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DRAFT

The National Strategy forManufacturing

National Manufacturing Competitiveness Counci lUdyog Bhavan

New Delhi 110 011

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The National Strategy for Manufacturing

Contents

Section Chapter Page No.

1 Introduction 1 5

2 Manufacturing imperative 6 - 11

2.1 Importance of manufacturing to Indian economy2.2 Competitiveness2.3 Components of manufacturing sector

3 Challenges facing Indian manufacturing 12 - 48

3.1 Creating conditions for growth, investment &employment

3.2 Driving cost competitiveness and domestic demand3.3 Investing in innovations & technology3.4 Strengthening education & skill building3.5 Benchmarking against best practices3.6 Providing right market framework & regulatory

environment3.7 Enhancing the role of Small & Medium Enterprises3.8 Enabling Public Sector Enterprises to meet competitive

market conditions3.9 Infrastructure Development

3.10 Importance of IPRs in the manufacturing sector3.11 Importance of IT in manufacturing sector3.12 Firm level competitiveness3.13 Role of State Governments3.14 Sub-sector engagement3.15 Creating a monitoring mechanism & measuring

performance

4 Way forward 49 - 62

4.1 4.13 Key conclusions and recommendations

ANNEX-1 Classification of Manufacturing 63 - 64ANNEX-2 Growth targets for 17 industry groups under Manufacturing

(IIP)65

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1

1. Introduction

1.1. Since 1991, the Indian economy is being progressively liberalized and its

integration into the global economy is deepening. On the one hand

liberalization and globalization have provided unprecedented opportunity

for the growth and expansion of the industry in general and manufacturing

sector in particular. On the other hand Indian industry today has to get

ready to face stiff competition from imports due to tariff reduction.

Parallelly, the Indian Industry needs to improve its export capability

through competitiveness.

1.2. The average annual growth was 5.8% during 1980s and it was a little

more than 6% during the 1990s. While contribution of agriculture to GDP

decreased from 32% in 1991 to 22% in 2003, the contribution of services

increased from 41% in 1991 to 51% in 2003. The contribution from

Industry had, however, remained stagnant around 27% of GDP between

1991 and 2003. The share of manufacturing sector within the industry

sector has shown only a marginal improvement from 16.6% in 1991 to

17% in 2003. In comparison in some of the East Asian economies the

share of manufacturing ranged from 25% to 35% in their GDP. The

manufacturing sector in India grew annually at an average of 6.3% during

1991 to 2003. Manufactured goods form about 75% of all exports from

India.

1.3. Indias share in the global trade is less than 1%, which is much below her

potential. Five sectors viz., Gems and J ewellery, Textiles and Garments,

Engineering Goods, Chemicals, Leather and Leather Goods account for

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over 75% of Indias exports. The two trading blocks, US and EU, receive

more than 50% of exports from India.

1.4. Manufacturing has been recognized as the main engine for growth and

accordingly emphasis was placed on growth of industry in most of our

Five Year Plans. Manufacturing will remain one of the principal

means by which wealth is created . It is a matter of concern that the

contribution of manufacturing to GDP has remained stagnant for over two

decades since 1985. One of the major reasons for the low level of

contribution has been Indias inability to build and maintain

competitiveness needed to meet the global challenges as well as to

develop a larger domestic market through low cost production. The low

levels of manufacturing growth had its adverse impact on employment

generation.

1.5. The current backlog of unemployment is more than 34 million. It is

expected that over the next twenty years, the total proportion of workforce

involved in agriculture is likely to decline from 56 per cent to about 40 per

cent, and this would call for finding substantial non-farm employment

opportunities. While service sector would provide high quality

employment opportunities it is likely to benefit only a fraction of the job

seekers in these areas. A number of sub-sectors in services that are

linked to manufacturing directly need to be concentrated upon as they

provide substantial job opportunities. However, it is expected that

manufacturing has to carry the major burden of providing employment in

the coming decades directly or indirectly for those coming from rural and

agricultural sectors. To the extent that the growth of manufacturing sector

creates strong multiplier effects for the growth of the services sectorareas like traditional trading, banking, transport etc., the employment

effect of manufacturing should be determined taking into account the

indirect generation of employment in the services sector. It has to be

recognised that the manufacturing sector plays a leading role in creating

growth possibilities overall.

1.6. Macroeconomic stability of the economy is essential for ensuring

manufacturing competitiveness. Large fluctuations in economic

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variables like output, employment and inflation add to the uncertainty for

firms, consumers and the public sector, and can reduce the economys

long-term growth potential. Therefore, it is important to maintain long-

term economic stability through the Governments macroeconomic

framework including proper monetary and fiscal policies to ensure sound

public finances based on the principles of transparency, responsibility and

accountability. This would enable to plan more effectively for the long

term, improving the quality and quantity of investment in physical and

human capital; and help to raise productivity and sustainable rates of

growth and employment in the manufacturing sector in India.

