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INDIAN MANUFACTURING SECTOR

 INTRODUCTION:
Manufacturing sector is the backbone of any economy. It fuels growth, productivity,
employment, and strengthens agriculture and service sectors. Astronomical growth in worldwide
distribution systems and IT, coupled with opening of trade barriers, has led to stupendous growth
of global manufacturing networks, designed to take advantage of low-waged yet efficient work
force of India. ' Indian Manufacturing ' sector is broadly divided into - Capital Goods &
Engineering, Chemicals, Petroleum, Chemicals & Fertilizers, Packaging, Consumer non-
Durables, Electronics, IT Hardware & peripherals, Gems & Jewelry, Leather & Leather
Products, Mining, Steel & non-Ferrous Metals, Textiles & Apparels and Water Equipment.
The overall manufacturing growth rate is projected to rise to 9.5% in 2008-09, after declining to
8.8% in the 2007-08 from a high of 12.3% attained in the previous year (2006-07). Over the past
year or two there has been mounting confidence about the new found strength of India's
manufacturing sector and its long-term potential. The recently approved 11th Five Year Plan
expects manufacturing to grow at 10-11 per cent a year during the period 2007-12.
Of the 100 sectors surveyed, as many as 67 sectors are poised to achieve ‘excellent’ to ‘high’
growth rates ranging 10 to 20 per cent or more. While 12 sectors project excellent growth of
more then 20 per cent or more, 55 sectors foresee high growth of 10 to 20 per cent, 32 sectors
expect moderate growth of up to 10 per cent and 1 sector has projected a negative growth during
2008-09.

 CHALLENGES FOR THE INDIAN MANUFACTURING SECTOR:

The various factors are as follows:


1. Cost Disability Factors Faced By Indian Manufacturing Sector:
Higher input costs for the Indian manufacturing sector can be attributed to: cascading effect
of indirect taxes on selling prices of commodities; higher cost of utilities like power, railway
transport, water; higher cost of finance and high transactions costs.
2. Low Operating Surplus In The Indian Manufacturing Sector:
A detailed investigation of 15 major manufacturing sector in India shows that the share of
operating surplus in the total value of output averaged 15% in India – much lower compared
to 22.6% in Malaysia, 29.4% in Indonesia and 30.6% in Korea.
3. High Costs Of Input Materials And Utilities In India:
A comparison of costs of input materials and utilities in India, China, Malaysia and Korea
across 15 important manufacturing segments showed that on the average the share of input
materials and utilities in total output value was as high as 81.3% in India as against 75.5% in
China, 68.7% in Malaysia and only 58.5% in Korea.
4. Agenda For Accelerating Growth And Improving Competitiveness Of Indian
Manufacturing:
• Infrastructure facilities: New initiatives for encouraging entry of more private sector
investors in important sectors like electricity distribution, aviation, roads, railways, ports
and airports.
• Development finance: Concrete steps that would enable the development financial
institutions to double the distribution of funds in the next year.
• Inspector Raj: Announcing of new initiatives for self-regulatory checks and self-
certification measures by entrepreneurs.
• Labour legislation: A new bill for reducing plethora of regulations and for introducing a
uniform labor laws for the whole country should be introduced in the next session of
Parliament.
• Contract labor: A new bill for encouraging Contract labor in all areas even while
protecting the social security payments and minimum wages should also be introduced.
• Opening up of small-scale sector: Removal of all restrictions on investment in labor-
intensive small-scale industries should be done by the end of the first 100 days.
• Fiscal policies: Steps for reducing incidence of indirect taxes on manufactured goods
should be reduced to international benchmarks along with a simultaneous move to bring
more and more services come under the indirect tax net.
• Removing negative cross subsides: Announcing a time bound program for removing
negative cross subsidies on inputs use by industries namely power, water, railway
freight.
• Exit of firms: An efficient bankruptcy law with foreclosure provisions will be major
step in this direction should be introduced in the next session of Parliament. This will
also help reduce industrial sickness and help reduce the non-performing assets of the
banking sector.
• Credit to small units: It is important that small and medium borrowers in
manufacturing are able to get loans at not more than 4 per cent higher than triple A rated
borrowers.

Cover All Services Under The Service Tax – Exempt only public services, essential public
utilities and important merit goods. Constitute a committee to periodically review abatement
rates.
Power supply is a crucial factor in sustaining this pace of growth. Any industry that is
growing very rapidly or has got mega plans is setting up its own captive power, an
investment not permitted even five years ago. This huge step forward notwithstanding,
companies in the private sector are still unable to expand their power business because the
state electricity boards control the majority of power distribution. Transmission is also in the
domain of the national government. If this area is opened up, it could become the engine of
growth for the manufacturing industry. Manufacturing advocates a growth rate of 12–14
percent for the sector for the next 10 years and lists action points toward this goal.

