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SWADHYAYA

Theme: Why cant India be a world class player in Manufacturing


Industry as it is in IT & BPO sectors?

Team:
1.Team Leader: Ankit Verma
2. Bhanu Singh Chauhan

Number of Words: 3350 (approx.)
Date of Submission: 30
th
July 2013



Signature of Team Leader :





Abstract
India has been regarded as a potential superpower. The country has already proved its
leadership and in software exports. But a stark contract is observed when manufacturing
sector is considered. Defying tradition, software sector is the prime driving force of
GDP growth instead of conventional services. The manufacturing sector contributes just
16 % to the GDP as compared to 55 % by services sector. The reason for this discord
can be explained on the basis of 1991 reforms in India. The services sector leveraged the
opportunity that kept coming and forced some critical reforms to sustain the growth. On
the other hand, manufacturing sector did not meet the expected potential. Anarchic
labour laws and absence of infrastructure like efficient road, ports and rail connectivity
proved to be a major bottleneck in the growth. The article focuses on the prime factors
affecting growth like education reforms, laws and case studies. The Indian
manufacturing industry was also compared to China and other developing countries. The
end analysis is that in current scenario, India cannot be a world class manufacturing
industry. However, if come critical steps are taken in field of R & D, training and
reforms the status can be achieved in coming decades.




Why cant India be a world class player in Manufacturing Industry as it is in IT &
BPO sectors?


The second most populous country of the world INDIA, is on agenda of every global organization
mulling expansions. With growth rate in excess of 5 %
[1]
it has a huge potential. Most important is the
future. India is going to have an average age of 26.2 years
[2]
: making it a young country- A potential
Superpower. The growth shown in last two decades as caught many eyeballs and brainstorming
sessions on how to tap the potential. The potential is in every sector- Energy, Software, Finance,
R & D, Infrastructure, Education, IT, Agriculture and of course entertainment. The average Indian is
spending more than ever. The countrymen no longer settle for frugal solutions. The demand is
world-class.
India is already a hub for software exports. Last year it exported US $ 100 billion worth of software
[2]
.
Indian IT companies cater to 60 countries
[3]
. The supplied software forms the backbone of finance,
travel, hospitality, education, aviation, banking and almost every IT enabled sector. The dream initiated
in early 90's has en-powered the Indian middle class. Improving standard of living and give millions
direct and indirect employment. There are over 3000 software exporting firms
[3]
in India.
India has also witness growth in Industries. Global automobiles companies have already set up
assembling or manufacturing units to cater the ever increasing demand of automobiles. Other sectors
like retail, aviation, and healthcare are also expecting huge FDI inflow.
The specialty about the Indian growth story is that the IT & BPO spearheaded the growth instead of the
Industry. It was a deviation from normal course in which manufacturing sector leads the growth.
The question under discussion is what caused this. What enabled the IT revolution that even beat the
manufacturing sector? The IT has been growing continuously and the potential to grow more is
limitless and on the other hand our manufacturing sector is still struggling to achieve world class status
and global outreach.
To find the answer we should look back in the history to the 1991 reforms and liberalization of
economy which shaped our present India and its growth story.
1991 Liberalization and Reforms
July 24, 1991 witnessed the beginning of economic reforms of India. Led by then Finance Minister
(now Prime Minister) Dr. Manmohan Singh in the government of Mr. P. Narshima Rao, started
breakthrough reforms like deregulation, privatation, tax, investment and inflation controlling measures.
The reforms were formulated when the central bank refused credit and the foreign reserves had reduced
to such extent that imports could be sustained for only three weeks.
The reforms were in the sector of
I. Finance
2. Industry
3. Trade
4. Fiscal