1.7. There is no denying that India possesses a comparative advantage in

many respects. With its experienced work force, large pool of scientists,

engineers and managers, reasonable endowment of natural resources

and a large domestic market India has the potential to emerge as a major

manufacturing hub for the global market. This can materialize quickly

with improvement in the competitiveness of its Industry, because

competitiveness is central to robust growth of manufacturing

sector. Manufacturing sector is crucial, directly or indirectly, for

providing jobs for the large work force entering the job market every

year, particularly from the rural areas.

1.8. The challenges faced by Indian manufacturers raise important questions

for both industry and government. While industry has to grapple with

problems within the Industry to maintain a competitive edge in a globally

competitive environment, the government will have to create conditions

that foster a healthy & competitive manufacturing sector including

substantial additional investments for generating higher levels of growth.This calls for a breakthrough and bold thinking on the part of all

stakeholders. Only bold aspirations can enable India to benefit from

emerging opportunities in the manufacturing sector.

1.9. In the above background and in line with the priorities laid down the

Government of India has set up the National Manufacturing

Competitiveness Council (NMCC). This is an inter-disciplinary and

autonomous body at the highest level to serve as a policy forum for

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credible and coherent policy initiatives. The main objective of NMCC is to

provide a continuing forum for policy dialogue and to energise and sustain

the growth of manufacturing industries. The NMCC is expected to

suggest various ways and means for enhancing the competitiveness of

manufacturing sector including identification of manufacturing sectors

which have potential for global competitiveness; current strengths and

constraints of identified sectors, and recommend National level industry/

sector specific policy initiatives as may be required for augmenting the

growth of manufacturing sector. The council will also help in the

implementation of the strategy.

1.10. In order to achieve these objectives, the NMCC is pursuing a two-pronged

approach. First to prepare a National Manufacturing Strategy Paper to

identify the areas of policy that are to be addressed and the Second, in

the meantime, proceed with detailed study and make recommendations in

respect of sub-sectors of manufacturing that are assessed to have

immediate potential for growth and employment.

1.11. The issues confronting the manufacturing sector are varied and cover a

vast area. It spans the entire gamut of the Indian economy and the need

for enhancing competitiveness, productivity and employment generation is

important for growth. In order to attain competitive edge in

manufacturing the constraints being faced have to be mitigated. The

generic issues such as lack of proper infrastructure, higher transaction

costs, higher interest rates, inadequate power availability and other

regulatory issues are being addressed by NMCC in detail for which further

studies if required and elaboration needs to be done. Simultaneously,

sub-sectors of manufacturing are being addressed in sub-group meetingsof NMCC and separate action plans are being prepared and monitored. A

strategy for phasing of the implementation plans and deliverables

comprising of both generic issues and sub-sector engagements into long

term, medium term and short term needs to be done based on their

potential to yield results and an assessment of their feasibility.

1.12. This paper - The National Strategy for Manufacturing attempts to identify

the areas of policy and outlines the strategic directions that need to be

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pursued in order to realize higher levels of growth and employment.

These steps are the start of a process and not the end. Section 2 of the

paper details the manufacturing imperative and Section 3 enumerates

challenges facing Indian manufacturing along with certain strategy

prescriptions. Section 4 lays out the way forward for the further work to be

done to realise the goal of sustained growth of manufacturing.

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2

2. Manufactur ing imperative

2.1. Importance of manufactur ing to Indian economy

2.1.1. India has to aim at achieving a long term growth rate of GDP of 8 to 10

per cent to substantially improve the living conditions of its masses. The

mid-term appraisal of the Tenth Five Year Plan (2002-2007) carried out

by the Planning Commission in March 2005, however, observed that the

overall GDP growth rate for the Plan as a whole is unlikely to exceed 7

per cent during this period. Given the projected trends, a growth rate of

8 per cent plus would not be infeasible for the period 2007-12.

Notwithstanding the low base in 2002-03, the GDP growth of 8.5% in2003-04 is significant. Similarly, the GDP growth of 6.9% in 2004-05,

given the high base in 2003-04 is noteworthy. Looking at the potential

of the economy to aim at a long term growth rate of 9 per cent appears

reasonable. A GDP growth rate of 9 per cent would mean that the

Industry as a whole would have to grow on a sustained basis at about

10 per cent and that the Manufacturing component in it at 12 per cent

per annum.

2.1.2. The issue is what sectoral growth rates can ensure a 9% real GDP

growth?. GDPs sectoral composition has agriculture, industry and

services components. Pure agriculture and allied activities (excluding

mining and quarrying) account for 22.1% of GDP1. The historical trend

for growth in this sector has never been more than 3%. Even if one

assumes that an optimistic rate of 4% is achieved, with a share of

1Economic Survey 2004-05 points to a further decline in agricultures share of GDP to 21% and a

decline in work force employed in agriculture to 57% (1999-2000).

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22.1%, this would contribute 0.884% to GDP growth. In case of

services sector, a trend growth of more than 10% is unreasonable and

with a share of 51%, this would contribute 5.1% to GDP growth.