 ISSUES RELATED TO TECHNOLOGICAL KNOW-HOW:

Technology and innovation combined can help a country to:


1. Improve its living standards
2. Increase productivity
3. Generate new industries and employment opportunities
4. Improve public services
5. Create more competitive products in world markets.
These are the various issues related to technological know- how:
Various routes:
Technology may be transferred either from a company or from a country, which possesses the
required technology through negotiations or purchase of equipment and establishment of units.
International Sub-contracting arrangements and Industrial Co operation agreements also play a
very effective role.
Legal aspects:
One of the major legal issues which may arise in the case of technology transfer transactions, are
the terms and conditions which the transferor will seek to impose as a result of his superior
bargaining power.
Legal avenues:
There are various legal avenues available under the Indian Law with regard to Foreign
Technological Collaborations. Of these, the most important is the maintenance of confidentiality.
Another important aspect is the specific performance of contract. If a party to a contract commits
a breach, the other party may either opt for the specific performance of the contract or claim for
the damages. As an alternative, he may even apply an injunction before the competent Court.
Legal responsibilities:
With the increase in transfer of technology, and the incidents of industrial hazards in recent
years, the Legislature and Judiciary has come out with stringent laws (Bhopal Tragedy Case).
The direct liability of a Tort committed in India would be of an Indian concern in whose
establishment the industrial hazard has resulted.
Protection under IPR copyright:
Technology may be in the form of literature or it may be in the form of computer devices such as
CD-ROM. The Indian Copyright Law is made available to the copyright owner or the assignee or
the License holder. On violation of Copyright Law, one may be held liable and made to pay for
counterfeiting as well as for rendition of the accounts.
Patent:
The existence of patent license agreement in developing countries or inclusion of patent related
clauses in a composite agreement is usually a condition imposed by the licensor. The licensor
may also insist on incorporating patent clauses in a contract to protect his know-how.
Trademarks/geographical indications:
Under Trademark Law, the proprietor of the trademark represents and demonstrates that he/she is
the owner of a trademark in a particular territory for a class of goods and grants permission to the
licensee to use the same and has the licensee registered as the permitted user of trademark for
those goods.
R B I regulations:
To inject technological dynamism in the Indian industry and to promote industrial environment,
foreign technology induction is encouraged through Foreign Direct Investment and through
foreign collaboration agreements and they are permitted either through automatic route under the
RBI or by way of specific permission from the Secretariat of Industrial Approval.
Royalties:
Royalty is calculated based on the net ex-factory sale price of the product, exclusive of excise
duties minus the cost of components, irrespective of source of procurement etc. The payment of
royalty will be restricted to the license capacity plus 25% in excess thereof, for items requiring
Industrial license. The royalty would not be payable beyond the period of the agreement.
E.g. In the private sector, the Hindustan Motors’ Earthmoving Equipment Division was
established in1969 at Tiruvallur, near Chennai with technical collaboration from Terex, UK for
manufacture of wheel loaders, dozers & dumpers. This factory has since been taken over by
Caterpillar for their Indian operations. The machines manufactured by Caterpillar in the
Tiruvallur factory are marketed by TIL and GMMCO. In 1974, L&T started manufacturing
hydraulic excavators under license from Poclain, France.

IMPACTS OF CONSOLIDATION IN MANUFACTURING:


