Inclusive Growth: Impossible without Manufacturing
‘Inclusive Growth’ and ‘Aam Aadmi’ have been two of the most commonly used slogans of UPA. The Eleventh five year plan is also titled ‘Inclusive Growth’. So let us try and define what Inclusive Growth should really mean.
Why Growth? What kind of Growth ?
Growth is not just an economic agent of change; it is also an agent of social change. India does not only need growth to eradicate poverty, it also needs growth to break the social barriers. The ‘Hindu rate of growth’ , which India witnessed in the first four decades of independence, is definitely not desirable. The Hindu rate of growth couldn’t get rid of caste.
Caste is still a reality in large sections of Indian society and the last two decades of growth has seen it somewhat cracking. The only thing that can break the caste barrier is rapid economic growth which creates enough opportunities for people to come out of their caste boundaries and hierarchies. Growth thus has to be rapid. Hindu rate of growth is unacceptable.
What is Inclusive Growth?
‘Inclusive growth is growth that ensures meaningful and sustainable jobs for all, which includes the poorest of the poor.’
Indian economy at a glance
India’s GDP can be divided into three broad sectors – primary sector (agriculture), industrial sector and the services sector. The table below depicts the sector composition of GDP over the years.
|Sectoral Composition of GDP|
Source: Economic Survey 2011-12
As is evident from the table above, the contribution of industrial sector to GDP has stagnated since 1991. Industrial sector can be further broken down into Manufacturing and Mining. Manufacturing constitutes roughly 16% of our GDP and has been stagnant at that level.
India’s GDP growth has essentially been services led growth with the share of agriculture consistently going down. This has naturally meant that growth has not been inclusive enough.
It is often alleged that the reforms initiated in 1991 has not really benefited the poor as inequality has increased. Unfortunately, it ignores the stagnant state of manufacturing. So why is manufacturing important for inclusive growth?
The answer to this question is because it cannot just be the other two sectors – agriculture or services. In the next 15 years, around 250 million more people would join the workforce – we need create adequate jobs for them.
Agricultural growth, though has improved from 2% earlier to now 3.5%, it still cannot accommodate this humongous number. Area of cultivated land per cultivator has declined from 0.43 hectares in 1901 o 0.23 hectare in 1981 and current. Availability of cultivable land is not increasing any further and current figures of area of land per cultivator would be even lower. There are far too many people involved in agriculture. (Source)
Services –There are some countries like Singapore and Switzerland that have become rich through services, like finance, tourism and trading; does it not show the viability of service-based prosperity?
The answer is no. Firstly, because India’s population is 1.2 billion and cannot be compared to much smaller countries. India is too large to survive on a services led economy and needs a more diverse economy. Within the services sector, knowledge based sectors like IT or Financial services provide jobs only to highly skilled and educated labor.
The two sub-sectors in services that are mass employment creators are – tourism and retailing. While there is tremendous scope for developing tourism in India, the latter is again not applicable in case of India. India has highest number of retail outlets per 1000 population (Source). This essentially means any growth in retail sector through reforms such as FDI is unlikely to produce too many incremental jobs as many more existing ones may be destroyed. FDI in retail must therefore happen once manufacturing reforms are in place.
The history of economic development followed a pattern of pulling people out of agriculture, moving them into non-farm activities such as into manufacturing and then into services. The present growth pattern led by high service sector growth and a stagnant manufacturing sector is leading to a rural-urban divide.
Manufacturing is crucial to the Indian economy. The effect of improvement in manufacturing sector goes far beyond the goods provided by it. Manufacturing sells goods to other sectors and in turn buys materials and services from them for its growth and development. Manufacturing spurs demand for everything from raw materials to intermediate components.
For instance, despite being hailed as the IT superpower, Indian IT sector is largely services based and not product based. This is because of lack of domestic manufacturing which essentially means that Indian IT companies don’t have adequate domain knowledge to create products. Likewise, manufacturing can spur growth in other sectors like financial, health, accounting and transportation.
Growth of manufacturing sector also lends greater support to Agriculture through more intensive efforts on agro-based Industries like food processing. As per the CII-Mc Kinsey Report prepared for Manufacturing Summit 2004, manufacturing can create 25-30 million jobs and possibly create two or three times this number in allied sectors (e.g. construction, education and entertainment) due to multiplier effect.
Factors ensuring Manufacturing competitiveness:
Factors which directly depends on Government and its policies:
1. Ensuring macro-economic stability: The first essentiality for ensuring manufacturing competitiveness is macroeconomic stability. This essentially calls for keeping inflation and fiscal deficit in check, and ensuring interest rates are lower. Large fluctuations in economic variables like inflation and interest rates add to the uncertainty for firms, consumers and the public sector, and can reduce the economy’s long-term growth potential.
