20-India's Manufacturing Strategy - Global Perspective

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India's Manufacturing Strategy: Global PerspectiveS. Das*

ABSTRACT

The Indian manufacturing sector has shown

remarkable results in the recent past. Manufacturingis the logical engine to provide employment growthin India, because the work force in the organizedsector - a core engine for growth - is currently onlyeight percent. The challenges are significant. Thereare numerous constraints to growth, and India has itswork cut out as it makes the transition from being anattractive labor pool to a global manufacturingpower. While focusing on operational efficiency,innovation, high-tech research and development,India needs to reform its fiscal policy, labor laws,regulatory system, foreign investment policy etc. inorder to attract all the top manufacturing giants of the

world by offering them world class facilities.

INTRODUCTION

The resurgence of India's manufacturing sector hasbeen seemingly magical. Currently, themanufacturing sector which accounts for 12 percentof the gross domestic product (GDP) is growing at arate of 9.5 percent to 10 percent annually. The aim isto accelerate the growth to 12 percent to 14 percent.India has set a target of a minimum of 12 per centgrowth in manufacturing, as it seeks to boost grossdomestic product (GDP) growth to 10 per cent in thecoming years, from 8.4 per cent in 2005-2006. India's

manufacturing sector will need massive investmentof $135 billion over the next five years if it is tosupport economic growth of more than 8 percent peryear. And given that the government has targeted 12percent growth in manufacturing, in support of a 10percent growth target for gross domestic product(GDP), even this amount may be insufficient.

Recently, a government-appointed panel hadprojected that India required $1.5 trillion including$72 billion in Foreign Direct Investment (FDI) ofinvestment in all sectors over a similar period. FDI,apart from bringing in capital, also brings with itmodern technology and business practices, and

*Associate Professor, Lai Bahadur Shastri Instituteof Management, Delhi

helps in increasing the competitiveness ofdomestic industry.

The Indian manufacturing sector has shownremarkable results in the recent past. It grew by about10 percent in the year 2005, and in a recent study wasidentified as the second most competitivedestination. In the last decade, Indian manufacturershave shown they can perform on par with the best ofcompanies and compete strongly in the globalmarketplace. Examples abound in terms ofmarket shares, costs, awards and certificationsdemonstrating high standards of quality, global scale,adopting contemporary manufacturing practices, etc.Much of this change has come about in a very shorttime of about 10-15 years after the liberalization ofthe Indian economy. It is also true that there are largesections of the Indian manufacturing industry thatsuffer from underutilization of technology,inappropriate scales, poor infrastructure, overstaffedoperations, expensive financing and bureaucracy.While companies from around the world are lookingat India as a partner in their supply chains, is Indianmanufacturing ready to integrate with the networkedeconomy? Achieving global competitiveness inmanufacturing is highly essential to the Indianeconomy: this sector offers the highest employmentpotential. The globalization of supply chains offerstremendous opportunities to the Indianmanufacturing sector. India cannot afford to miss this

time and opportunity.

Few months ago the Indian government asked keyMinistries to coin policies to help investors fund thecountry's infrastructure projects. Apart fromallowing FDI up to 100 percent in most industries, thegovernment has initiated a slew of measures to boostmanufacturing, such as improving infrastructure anddeveloping growth centers. India needs to ensure thatthe foreign direct investment in the country goes up to$84 billion by 2010-2011 from $47 billion at present.This calls for a total investment of $331 billion in thecountry's infrastructure over the next five years,according to a study on infrastructure done by the

Confederation of Indian Industry's (CII)infrastructure council. According to another study bythe Ratan Tata-led Investment Commission, there is a


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56 LBS Journal of Management & Research

need for over $269 billion in funds in the next fiveyears.

So far, the manufacturing sector has attracted $2billion as FDI in 2005-2006, a 75 percent rise over

$671 million in 2003-2004. As announced by theindustry minister recently, manufacturing investmentregions will be set up for automotive components,leather, footwear, telecom and hardware.