While the pace of merger and acquisitions has slowed in the United States in the wake of the
recent credit crisis, some countries are still seeing considerable activity. Major companies in
India, having money to spend and a desire to expand, are continuing to pursue M&A
opportunities. The corporate sector all over the world is restructuring its operations through
different types of consolidation strategies in order to face various challenges posed by the new
pattern of globalization, which again led to the greater integration of national and international
markets. The intensity of such operations is increasing with the deregulation of various
Government policies as a facilitator of the new economic regime. The Indian corporate sector too
experienced such a boom in mergers and acquisition led restructuring strategies especially after
liberalization mainly due to the presence of subsidiaries of big MNCs here as well as due to the
pressure recorded by such strategies on the domestic firms. Mergers and acquisitions are
expected to change the performance of merging firms in two ways. One is through an increase in
the scale factor, which in turn will reduce the total cost of production of the merging firms,
which will result in the better performance. It is also likely that mergers and acquisitions may
give monopoly power to the merging firms in the market and this will give them powers to
increase the ‘mark-up’ that again lead to high prices and ultimately to high profits. Sometimes
mergers will reduce the performance of the merging firms if it acquires loss-making firms and
are not able to derive the expected synergies. Also if the industry is less colluded, the combined
market share of the merging firms could fall, which result in loss of market shares and low
profitability. Firms may opt for mergers in order to reduce the risk and uncertainty. If a firm is
more diversified, then there is greater possibility of obtaining stable return. Any losses in one
particular market can be offset by profit in some other market. Mergers enable firms to diversify
their production by adding new product to more therapeutic categories and thereby not only
reduce risks, but also expand their market size. The synergy effect of merger will enable the
firms to either deepen or extent product structure.
Recently, One of the major U.S. acquisitions took place last year, when GHCL, based in the state
of Gujarat, India, acquired Dan River, a Danville, Va.-based maker of home textiles for $93
million ($17 million in cash and the assumption of $76 million in debt). Also making major
moves in 2006 were members of the Tata Group, a major Mumbai-based conglomerate with
interests in, among other things, manufacturing, transportation, software and hotels. In June, Tata
Coffee paid $220 million to buy Eight O’clock Coffee, a venerable U.S. brand. In August, Tata
Tea paid $677 million for a 30% stake in Glaceau, a maker of vitamin water. It is now safe to say
that Indian companies are now firmly setting up themselves in global marketplace! Indian
companies have been on a buying spree in Continental Europe in the quest to become players in
the global market. Very recently, Tata Steel bought the English-Dutch steel maker Corus for a
staggering deal of $12 billion. Temptation food acquisition of Ever fresh from Chambal fertiliser
and chemicals. NTPC, Indian Railways formed JV to setup 1000 MW plant.

LEARNINGS FROM CHINESE MANUFACTURING MODEL:

Despite different political systems, China and India are aggressively pursuing economic
liberalization for growth. Both the countries tout science and technology, and exports as a basis
for their growth. Yet, their strategic paths for economic development are remarkably different.
China's strategy is methodical and deliberate, while that of India's is chaotic and opportunistic.
China is marching ahead with over 10 per cent gross domestic product (GDP) growth rates over
the last two decades. China has followed a conventional path in transiting from an agricultural
economy to a robust industrial economy - an evolution observed in many developed countries
including the United States, Japan, South Korea and Taiwan. China is building vital linkages
among its agricultural, industrial and service sectors, and systematically encouraging domestic
consumption in parallel with a sharp focus on exports. Guided by the firm hand of the
government, China's approach to development has been methodical and deliberate. The results
may be far from perfect. The urban-rural economic divide and the impact on the environment
may be worsening. On the positive side, though, China's per capita GDP is now double that of
India, although both nations had similar numbers as late as 1991.
In contrast, India is attempting to leapfrog from a predominantly agricultural economy to a
knowledge-based service economy. This approach is highlighted as the "shining" beacon of a
21st century economic development model. Bureaucrats and business leaders cite India's 6 per
cent GDP growth over the last decade and the strong growth of India's software and Information
Technology-enabled services (SITS, henceforth) sector in support of the leapfrogging approach.
However, they ignore the lack of vital linkages of SITS with the remainder of the Indian
economy and the fact that less than 10 per cent of the GDP growth is actually due to the SITS
sector. Linkages with other economic sectors are essential since they exert a ripple or multiplier
effect and create large numbers of jobs for the entire spectrum of workforce. The SITS sector
employs mainly the educated, urban youth, leaving a large fraction of India's population further
behind. If a country is to pursue a politically and economically stable development strategy in a
largely rural, unskilled agricultural economy it must focus on such linkages.
While the progress made in India is laudable, for a huge fraction of the population, the glass
must be viewed as "half-empty." The benefits of SITS sector in India have been constrained to
educated elite and to urban areas. On the contrary, with its focus on manufacturing, China has
achieved a growth pattern that is more robust and balanced than that of India, and has created
employment opportunities to absorb large agricultural workforce in industrial sector.
Without a well-articulated strategy for balanced economic development, India is destined to fall
farther behind China even as it celebrates its shining success in the SITS sector. India's growth
has been sporadic and opportunistic, with no strong central guiding policy. Indian leaders need
the vision for an economic agenda that recognizes democracy, sustainability, and widespread
socio-economic development. There is something useful to be learned by other developing
nations from the experiences of China and India.