Among the first sectors to be liberalized, one was the Industrial Sector. The reforms included abolition
of industrial licenses and removal of restriction on expansion.
The following were expected from these reforms
1: Increase in growth rate
2. Increased competitiveness of industrial and services sector
3. Reduction in poverty and inequality
4. Fall in fiscal deficit
These reforms also exposed the industry to these problems:
1. Dependence on foreign debt
2. Dependence on foreign technology
3. Undue importance to privatization
4. Problem of unemployment
Fig.1: Rate of Growth of GDP (%)
[1]


The effect on Industry
Main focus of the reforms was upon the industrial sector. Industrial licenses were abolished for most
industries. Earlier 12 sectors were reserved for public sector. Now only atomic, defense aircrafts,
weapons and warships and railway transport is reserved for public sector. Imports were liberalized.
Monopolies and Restrictive Trade Practices (MRTP) Act was also relaxed in synchronization with
other reforms
[4]
.
The reforms made the sectors specially industries flexible. The industries could now decide upon the
location, production and other decisive polices. These reforms gave a huge boost to entrepreneurship
primarily in the field of ancillaries industry and service sector.
Mrs. Seetha
[4]
, Journalist and Author, highlights that there are still very stringent regulations that
industrial units has to comply to. The country has moved on from License Raj to Inspector Raj. Most of
the cases related to manufacturing industries norms are at the sole discretion of administrative officers
resulting in corruption and negative impact on growth. A major road block is the anarchic labor laws of
the country for manufacturing sector.
In sense of Macro economics, Average growth rate of GDP was 0.8 % in 1991-92. just after reforms it
shot to 5.3 % in 1992-93, average growth rate in 1990s was 5.5%. Share of world GDP was 5.5 % in
2010 as compared to 3.3 % in 1990
[4]
.
Fig.2 Reproduced from [5]



The effects on Services sector:
This sector benefited immensely from the opening of foreign investment. It was lucky to escape the
heavy regulations of the government. The new opportunities were visible and plethora of entrepreneurs
seized them to create a niche in services sectors. Indian share in global services export market was
0.5 % in 1990 which increased by six times to 3.3 % in 2010
[3]
. The major companies to take advantage
were Infosys, TCS, Wipro, and Satyam (Now under TechMahindra).
Opening up foreign direct investment (FDI) in sectors like telecommunications, banking and insurance
resulted in tremendous growth of these sectors. The share of FDI in these sectors rose from 10.5 % in
early 1990s to 30% in second half of the decade
[3]
. Import de-licensing permitted import of computer
systems gives access to world class equipments. Financial liberalization allowed the companies to raise
capitals resulting in business development and competition. Most important was current account
convertibility. It made travel easier and allowed companies to set up sales offices abroad.

Effect on Infrastructure
Infrastructure development is still mostly carried out by public sector companies. CPWD, NHAI, BRO
being the prime drivers. The private sector is skeptical into marching in the road construction sector. To
counter this Public Private Partnership (PPP) model has been formed. The private sector is now
allowed to set up power distribution systems, develop ports, roads, railroad to connect plants but most
of the involve red tape-ism discouraging investment. Land acquisition is still a big problem proving to
be the bottleneck in growth. The cities have developed but rural- urban connectivity is still an issue.


Effect on Telecommunications
The back-bone on any modern economy for modernization and globalization telecommunication is an
example to refer to in infrastructure development by Public private partnership model. It showed that
with proper planning and execution, the ultimate winner is the consumer who got access to service at
low cost. The tele-density in 1991 was less than 1% and it rose to more than 70 %in 2012. Presently
there are over 700 million mobile phone users in India
[4]
. The easy availability of communication has
revolutionized the way businesses are run especially in unorganized sectors. A famous example is how
Kerala fishermen used mobile phone to counter volatile prices of fish by planning the fishing according
to the latest prices.
Effect on Employment
Post reforms, employment opportunities increased due to expanding businesses. IT and BPO firms
(Both large and small) hire over one million every year.
However, employment in manufacturing sector is a bit different. The sector can be divided in to two
categories- Unorganized sector and organized sector. With years, employment in organized sectors has
depreciated while that in unorganized sectors has increased.
A. Kotwal et al. in Economic Liberalization and Indian Economic Growth: What's the evidence? (2010)
expresses this may be due to Small Scale Reservation Policy introduced post-reforms for labour
intensive firms. India now has too few labour intensive firms. Overall non-Farm employment increased
35.59 million. The statistics is far lower when compared to China. Unorganized Sector accounts for
83 % of non farm labour
[1]
. In 2004-2005, 457 lakh people were employed in out of which, just 6% in
organized sector (27 million)
[1]
. The number is almost stagnant since 2001.
The trend of preferred Employer shifted from agriculture to industry to Services.
[5]
Figure 4: Annual growth of Employment in organized and unorganized sector
[5]