LITERATURE REVIEW

Manufacturing strategy process, content andimplementation determine how manufacturingresources and capabilities are deployed (Hayes andWheelwright, 1984) to complement the businessstrategy (Swamidass and Newell, 1987) and ifproperly utilized provide a 'competitive weapon' inthe firm's strategic planning (Skinner, 1969).Manufacturing strategy hence influences the success

of strategic initiatives including new processtechnologies (Beach et al., 2000; Gagnon, 1999;Honeycutt et al., 1993; Schroeder et al.,1995;Wathen, 1995), new products (Spring andDalrymple, 2000; Voss et al., 1996), and human-resources (Bates et al., 1995; Youndt et al., 1996).Manufacturing strategy contributes substantially notonly to manufacturing performance (Anderson et al.,1991; Meredith and Vineyard, 1993) but also tobusiness strategy, as measured by business unitperformance on market share, growth, and profits(Ramanujam and Venkatraman, 1987) .Manufacturing strategy frameworks have identified

key manufacturing decisions and highlighted theneed for consistency among decisions that affectbusiness-level strategy, competitive priorities andmanufacturing strategy and infrastructure (Fine andHax, 1985; Hayes and Wheelwright, 1984; Hill,1985,1995; Schroeder etal., 1986; Skinner, 1969), aswell as manufacturing strategy, manufacturingcapabilities, marketing-manufacturing congruence,and their effects on manufacturing performance(Bozarth and Edwards, 1997). Recently, however,concerns have been raised about the currentmanufacturing strategy paradigm. Inevitably, coremanufacturing strategy concepts such asmanufacturing capabilities, market requirements,

and tradeoffs between competitive priorities have

been criticized. For example, Spring and Boaden(1997) have argued that the firm wins orders in themarketplace as a result of a number of factors, and not just via the firm's products per se, as had beenindicated in some of the manufacturing literature

(e.g. Hill, 1985). Similarly, the tradeoff view has beenchal lenged by Japanese approaches tomanufacturing, world-class manufacturing(Schonberger, 1990), and empirical findings (e.g.Meredith et al., 1994). More fundamentally,however, whether the existing manufacturingstrategy paradigm is still useful has been questioned(e.g. Drucker, 1990). Leongetal. (1990) suggest thatthe current manufacturing strategy paradigm lacks:(1) a cohesive theory-based effort by manufacturingstrategy researchers; (2) sufficient survey basedempirical work; and (3) proper integration withconcepts and theories developed in other disciplines.

The lack of consensus about manufacturing strategy'scontent has been especially identified as a barrier toadvancement (e.g. Hayes and Pisano, 1994; Kim andArnold, 1996; Mills et al., 1995) as it creates"Competition between alternate manufacturingstrategy paradigms (Voss, 1995). Thus,manufacturing strategy still needs a coherent theory(SwinkandWay, 1995).

Is manufacturing strategy passe (Clark, 1996) or doesits importance need to be regained (Pilkington,1998)? Despite providing Skinner's (1969) missinglink between business-level strategy andmanufacturing, manufacturing has increasingly lost

touch with the mainstream corporate and businessstrategy literature (Ward et al., 1996). Environmentaland other changes have caused manufacturingstrategy to drift away from the strategy mainstream,particularly the market-led and resource-drivenapproaches to strategy. However, manufacturingmust be aligned with corporate strategy in order tocontribute to performance (Skinner, 1969).

As can be seen from Table-1, the route ofmanufacturing has tracked a unique path starting withmass production; product oriented philosophy during1980s to mass customization and value proposition inthe present day situation.


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India's Manufacturing Strategy: Global Perspective 57

Table-1. CHANGING FACE OF MANUFACTURING

1980s 1990s 2000+

Philosophy Mass production;

Product oriented

Just-in-Time;

Customer Service

Mass customization;

Customer Value

People Individuals; Self -

oriented

Teams; Company

oriented

Strategic leadership;

process oriented

Finance Labor allocation Activity based Integrated Performance mm

Materials Adversarial suppliers Supply Chain Value Chain

Overall Posture Just-in-Case Lean Strategic Manufacturing Initiative

To be successful in today's increasingly time-sensitive and competitive markets, businesses needmanufacturing processes that are fast, flexible, andadapt quickly to change. Achieving this objectiverequires integrated solutions that connect supplychains to factory processes, production equipment,

and factory systems in a seamless, customer-centricnetwork.

THE EMERGING SCENARIO

Just as Japan appears to be emerging from more thana decade of economic difficulty, the emergence ofChina and India is rapidly undermining Tokyo's long-term game plan for staying competitive.

