This, it is felt, may be negating the several policy measures taken to boost industrial sentiment. This raises an interesting question. Can interest rates be so powerful? Admittedly, economic theory does say that investment decisions are negatively correlated to interest. It is, undoubtedly, an important variable affecting individuals but is it the most important under Indian conditions? After all, even a cursory overview of any standard stock market/CMIE database for corporates reveals that the actual share of ‘interest’, in the average Indian corporates’ profit and loss statement, fluctuates between 1.7 and 4.2 per cent of sales realisation. The shares of taxes (5-8 per cent ) and all other management expenses (10-14 per cent) range at much higher levels. So even if RBI were to slash rates by half or more, the resultant booster would still be quite low in relation to other cost heads. Further, the RBI database indicates that the repo rate had stood at 7.5 per cent during 2006/07/08 before falling to 5 per cent in 2008/09. The correlation test between repo rate movements and project announcements post-2001 is also seen to generate low scores. We thus need to look elsewhere to understand this low corporate appetite for investment.</p>.<p>One possibility could be our quality standards regime. Indian public policy regarding manufacturing orientation has always been to safeguard what we feel are the interests of our MSMEs. We have, therefore, designed India-relevant standards. These are quite different and focus on ‘value for money’. A side effect of this is that it is easy to dump goods into India while most of our companies lack the reflexes to succeed in export markets. Most other countries, including in sub-Saharan Africa, follow European standards which involve detailed intricacies and are resultantly expensive to follow unless our reflexes are conditioned to them. Our corporates thus prefer to stay inward at domestic markets. Plant sizes are thus smaller than global averages and do not therefore derive the ‘increasing returns to scale’ advantages available to extra large-sized plants.</p>.<p>However, some rare exceptions exist. Illustratively, in our auto-components and petroleum refining sectors. Maruti set up shop as a joint venture with a large initial capacity in the pre-liberalisation era and received strong state support in the initial years. It implemented Japanese systems, standards and disciplines. Likewise, post-liberalisation, Reliance/Essar, two corporates with ‘good connections’ took advantage of the mid-90s SEZ guidelines to set up mega-sized refineries that are, still, considered market leaders. These developments had witnessed concerns voiced by numerous commentators.</p>.<p>The concept of widespread availability of ‘increasing returns to scale’ is of recent origin. Economics, as a science, developed under what were universally agreed to be conditions of scarcity and ‘diminishing returns to scale’. It was always known as the ‘dismal science’. Trade theories developed under these conditions. But times have changed. Rapid technological advances in computational power and the rise of the internet, combined with advancements in transportation systems, have created conditions in which ‘increasing returns to scale’ is getting experienced in many sectors. We need to make it happen elsewhere in India. If we cannot straightaway bring in globally accepted standards for domestic production, we could, at least, adopt them for our imports while allowing a reasonable pre-announced time and incentives for quality upgradation to our existing local units. This would stop dumping/import of cheap goods and incentivise our entrepreneurs to shift their focus back to manufacturing over other business plans.</p>
<p>It is difficult, at times, to define what troubles Indian manufacturing. Is it suffering from a problem of plenty or of deficiency? Stock market valuations continue to climb. IPOs are running riot; they are not only getting massively oversubscribed but are also opening at higher than initial issue prices. Yet, fresh project investment announcements in manufacturing remain, to put it mildly, insipid. It is not as if the corporates are not growing. They are, and quite rapidly. However, other sectors, especially the realty and financial sectors, are benefiting from their energy but not core manufacturing. This, despite a plethora of unprecedented incentives and subsidies on offer for incentivising investment into manufacturing. The annual budgetary commitments to promoting investment presently exceed Rs 2 lakh crore.</p>.<p>The fresh annual manufacturing project announcements are still below the nominal peaks touched during 2007/09. It needs noting that the size of the economy has tripled and the rupee-dollar conversion rate has doubled in the past two decades. Our annual manufacturing project announcements ought, thus, to have at least doubled or tripled but instead, is stagnating. This is significant, considering a growing global recognition that Indian economic growth rates are behaving much better than the global averages. In consequence, the sectoral share of manufacturing to GDP shows a continuous fall. Our merchandise trade deficits keep rising, so also our import dependence on Chinese goods.</p>.<p>Some policy commentators attribute this to the RBI repo rate being at a high of 6 per cent. This, it is felt, may be negating the several policy measures taken to boost industrial sentiment. This raises an interesting question. Can interest rates be so powerful? Admittedly, economic theory does say that investment decisions are negatively correlated to interest. It is, undoubtedly, an important variable affecting individuals but is it the most important under Indian conditions? After all, even a cursory overview of any standard stock market/CMIE database for corporates reveals that the actual share of ‘interest’, in the average Indian corporates’ profit and loss statement, fluctuates between 1.7 and 4.2 per cent of sales realisation. The shares of taxes (5-8 per cent ) and all other management expenses (10-14 per cent) range at much higher levels. So even if RBI were to slash rates by half or more, the resultant booster would still be quite low in relation to other cost heads. Further, the RBI database indicates that the repo rate had stood at 7.5 per cent during 2006/07/08 before falling to 5 per cent in 2008/09. The correlation test between repo rate movements and project announcements post-2001 is also seen to generate low scores. We thus need to look elsewhere to understand this low corporate appetite for investment.</p>.<p>One possibility could be our quality standards regime. Indian public policy regarding manufacturing orientation has always been to safeguard what we feel are the interests of our MSMEs. We have, therefore, designed India-relevant standards. These are quite different and focus on ‘value for money’. A side effect of this is that it is easy to dump goods into India while most of our companies lack the reflexes to succeed in export markets. Most other countries, including in sub-Saharan Africa, follow European standards which involve detailed intricacies and are resultantly expensive to follow unless our reflexes are conditioned to them. Our corporates thus prefer to stay inward at domestic markets. Plant sizes are thus smaller than global averages and do not therefore derive the ‘increasing returns to scale’ advantages available to extra large-sized plants.</p>.<p>However, some rare exceptions exist. Illustratively, in our auto-components and petroleum refining sectors. Maruti set up shop as a joint venture with a large initial capacity in the pre-liberalisation era and received strong state support in the initial years. It implemented Japanese systems, standards and disciplines. Likewise, post-liberalisation, Reliance/Essar, two corporates with ‘good connections’ took advantage of the mid-90s SEZ guidelines to set up mega-sized refineries that are, still, considered market leaders. These developments had witnessed concerns voiced by numerous commentators.</p>.<p>The concept of widespread availability of ‘increasing returns to scale’ is of recent origin. Economics, as a science, developed under what were universally agreed to be conditions of scarcity and ‘diminishing returns to scale’. It was always known as the ‘dismal science’. Trade theories developed under these conditions. But times have changed. Rapid technological advances in computational power and the rise of the internet, combined with advancements in transportation systems, have created conditions in which ‘increasing returns to scale’ is getting experienced in many sectors. We need to make it happen elsewhere in India. If we cannot straightaway bring in globally accepted standards for domestic production, we could, at least, adopt them for our imports while allowing a reasonable pre-announced time and incentives for quality upgradation to our existing local units. This would stop dumping/import of cheap goods and incentivise our entrepreneurs to shift their focus back to manufacturing over other business plans.</p>