Critical Comparisons of IT/BPO sector with manufacturing
The survival and success of an industry depends on these three factors:
I. Cost reduction
II. Productivity Growth
III. Innovative advantages
If the product satisfies these three conditions, the organization is bound to flourish. The IT and
manufacturing sector too had the same three determining factors. Lets compare the two sectors on
these three points.
Starting with IT and BPO sectors, these excelled because they offered quality and innovative solutions
at fraction of costs at what the western competitors did.
India had a huge resource of well qualified engineers at low cost. This was the unique advantage. The
proficiency in English provided leverage over countries with similar employment costs like China and
Taiwan. Thus they achieved cost reduction.
Initially, IT and BPO hired west returned Indian as heads and managers to run the business. They
brought with themselves a highly professional culture that resulted in excellent streamlined operations
and distribution of services. This enhanced productivity of the skilled talent. Thus they also achieved
the second step.
With the IT boom, many entrepreneurs and organization jumped at the opportunity to become BIG in
this sector. TCS, Infosys, Wipro, CMC etc were some domestic companies. Apart from them, MNCs
like IBM, Accenture, HP, and SAP set up their Indian arm to cater their needs at competitive costs.
This created neck and neck competition in the market. The drive to succeed encouraged the
organizations to develop innovative solutions to use it at USP. The competition was the driving force
for innovation hence taking the industry forward. Hence they achieved the three important
requirements for a successful business.
Co-incidence of educated manpower and the presence of huge international demand backed up by
required infrastructure LAUNCHED Indian software industry from US $ 754 million industry in
1995-96 to US$ 23600 million in 2005-2006
[6]
.
Manufacturing sector has not been so successful. The production of manufactured goods has certainly
increased but that was not sufficient as compared to the other developing nations like China and
Vietnam. The manufacturing sector could not capitalize even on the IT boom which created huge
demand for computer hardware like memory drives and chips. Most of these equipments are imported
from Taiwan, China, Vietnam, Thailand, Indonesia and Philippines. The indigenous industry is below
par in quality and reliability at the same price. Most of the IT peripherals manufacturer in India is either
producing low price solutions (inferior quality goods) or is an arm of global giants like IBM, HP or
Canon. The foreign MNCs have created assembling plants in India to cut costs and stay competitive.
Analysis of manufacturing Industry on three requirements of cost reduction, productivity growth and
innovative advantage we get a clear picture of the failed potential realization of this sector. The prime
requirements of any manufacturing industries are.
I. Power
II. Infrastructure
III. Raw Materials
IV. Manpower
A technology is considered feasible only after considering these four factors. India still does not have
the required power supply. Moreover, the cost power in India is higher than most of the developing
countries. The infrastructure has not developed at the pace required by manufacturing industries. This
caused manufacturing sector to display subdued growth.
There also in monopoly over mines limiting the entry of new players in metal and mining industries.
The ratio of cast of captive power and grip power is 1:3. The international prices of raw materials are
also fluctuating giving difficult times to manufacturing units without captive power plants and mines.
Recent events had already eroded profits of Welspun. Visa Steel etc as they lack captive power and
mines driving the input cost high. Whereas, big companies like Tata and Jindal Group are still able to