The Chinese challenge has, of course, beenrecognized for some time and Japanese companieshave responded by redoubling efforts to penetrateChinese markets while at the same time keeping

proprietary, high tech production at home. But just asit seemed like these efforts might be paying off, Indiahas entered the picture with a high tech strategy of itsown that, when paired with China's manufacturingthrust, makes the entire Japanese economy morevulnerable than ever.

Ironically, this is, at least in part, the result of thesuccess of Japan's original export led growth policy.It worked so well that it was studied and widelyimitated by other Asian countries seeking "miracles"of their own. First Korea, then Taiwan, Hong Kong,Singapore, Malaysia, and Thailand adopted their ownversions of the Japanese game plan. It worked for

them too and turned them from scrawny alley catsinto Tigers. Of course, there was another importantfactor that contributed powerfully to the success. TheUnited States adopted a complementary domesticconsumption led growth plan. This created the

demand necessary to absorb the exports of the exportled growth countries by making America into thegreatest consuming country the world had ever seen.

Over the past thirty years, the convergence of thesetwo strategies has led to creation of a globaleconomic structure that is highly complementary and

unbalanced. The strong dollar, while good forAmerican consumers, has tended to movemanufacturing out of the United States to offshorelocations in Asia. The result is a large and rapidlygrowing U.S. trade deficit that acts as the primaryengine of growth of the global economy. However,this deficit has to be financed, and is currently fundedprimarily by lending from Japan and China. Theyprovide a kind of vendor financing that keeps theirexports and those of most of the rest of the worldgrowing while enabling Americans to enjoy livingbeyond their means by consuming more than theyproduce.

For a long time, it has been argued that this situation isnothing to worry about because the United States willmove to higher ground by creating primarily servicesand a high tech based economy that will eventuallyreplace manufactured exports with exports of highvalue added services and technology. As it hasbecome a high cost country in recent years, Japan hasalso begun to move manufacturing offshore whilefocusing more attention on services and hightechnology as the keys to future growth andcompetitiveness.

Perhaps even more significant, however, is theimpact of India on the global economy. Like China,

its large population is mostly poor and unskilled, butten percent is over 100 million people who are highlyskilled and fluent in English with many educated inelite U.S. and U.K. universities with extensiveexperience in Silicon Valley, the U.S. Center for


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Disease Control, and other leading institutions andcompanies around the world. These people can doanything that can be done in Japan, North America,and Europe. Indeed, they can often do it better, andthey can do it for twenty percent of the cost. In

particular, because of the Internet, they can do highlysophisticated services as well as high tech. Intel andTexas Instruments, for example, have teams in Indiadoing design of cutting edge semiconductors. GE hasone of its main R&D centers in India. Brain scans andradiology of all types are read on-line in India. Indianhospitals are flying patients from all over the worldfor high quality-low cost treatment in Indianfacilities. On top of this, India has an entrepreneurialculture and experience that is second only to that ofSilicon Valley and far ahead of Japan's. India maywell outdo Japan and even the United States atinventing the next generation of technology and

bringing it to market.Thus, the comforting neo-classical paradigm inwhich developed countries do R&D and high techinvention along with sophisticated services whiledeveloping countries specialize in agriculture andlow end, simple manufacturing is being stood on itshead. China and India will excel at both the high endand the low end and in services as well asmanufacturing. This means Japan's ability tocompete in the future will be severely challenged andAmerica's even more so.

Indeed, it means acceleration of the likely collapse ofthe current global economic structure. The U.S. trade

deficit cannot grow indefinitely. The ability of Japanto help finance this deficit will be dramaticallyreduced by Japan's increasing inability to retain hightech manufacturing as China more and moreproduces its own components and equipment and asIndia takes more and more of the sophisticatedservice work. Japan's trade surplus and level ofsavings will drop significantly. Likewise, the UnitedStates will not be able to expand its exports becauseChina and India will be more competitive in bothhigh tech and services.

In light of this, experts like former Federal ReserveChairman Paul Volcker are predicting a 75 percent

chance of a global financial crisis in the few years.This would entail a dramatic devaluation of thedollar, spiking global interest rates, and recession ifnot depression on a world wide scale with China andIndia emerging as the new arbiters of the direction ofthe global economy.

THE SITUATION IN INDIA

The resurgence of India's manufacturing sector hasbeen quite magical. Not only are profits soaring, thesector is fast spreading its roots abroad as manyIndian manufacturing firms inch close to becomingtrue blue multinationals.