2. Infrastructure Development: Energy availability is critical to sustain industrial growth and competitiveness. The average manufacturer in India loses 8.4 per cent a year in sales on account of power outages as opposed to less than 2 per cent in China and Brazil. It is estimated that power shortage alone contributed to a production loss of at least one per cent of GDP.
Besides power, from the manufacturing perspective the most important infrastructure areas are ports, and roads. Improvement of these sectors has direct impact on the competitiveness of the manufacturing sector.
3. Providing right market framework & regulatory environment: Government has a major role to play in providing the right market framework and regulatory environment as these provide invaluable impetus to the competitiveness of manufacturing sector. Sound regulatory regimes increase competition, encourage efficiency and also enhance productivity growth.
A framework that ensures fair competition, better access to markets – both domestic and foreign, level playing field for domestic manufacturers, review of existing regulations and reduce the burden of paperwork and inspector raj in respect of existing Laws, promote sub-sector wise policy on regulation can give a huge boost to the manufacturing sector..
The adverse impact of regulations on SMEs is particularly large. This is because the SMEs are less equipped to deal with the complex regulatory requirements. The inherent strength of SMEs which is flexibility would also be hampered by unnecessary and complex regulations.
4. Ensuring cost competitiveness and stimulating domestic demand: Various studies have shown that India suffers on competitiveness due to following factors such as:
· Higher import duties including inverted duty structure
· Higher incidence of indirect taxes
· Sub-optimal levels of operations
· Lower operational efficiencies
· Higher transaction costs
· Lower labor productivity
5. Labor Laws: Despite being a country which has abundant supply of cheap labor, Indian manufacturing has been long held back because of its archaic labor laws. Welfare provisions are an important part of labor laws, however, this has lead to unnecessary inspector raj. India’s archaic labor laws were last updated in the Industrial Disputes Act of 1948. They require companies with over 100 workers to get government permission to fire workers.
Barring the Payment of Wages Act, all other labor laws don’t prescribe any maximum period for which records and registers must be maintained. Compliance thus becomes difficult. This system also tends to hurt the small-scale sector much more than it hurts large-scale industry.
6. Land acquisition: Increasing manufacturing growth rate would require land to support this expansion. India currently has an archaic Land acquisition law that goes back to 1894.
7. Availability of Skilled labor: If Indian manufacturing has to grow at around 12 percent per annum, it will be necessary for the education and training system to produce at least 1.5 million technically skilled people every year. India would need an incremental requirement of about 20 million skilled technicians by 2015.
As the country moves up the technology ladder and begins to produce more complex products in greater volumes, manufacturers will need to invest in research and require talented employees. It is important to attract the best minds to teaching and research in our institutes of higher learning especially in science and technology.
The current salary structure with the upper limit set is unable to attract the best talent. At present the salaries of Assistant Professors are well below those offered to fresh B. Tech. and MBA graduates by the industry. In the long run this is detrimental to the interests of the nation. Generally there are 20,000 Post Graduate (PG) seats in engineering of which only 10,000 are filled while 4, 00,000 enter Under Graduate (UG) education every year. This is to be contrasted with the USA where there are about 60,000 seats each at the UG and PG level in engineering. At this rate there already is and there will continue to be a very severe shortage of teachers in Engineering and Technology.
8. Investing in innovations & technology: Innovation holds the key to increasing productivity, and productivity gains are the key to both economic growth and rising the standard of living. Increasing productivity is the key to maintaining competitiveness in manufacturing. Indian firms need to invest in research and development.
9. Enabling Small & Medium Enterprises (SMEs) achieve competitiveness: The Small and Medium Industries form the backbone of Manufacturing Sector not only in this country but even in the developed countries. SMEs are more labor intensive as compared to larger firm. In India, the Small Scale Sector contributes to 40% of Manufacturing.
Among the several impediments preventing the segment from achieving its full potential, the important ones are : access to timely and adequate credit (particularly, as a sequel to the general decline of the State financial corporations), technological obsolescence, infrastructural bottlenecks, lack of R & D linkages, marketing constraints and disabling rules and regulations.
10. Increasing the usage of Information & Communication Technology (ICT) in manufacturing sector: In today’s information age, business environment requires new capabilities in manufacturing organizations for competitive success. ICT has been fundamentally changing the way organizations conduct their business and compete in the market place and it can significantly improve the productivity of manufacturing sector.
Current stage of ICT adoption in Indian manufacturing sector is not encouraging and the lack of global competitiveness in manufacturing is partly due to lack of adequate ICT enablement. Most of the enterprises have not been able to adopt the ICT architecture due to non-affordability of the costs associated with it. They lack the knowledge of business performance improvement potential of ICT and it is still used as office administration and accounting automation tools.