sustain growth due to their captive mines and power plants.
As Malcolm Gladwell explained in his book 'Outliers, every great man had access to something, that
helped them succeed. E.g. Bill Joy had access to Michigan University Computer Centre. Bill Gates had
access to computers at very early age; similarly, IT and BPO industry are so big because just at the
right time telecommunication revolution had stuck. As discussed earlier, post-reforms
telecommunication has developed tremendously giving IT and BPO firms all the fire power they need
to move ahead.
Government to eased policies as it was required by the industry. The sectors was showing huge
potential and the revenue forced the government to ease the thing necessary. Reserve Bank of India too
supported the sector by simplification of filling the Software Export Document Form (SOFTEX),
acquisition of overseas parent company share by employees of Indian companies, companies whose
software exports exceeded 8-% could grant stock options to NRIs. Tax holidays were provided along
with development of Special Economic Zones (SEZ) to aid the growth
[3]
.
As a result, India exports $100 billion
[2]
worth of software to over 60 companies, half of the Future 500
companies included
[3]
.
One thing that clearly sets both the sectors apart is the methodology in human resource development.
India has over 500 Universities, 30000 colleges and over 7000 technical institutions. But the number of
industry ready graduates is few. India lacks the culture of finishing school. This creates a gap between
industry and academia.
Manufacturing industry hires candidates from core engineering branches, trains them in house and
absorbs them. The innovative input in industry is low as most of them run on imported technology. The
engineers are mainly required to sustain the industry and maintain the operations and predefined
growth path.
On the other hand, IT and BPO hire over a million people every year. They have a robust training
facility to train them in just months. The IT companies foresighted that demand will not be met by the
numbers of computer engineers. So they tuned their training to accommodate engineers irrespective of
their branch. This actually recruited engineers who traditionally joined industries. Manufacturing
industry lost a substantial part of talent pool to IT/BPO Industries.
BPOs just required English speaking proficiency. Even just primary school educated was trained to
serve the needs of the organization. Companies like NIIT and Aptech too contributed in training the
required manpower for IT and BPO sector.
Industry has stringent minimum requirement for employment. The knowledge of domain is still
necessary for executives. ITI training is the bare minimum requirement.
However, some manufacturing units have embraced innovative and India oriented Human resources
management techniques.
A case study of Tata Steel by McKinsey and Company speaks about some of the efforts. Tata Steel
standardized tasks throughout the plant and trained workers to uncover the root causes of the problems.
They also reduced the managerial positions from 13 to just 5 to increase the accountability of
employees. A important development was the establishment of SNTI. Training Institute for Tata
Employees. The institute trains over 2000 candidates every year
[6]
.
Similarly, a case study of Maruti Suzuki again by McKinsey and Co, speaks how Maruti filled the
industry- academic gap. It adopted six technical institutes and developed them. Among the faculties,
some are managers of Maruti who personally train them inoculating the culture in the candidate in early
states, every before joining the plant
[6]
.
Companies like JSPL and Tata Steel stress upon the need of training local population and give them
employment to sustain growth as well as trained manpower.
Long story short, manufacturing sector failed to efficiently tap human resource for its growth at IT and
BPO sector had.