Indian government statistics released in June held apleasant surprise for those with a stake in the Indianeconomy. India's Gross Domestic Product (GDP) forthe January through March 2006 quarter grew by 9.3percent, beating market expectations. That growthcompared to 8.6 percent in the year-ago period, andcame mainly on the back of a healthy 5.5 percentgrowth in the agriculture sector. Full-year GDPgrowth for fiscal year 2005/06, ending March 31,2006, was revised to 8.4 per cent from a previousestimate of 8.1 percent. The better-than-expectedperformance in the economy was also due to healthygrowth in manufacturing and services.

(a) Scope for Improvement

"The Indian manufacturing sector has to grow muchmore before its full potential is realized, particularlywhen the share of manufacturing in gross domesticproduct has remained between 16 percent and 17 percent during the last two decades. Indian industrialsector has shown signs of strength in recent years.Traditionally, the country has been strong in labor-intensive industries such as apparel, footwear, jewelry, leather and textiles. But of late, it has

emerged as a key player in skill-intensive industriessuch as auto components, hardware, generic drugsand specialty chemicals.

The Indian manufacturing sector has by and largewithstood the "competitive pressures" from imports,even as tariffs on industrial goods have been cut fromthe levels of more than 100 percent to a peak of 15percent. Domestic manufacturers have demonstratedtheir global competitiveness by notching up exportgrowth by 20 percent or more during the lastthree years.

"With a growing middle class and their increasingpurchasing power, domestic demand is likely to be amore powerful engine of growth than externaldemand. The realization that India is not just aprovider of services but a huge market in itself ispushing companies across the world to rethink theirstrategy toward India. The effect of this can be seenacross the manufacturing spectrum, from small to


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mid-sized to very large companies. They are alllooking at India as a sourcing and manufacturinglocation.

(b) India DiscoveredAs global multi-national companies (MNCs) movetheir manufacturing bases to India, several of themhave realized that they need to create products forIndia locally. The primary reason for this is to achievesuccess not only in India, but globally as well. A silentbut stirring revolution is under way among manyeminent global high-end technology companies.After having established themselves firmly in theIndian sub-continent, utilizing local talent to work onessentially western problems, India has come a fullcircle now. Information technology (IT) majors arenow seeking out help when it comes to producing

products in the country itself.This phenomenon has already sparked a lot ofactivity in companies including Cisco, Ericsson,Nokia, LG and Samsung.. India's dream of becominga global manufacturing hub now seems to be movingin the right direction. So much so, that even high-endsemiconductor chip manufacturing companies suchas AMD and Intel are not far behind when it comes tocommitting themselves toward establishing theirmanufacturing bases in this region. The most recenttechnology major that plans to set its base in this partof south Asia is Dell. Having done so, it aspires toincrease its workforce by 50 percent within two

years.

(c) Strong Vision

U.S. conglomerate General Electric says it isconsidering India as a manufacturing hub. Indicatingthat the company was looking at enhancing itsinvestment in India, Chief Executive Officer andChairman of GE Worldwide Jeffrey Immelt saidrecently that "this is the right time to invest in India,and we will be bold on the market here."

India Finance Minister P. Chidambaram is alsounflinching regarding India's manufacturing future.

"We will become a global manufacturing hub forsmall cars in the next three to five years,"Chidambaram declared recently, adding, "we willemulate this success story in other sectors to becomeone of the world's top three manufacturing centers."

India has displaced the United States to become the

second-most attractive destination for foreign directinvestment (FDI) among manufacturing investors,according to consultant A. T. Kearney's latest FDIConfidence Index rankings. Will the manufacturingindustry in India emerge as the major contributor in

the overall growth of the country? "Despite the recentrapid growth, there is no evidence of overheating inthe Indian economy", as stated by Mr. Montek SinghAhluwalia, deputy chairman of the Indian PlanningCommission. There is scope for further expansion inthe manufacturing sector, he said. In fact, the high-growth rate can't be 'sustained' on the basis of servicesalone, he added. "Manufacturing sector must begiven greater thrust."

The domestic manufacturing sector reportedimpressive growth for the April-September period of2005-2006 compared to the corresponding period inthe previous year says an ASCON-CII survey. Of the

total 140 manufacturing sectors in the countryreporting production, 27 recorded a growth rate ofmore than 20 per cent, according to the survey. Forty-three sectors recorded a growth rate of 10-20 per centand 50 sectors registered growth of up to 10 per cent.These figures have a story to tell of tightened beltsand focus on innovation.