 IMPACT OF INCREASING OIL PRICES ON THE


MANUFACTURING SECTOR:

Oil prices have risen dramatically over the past year. When they passed $100 a barrel, they hit
new heights, expressed in dollars adjusted for inflation. As they passed $140 a barrel, they
clearly began to have global impact. Recently, we have seen startling rises in the price of food,
particularly grains. Apart from higher prices, there have been disruptions in the availability of
food as governments limit food exports and as hoarding increases in anticipation of even higher
prices. Oil and food differ from other commodities in that they are indispensable for the
functioning of society. Food obviously is the more immediately essential. Food shortages can
trigger social and political instability with startling swiftness. It does not take long to starve to
death. Oil has a less-immediate — but perhaps broader — impact. Everything, including growing
and marketing food, depends on energy; and oil is the world’s primary source of energy,
particularly in transportation. Oil and grains — where the shortages hit hardest — are not merely
strategic commodities. They are geopolitical commodities. All nations require them, and a shift
in the price or availability of either triggers shifts in relationships within and among nations. The
major manufacturing industries that would be most affected by the sharp rise in oil prices would
include chemicals, transport equipment, textile products, basic metal and non metallic minerals.
Increase in oil prices will lead to increase in cost of production as oil is basically required in each
and every industry to run the machinery, for transportation, as an input or raw material, etc.
hence increase in oil prices will result in increase in the price of products.

 IMPACT OF INFLATION ON THE EXPORTS AND IMPORTS:

Export of non-basmati rice was banned and the minimum export price of basmati rice was raised
to $1200 per tonne. In the case of wheat there will be no import duty till December this year. In
order to pave the way for increased supply of edible oils, a commonly used medium of cooking
in India, a number of steps have been taken. Customs duties on crude and refined edible oil have
been reduced by about 50 percent and now range from 20 to 27.5 percent. Simultaneously, the
import of crude edible oil at zero duty and refined oil at 7.5 percent has been allowed. 10
percentage points too reduced customs duty on palm oils. The 4 percent additional countervailing
duty on all edible oils was also withdrawn. Export of all edible oils has already been prohibited.
Customs duty on maize imported under Tariff Rate Quota of five lakh metric tonnes was also
done away with. Import of Portland cement, other than white cement, was exempted from
countervailing duty. At the same time, export of cement was banned. Basic customs duty on
various kinds of steel too was either reduced or done away with. On cotton imports the 10
percent customs duty along with 4 percent special additional duty was abolished. Crude oil and
petroleum products also received a favourable consideration. In the case of crude oil customs
duty was done away with. On petrol and diesel it was reduced from 7.5 to 2.5 percent. On other
petroleum products it was halved to just 5 percent. Rs. 1 too reduced excise duty on petrol and
diesel per litre. Ultimately it boils down to somehow increasing the supply of goods and services
in the market by increasing the imports and reducing or stopping altogether the exports of certain
key commodities, reducing money supply in the short run and ensuring proper distribution of
whatever stocks are available.
 CONCLUSION:
Indian Manufacturing Industry ' is successfully competing in the global marketplace and
registering high growth, but large sections of ' Indian manufacturing' sector still suffers from
bottlenecks like -
• Use of primitive technology or under utilization of technology.
• Poor infrastructure.
• Over staffed operations.
• Expensive financing and bureaucracy.
Further, ' Indian Manufacturing ' sector must focus on areas like improving the urban
infrastructure, ensuring fair competition and access to markets, reduction of import duties,
quality improvements in vocational and higher education, increased investment in R&D and
support of SMEs. Government leaders, experts, and researchers focusing towards making Indian
manufacturing globally competitive and to have a sustained growth, which contributes
significantly to GDP growth, employment generation and overall economic development. It also
aims to identify factors hampering industrial growth and seeks to redress these factors.
Also, macroeconomic policy should be calibrated to curb the Depreciation of rupee of the rupee.
Every effort should be made to hang on to the hard won gains of fiscal consolidation, including
through necessary hikes in domestic prices of petroleum products. The usual agenda of
infrastructure reforms would pay high dividends for manufacturing productivity and
competitiveness. Reform of our labour laws would encourage scaling up production levels in
manufacturing units in labour-intensive industries such as textiles, garments and leather
products, thereby increasing output, exports and employment in these sectors. Finally, for the
longer run, there is a whole raft of measures that need to be adopted in education, training and
health to enhance the productivity of our labour force and generate the kind of skill mixes sought
by an expanding industrial sector. It's all been said before, with dubious impact on actual policy!
BIBLIOGRAPHY

1) www.google.com
Links:
• http:/findarticles.com/
• http://www.ficci.com/studies/study_on_oil_price_impact__may_17.pdf
• http://nmcc-vikas.gov.in/PolicyGovernance/PDF/manufinal.pdf
• http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-
changing-indian-business/
• http://news.bbc.co.uk/2/hi/business/3708951.stm

2) www.answers.com
3) www.businessgyan.com