Comparison of Indian manufacturing sector with that of other countries
[7]

Particulars China India Global Average
Manufacturing GDP CAGR(2005-10) 11.9% 8.5% 2.9%
Manufacturing GDP as percentage of total
GDP(2010)
32.7% 14.1 % 18.3 %
Labour Cost (US $/ Hour) (2011) 2.8 0.9 21.9
Manufacturing Exports as a % of total exports
(2011)
93.2% 30.3% 59.9 %
Manufacturing job per Hundred people(2001-10) 3.1 1.6 -0.8
Researchers per million INSEAD 2012 1071 136 2980
Per Capita Disposable income (2011) US $ 2302 US $1271 US $15886

The picture is pretty clear with this table. India has the privilege of having lower labour cost than China
and most developed countries. But with low number of researchers per million, the country lacks in R
and D activities resulting in poor innovation skills. This as a result, provides lower employment
(1.6 per 100 as compared to Chinas 3.1) and create unenthusiastic market demends. Manufacturing
Exports as percentage of total exports stand at just 30.3% in front of global average of 59.9 % and
China's mammoth 93.2%. Indian has shown appreciable manufacturing GDP CAGR (2005-10) of
8.5 % as compared to global 2.9 %, it still need to improve manufacturing GDP as percentage of total
GDP from 14.1 % to at least the global average of 18.3 % urgently
[7]
. Experts expect this to reach
25 % by 2025
[6]
.
China is an example of growth. There were number of reforms in China aimed at augmenting the
manufacturing sector. Heavy Investment in power sector especially in renewable sources ensured
required power supply at feasible rates to the industry. The education reforms were highly successful
shooting China up in research and development area. China has continuously increased R & D
expenses. Patent Applications are at growing at 30 % CAGR since 2000
[7]
. Like India, China too has a
large middle class which is seen as a consumer base and important for domestic demand. Abundance of
minerals has also proved pivotal in the growth and ensuring security of its industry to international
market prices. The physical infrastructure is also much better than India and Vietnam which has
competitive labour rates.
India required huge investments in infrastructure. Logistics cost in India accounts for 13.17% of GDP
as compared to 7.8 % in developed countries
[7]
. An urgent relook at land acquisition and anarchic
labour laws is necessary. Increased inflation, higher interest rates and falling growth rate is
discouraging further investment in India. The growth rate in 2011-12 was lowest in decade for India.
Recent pullout of Arcelor Mittal from Orissa and hung project of Posco , S. Korea give a negative
impression on investors.
The country needs to fire desires among the industrialists to set up plants in India to tap the consumer
base and talent for operations.
Many companies have shown strong desire in expanding themselves and contribute to the growth of
Indian economy. Some major overseas acquisitions by Indian companies are:

Indian Company Acquired Company Deal value
Tata Steel Corus Europe US $ 12.1 billion
Hindalco Industries Limited Novelis US $ 6 billion
Essar Group Algoma Steel US $ 1.58 billion
Suzlon Energy RE Power US $ 1.6 billion
Videocon Industries Daewoo Electronics US $ 730 million

Apart from these, JSPL, Gujarat NRE has acquired mines abroad in Africa and Australia respectively
to ensure raw material security.
Final Words:
So, with all the discussions we are now aware of the growth story of IT, BPO and the manufacturing
sector. India chanced up the opportunity to become world leader in software exports. BPO set an
example in manpower training and development which was later adapted by IT industry as well.
Manufacturing sector, though having superb potential, failed to grasp the opportunity partly due to
government policies on labour laws, difficulty in land acquisition and orthodox thinking of leaders.
Thus, we can conclude that India with its current policies and scenario cannot become a world class
player in manufacturing sector as it is in IT and BPO, But with development in sectors like education
and training, infrastructure, labour laws we can dream of India achieving world class status in
manufacturing in years to come.



References:
[1] Ashok Kotwal et al., Economic Liberalization and Indian Economic growth: Whats the evidence,
Discussion Paper 11-13, ISI, Delhi 2011
[2] Ernst & young, Doing Bussiness in India, 2012
[3] S. Bhatnagar, Indian Software Industry, IIM Amhedabad
[4] Seetha, An audit-From the Liberal perspective, The Indian Economic Liberalization Story, Project
for Economics Education , 2012
[5] IBEF, Role of Manufacturing in employment generation in India, 2012
[6] Nick Bloom et al., Can better management sustain Growth in China and India, CenterPiece Spring
2008
[7] Rajat Dhawan et al., Fulfilling Promise of Indian manufacturing sector, McKinsey Quaterly, march
2012