Energy expenses are being monitored, says anEconomic Times study. Between FY00 and FY05,sales have grown at a CAGR of 11.5 per cent, whilepower and fuel expenses have grown at 7.3 per centonly. This despite a hike in fuel prices during thisperiod. Chemicals and steel, for which fuel costs

form a significant part of the total cost of production,have brought down the fuel/sales ratio by 4.2 and 2.8percentage points respectively.

Indian manufacturing is also leveraging innovationlike never before, using it to push the envelope onoperational efficiencies. Faster productdevelopment, smart supply chains and deployment oflean manufacturing for dynamic production havebecome the order of the day. Lead time for newproduct development has come down by as much as50 per cent in the past three years. Inventories arebeing reduced too by about 20 to 30 per cent in thelast four years, added to which is the reduction in

defects from about 20,000 parts per million (ppm) tobelow 100 ppm. On a scale of 1-10, Indianmanufactured goods quality could be 7, againstGermany's 9.

The Indian economy has been made more and more


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open. This is reflected through the following points:

Foreign equity up to 100% is encouraged inseveral sectors.

Single market-determined exchange rate for therupee is prevalent.

Use of foreign brand names and trademarks forsale of goods in India is allowed.

Foreign companies are permitted to open branchoffices in India.

The entry of multinational companies hasincreased the level of competition; for example,since 1991 Daewoo, LG, Santro, Samsung, andso on have started plants in India.

There is a favorable attitude of government andother funding agencies.

Facilities for automatic and single-windowclearance are available with respect to proposalsfor 100% export-oriented units.

The Reserve Bank of India gives automaticpermission for foreign technology agreements inhigh-priority industries.

The Indian manufacturing sector has to grow muchmore before its full potential is realized, particularlywhen the share of manufacturing in gross domesticproduct has remained between 16 percent and 17 percent during the last two decades. In order toaccelerate its ongoing growth, India needs a robustmanufacturing sector. This is because:

1. Contribution of the manufacturing sector to

India's GDP has remained stable at around 17%while in China the manufacturing sectoraccounted for around 35% of the GDP and in thecase of Korea it was 31%

2.In order to achieve an overall growth of 8% perannum, it is essential that both manufacturing andservices grow at more than 11% even whenagriculture growth picks up to close to 4%.

3.Only a sharp increase in the manufacturing sectorworkforce would take the pressure off theagriculture sector and increase income levels.Agriculture, supporting about 65% of the workingpopulation, contributes only 22% of its grossdomestic product. A large shift of workforce fromagriculture to manufacturing will help improve

rural incomes and reduce poverty levels.

4.1f we compare India's performance with that ofother major Asian countries we can see that thesize of the value added in the Indianmanufacturing sector ($ 66 billion in 2000) wasless than one fifth of the Chinesemanufacturing sector ($ 373 billion) and even lessthanhalfofthe Korean manufacturing sector ($144 billion).

Table-2: MANUFACTURING SECTOR IN INDIA AND OTHER MAJOR ASIAN

COUNTRIES

Value added inmanufacturing in

2000($billion)

Share of Food,beverages &tobacco (%)

Share ofTextile &

Clothing(%)

Share ofMachinery &

equipment (%)

Share ofChemicals(%)

India 66 13 11 22 25

China 373 16 11 29 12

South Korea 144 8 8 45 9

Indonesia 40 20 20 17 11Thailand 39 26 17 10 8

Malaysia 30 8 4 47 7

Source: World Bank Report :2001 -02 on Status of Manufacturing in India and other Asian countries pp:3-5 of the web page


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SHARP SLOWDOWN IN MANU1

The manufacturing sector grew at an averageannual rate of 6% in the 14 years between 1990-91and 2003-04. This was higher than the 5.8%

growth in Industry and the 5.7% GDP growthduring this period. However, manufacturing sectorgrowth has fallen

ACTUREVG SECTOR GROWTH

sharply in the last seven years as compared to thefirst seven years of the reforms period. It hasslumped from 7.4% to just4.7% later.

Manufacturingsectorgrowthinthelatterperiodwaslower than the 5.1% growth clocked by industry andthe 5.7% growth of GDP during the period.

Table-3: SHARP SLOWDOWN IN MANUFACTURING SECTOR GROWTH (%

First seven years

(1990-91 to 1996-97)

Last seven years

(1997-98 to 2003-04)

Overall period (1990-

91 to 2003-04)

Manufacturing 7.4 4.7 6.0

Industry 6.5 5.1 5.8

GDP 7.8 5.7 5.7

Source: Reserve Bank of India Report: 2005-06 pp36 of the chapter on manufacturing.

COST DISABILITY FACTORS FACED BY

INDIAN MANUFACTURING SECTOR

Higher input costs for the Indian manufacturingsector can be attributed to: 1. Cascading effect ofindirect taxes on selling prices of commodities, 2.Higher cost of utilities like power, railway transport,water; 3. Higher cost of finance and 4. Hightransactions costs.

FICCI has estimated that additional costs imposedon the manufacturing sector on account ofmultiplicity and high level of taxes, high cost of

capital and poor quality and excessive user charges ofsupport infrastructure services add up-to 12.2% ofthe cost of production.

1. Cascading effect of indirect taxes on selling

prices of commodities

A FICCI study showed that the average totalincidence of indirect taxes on the selling price ofall commodity groups works out to 36.25%.

Whereas custom duties have been brought downover the years (peak customs duty onmanufactured items stands at 20%) thegovernment has been increasing the excise dutyburden on the manufacturing sector.

2. Higher cost of utilities

High cost of power - Total electricity costs as aproportion of total manufacturing cost is 10.4%.

Table-4: COST OF POWER SUPPLIED TO INDUSTRY:

AN INTERNATIONAL COMPARISON (2001)

Country US $ kilo watt per hour

India 0.074

Korea 0.062

Malaysia 0.056

Thailand 0.061Singapore 0.079

China 0.032

USA 0.040

UK 0.055

Source: The World Competitiveness Yearbook, 2002 pp 237


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Inefficiencies at Indian ports - High turnaroundtime, few containers handled per hour, and highcharges impose 30% higher working capitalrequirement in India.

At present, the capacity of 43 million tonnes at allIndian ports is being fully utilized, and thisrequirement will increase up-to 120-150 milliontones by 2015.

Table-5: PRODUCTIVITY IN CONTAINER HANDLING AT MAJOR PORTS: AN

INTERNATIONAL COMPARISON

Ports Handling Productivity

(moves per ship hour)

Throughput Per Day

Chennai 310

Jawahar Lai Nehru 15 800

Bangkok Laom Chabang 35 1300

Colombo 38 1400

Source: Fairplay Report on Productivity in container handling at major ports: An international comparison pp : 105.

Poor road conditions - Losses due to congestion and on costs to industry.poor condition of roads estimated at more than Rs120 billion (WorldBank). 3. High cost of finance to industry

Railway freight prices- It is well know that the The lending rates of banks are still much higher inrailways cross subsidize passengers at the expense of | India as compared to the other countries that competefreight. This cross subsidization has eroded the cost | with India in global markets and also much higheradvantages of rail transport and negatively impacted than the developed countries.

Table-6: CROSS SECTION DATA ON LENDING RATES (% FOR THE YEAR 2003)

Country Lending Rate Real Interest Rate

India 11.46 7.66Thailand 5.94 6.00

Malaysia 6.39 5.2

Singapore 5.37 5.76

China 5.31 4.11

Korea 6.24 3.14

USA 4.12 1.82

UK 3.69 0.79

Source: International Financial Statistics, pp-45 of the International Monetary Fund Report for the year 2005

Major financial issues that hinder the manufacturingsectorwould include:

(i) Demise of development financial institutions -73% of respondents to a FICCI survey pointout that DFIs have not been very activeduring the last five years and

(ii) The risk-averse attitude of the financial sector onaccount of Asset Liability Mismanagement(ALM) and the large size of the Non-PerformingAssets (totaling Rs 62436 crores in September2004) has led to a dearth of low cost long-termcapital for the manufacturing industry.


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4. High Transactions costs and a prosecution

oriented regulatory environment

One survey conducted by FICCI points out that amaximum of91 inspectors could visit an industrial

establishment with20 of them under 5 regulatory

areas having the power of sending the owner behindbars. Moreover, the multiplicity of procedures andcompliance measures adding to transactions costsand time thwarts efficiency.

Table-7: THE BUSINESS ENVIRONMENT (AS ON JANUARY 2003)

India China

Days to start a business 88 46

Cost to register business (as % of GNI per capita) 50 14

Days to enforce contract 365 180

Source: World Development Indicators, 2004 Report pp 6-9 of the web page.

It has taken much too long for units to declared sick or revived, which blocks productive use of capital.. It takes onaverage, 11.3 years in India to resolve insolvency as compared to 1 in China.

Structure of the Indian Manufacturing

Sector and the Cost Advantages and

Disadvantages in International Perspective

In 2002-03 there were 1.28 lakh registeredproduction units employing 78.9 lakh workers. Thetotal output of the manufacturing sector was Rs10,87,865 crore and the gross value added Rs2,15,006 crore.

1. Size and distribution of production units in the

manufacturing sector

The manufacturing segments with the largest numberof units were food and beverage with 23,941 units(18.7%), followed by textiles with 12792 units(10%), non-metallic mineral products with 11,508units (9%), chemicals with 10,435 units (8.1%),machinery and equipment with 8,657 units (6.8%)and fabricated metal products with 8,137 units(6.4%). These six industries accounted for 59% of thetotal registered production units in 2002-03.

2. Size and distribution of manufacturing sectoremployment

The registered units with the largest share ofemployment were in the food products and beveragewith 12.9 lakh workers (16.4%) followed by 12.2

lakh in textiles (15.4%), chemicals with 7.5 lakhworkers (9.5%), basic metals with 5.6 lakh workers(7.1%), non metallic mineral products with 5.1 lakhworkers (6.5%), and tobacco products with 4.5 lakhworkers (5.7%).

These six industries together accounted for 61% ofthe total employment in the registered manufacturingsector in 2002-03.

3. Size and distribution of manufacturing sector

output

The registered manufacturing sector output was thehighest in food products with Rs 1,68,565 crore(15.5%), followed by chemicals with Rs 1,59,081crore (14.6%), coal, coke and refined petroleumproducts with Rs 1,48,029 crore (13.6%), basicmetals with Rs 1,17,818 crore (10.8%), textiles withRs 84,271 crore (7.7%) and motor vehicles with Rs

57,732 crore (5.3%)Together these six industries accounted for 68% ofthe total output in the registered manufacturing sectorin2002-03.


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Table-8: SHARE OF DIFFERENT SEGMENTS IN THE REGISTERED MANUFACTURINGSECTOR IN INDIA: 2002-03 I

Units Employment Output Gross

valueadded

Food products and beverages 18.7 16.4 15.5 9.4

Chemicals and chemical products 8.1 9.5 14.6 18.8

Coke, refined petroleum products

and nuclear fuel

0.7 0.9 13.6 10.3

Basic metals 5.1 7.1 10.8 10.5

Textiles 10.0 15.4 7.7 7.7

Motor vehicles, trailers and semi-trailers 2.2 3.4 5.3 4.8

Machinery and equipment 6.8 5.0 4.4 5.5

Rubber and plastic products 5.4 3.5 3.3 3.7

Other non-metallic mineral products 9.0 6.5 3.3 4.4

Electrical machinery and apparatus. 3.0 2.8 2.9 3.2

Transport equipment 1.5 2.2 2.6 2.9

Radio, television and communication

equipment and apparatus

0.8 1.4 2.3 2.2

Fabricated metal products, except

machinery and equipments

6.4 3.6 2.2 2.4

Wearing apparel; dressing and dyeing of fur 2.6 4.4 1.8 2.0

Paper and paper product 2.7 2.3 1.7 1.6

Furniture manufacturing 1.6 1.7 1.6 1.4

Tobacco products 2.0 5.7 1.4 2.6

Publishing, printing and reproduction of

recorded media

2.4 1.6 1.0 1.6

Tanning and dressing of leather; luggage,

handbags saddlery, harness and footwear

1.8 1.9 0.9 0.8

Others Medical, precision and optical

instruments, watches and clocks

3.6

0.8

1.6

0.9

0.90.7

1.9

0.9

Office, accounting and computing

machinery

0.1 0.2 0.4 0.7

Wood and of products of wood and cork 2.3 0.7 0.2 0.2

All industries 100 100 100.0 100

Source: The World Competitiveness Yearbook, 2002 pp-169-172.


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HIGH COSTS OF INPUT MATERIALS AND UTILITIES IN INDIA: A MAJOR

DISADVANTAGE IN THE GLOBAL MARKETS

The raw material and infrastructure (utilities) inputcosts in the Indian manufacturing sector are much

higher in India as compared to other major Asianplayers. A comparison of costs of input materials andutilities in India, China, Malaysia and Korea across

15 important manufacturing segments showed thaton the average, share of input materials and utilities

costs in total output value was as high as 81.3% inIndia as against 75.5% in China, 68.7% in Malaysiaand only 58.5% in Korea.

Table-9: SHARE OF COST OF INPUT MATERIALS AND UTILITIES IN TOTAL OUTPUT OFDIFFERENT INDUSTRIES IN THE MANUFACTURING SECTOR (%)

India China Malaysia Korea

Food Products 88.8 78.7 87.0 62.4

Leather & Fur products 85.8 77.1 66.4 69.5

Textiles 85.4 76.8 63.6 58.1

Wood products 83.5 77.1 67.8 59.5

Metal products 83.2 76.6 68.6 54.9

Industrial chemicals 82.8 68.4 62.4

Non ferrous metals 82.4 79.6 76.0 74.9

Plastic products 82.4 76.3 61.6 57.8

Rubber products 80.2 66.0 53.1


Electrical machinery 78.7 76.5 75.9 51.8

Non-Electrical machinery 78.5 73.7 73.6 61.6

Iron & Steel 77.9 74.7 81.8 66.0

Glass 76.0 73.0 53.5 44.2

Printing & publishing 75.1 66.4 47.4 41.5

Average 81.3 75.5 68.7 58.5

Source: UNIDO Report on Share of cost of input materials and utilities in total output of differentindustries in the manufacturing sector, pp99-102


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ADVANTAGE INDIA: THE LOW LABOR COSTS IN THE MANUFACTURING SECTOR

No comparison can be made with the share of laborcosts in manufacturing in China because of non-availability of data. Available figures show that labor

costs of manufacturing are much lower in India ascompared to Malaysia and Korea. However, the shareof labor cost in manufacturing in Indonesia is much

lower than that India. Estimates show that theaverage share of labor costs in manufacturingacross 15 major industries was 6.9% in India as

compared to 8.7% in Malaysia, 10.7% in Koreaand5.5% in Indonesia.

Table-10: SHARE OF COST OF LABOR IN TOTAL OUTPUT OF DIFFERENT INDUSTRIES INTHE MANUFACTURING SECTOR (%)

India Indonesia Malaysia Korea

Food Products 3.7 4.2 3.2 7.7

Leather & Fur products 4.4 7.7 16.7 8.1

Industrial chemicals 4.6 4.9 2.9 5.5

Plastic products 4.9 6.0 12.9 12.0

Iron & Steel 4.9 2.2 5.0 5.9

Rubber products 5.3 4.8 10.0 13.8

Non ferrous metals 6.1 3.4 5.1 5.8

Electrical machinery 7.1 4.6 6.4 9.1

Textiles 7.2 4.7 8.8 13.4

Metal products 7.4 6.1 10.7 13.7

Wood products 7.6 5.9 10.9 12.6

Glass 7.9 7.5 8.1 14.0

Non-Electrical machinery 8.4 6.3 6.6 11.2


Printing & publishing 13.9 10.1 16.7 16.6

Average 6.9 5.5 8.7 10.7

Source: UNIDO Report on Share of cost of labor in total output of different industries in themanufacturing sector, pp 72-75

CONCLUSION

Over the last decade, India's manufacturing sectorhas changed dramatically and emerged as the key tomeeting the ambitious nine percent growth target inthe Tenth Five Year Plan. Manufacturing is the logicalengine to provide employment growth in India,

because the work force in the organized sector coreengine for grow this currently only eight percent. Thechallenges are significant. There are numerousconstraints to growth, and India has its work cut outas it makes the transition from being an attractive

labor pool to a global manufacturing power. Whilefocusing on operational efficiency, innovation, high-tech research and development, India needs to reformits fiscal policy, labor laws, regulatory system,foreign investment policy etc. in order to attract allthe top manufacturing giants of the world by offering

them world class facilities. Based on the speed atwhich India is growing and the kind of role it isplaying in the field of global manufacturing, it can besafely predicted that India is going to be universallyaccepted as the "Global Manufacturing Hub".


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Documents

20-India's Manufacturing Strategy - Global Perspective