Therefore, achieving a 9% GDP target would still require a 3.016%

contribution from the Industry sector. With a contribution of 26.9%

(including mining and quarrying), the industry sector needs to grow at

11.21%. Even though industry sector includes components of (i) mining

and quarrying, (ii) manufacturing, (iii) electricity, gas & water supply and

(iv) construction, manufacturing alone accounts for a weight of 79.36%2

in the IIP index. An average growth of 6% in the other three

components of industry requires manufacturing to grow at 12.26%.

2.1.3. It is felt that vigorous pursuit of reforms in agriculture sector through an

end-to-end approach where production and productivity patterns are tied

up with markets and end users would drive investments needed for

irrigation, post-harvest infrastructure, processing and value addition, etc.

This would also result in expansion of rural markets and enhance

opportunities for manufacturing & employment. Making agriculture more

efficient will raise purchasing power and over time, allow large scale

movement of workers into other parts of the economy.

2.1.4. Off-shoring of manufacturing activities to low cost countries can be

significant and India can reap part of this dividend3. In the past, India

missed opportunities in outsourcing of manufacturing although India has

an outstanding record in the areas of software. The global trend of

outsourcing parts of manufacturing value chain to low cost destinations

is in favour of countries like India.

2.1.5. It is estimated that nearly 10 million people will join the workforce

annually and would require to be provided with employment. In this

context, it needs to be noted that the present growth pattern led by high

service sector growth and a stagnant manufacturing sector is leading to

a rural-urban divide. The solution to provide jobs to the millions joining

the workforce can only be through a robust revival of manufacturing

2 As a weight in the index of industrial production.3Made in India the next big manufacturing export story, CII-McKinsey, October 2004.

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sector which can match the rapid growth performance of the services

sector.

2.1.5.1. It is estimated that India needs to create 7-8 million new jobs each

year outside agriculture just to stay at its current unemployment level

of 7 per cent. Manufacturing jobs are ideal for workers transiting out of

agriculture. The revival of manufacturing can create close to 2.5

million new jobs each year as opposed to one million jobs created

each year over the last decade.

2.1.5.2. Manufacturing is a force multiplier. It creates productive employment,

promotes agriculture and service sector and spins a cycle of wealth

creation. Investments in manufacturing produce a Keynesianmultiplier effect on GDP growth to the tune of four times in India as

every rupee invested adds four rupees to GDP.

2.1.5.3. Manufacturing provides an array of products to end users for fulfilling

not only basic needs but to improve the standard of living.

2.1.6. Small Scale Industry, comprising of 114 lakh units has been a significant

contributed to the manufacturing by accounting for nearly 40% of total

industrial production.

2.1.7. The quest for competitiveness at firm level might result in reduction of

employment to begin with. But overall increase in competitiveness in

the sector in which the firm operates would lead to enhanced

opportunities that not only drive demand but also generate employment

through the spread effect. There are also sub-sectors which are good

employment generators while being competitive.

2.2. Competitiveness

2.2.1. International competitiveness is really a multi dimensional concept,

dependent upon three main sets of factors - all taken together. viz.,

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2.2.1.1. Country specific advantages - related to technological, financial

and other infrastructural status of the economy vis--vis those of

the highly developed economies where major competitors are

located.

2.2.1.2. Industry specific advantage - related to the type of industry

where competitiveness is also affected by various fiscal and

monetary policies which can change from time to time.

2.2.1.3. Enterprise specific advantages - related to a particular company,

like the ability to acquire, assimilate, develop new technologies;

capabilities to reduce production costs; cut down delivery cycles;

enhance quality & productivity and after-sales-service etc.

2.2.2. At a very broad level, some indications of competitiveness can be

obtained from Global Competitiveness Report (GCR), published by

World Economic Forum4 (WEF). This has a Growth Competitiveness

Index (GCI) which captures an economys capacity to grow in the future.

GCI builds on three pillars of (i) macroeconomic environment, (ii) public

institutions and (iii) technology. While the report is not about

manufacturing competitiveness alone, manufacturing does form an

integral part of the rankings.

2.2.3. While Finland with a GCI score of 5.95 ranks 1st among 104 countries in

2004-05, India with a GCI score of 4.07 ranks 55th compared to its score

of 3.90 in 2003-04. The values of GCI are a better indication of

movements than ranks. On the three pillars mentioned above, following

have been the scores:

Rank in 2004-05out of 104countries

Score in2004-05

Score in2003-04

Technology index 63 3.72 3.68Public Institutionsindex

53 4.45 4.26

Macro-economicindex

52 4.05 3.75

4 Since 1979.

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What is required through good reforms is to improve our values of GCI

in order to enable competitiveness vis--vis other countries.

2.2.4. What is pertinent to note is that countries or economies dont compete.

It is companies that compete. Therefore, government policies need to

provide the enabling environment within which companies are able to

compete.

2.3. Components of manufactur ing sector

2.3.1. The basic classification of manufacturing as per UN systems

International Standard Industrial Classification (ISIC) and Central

Statistical Organisation (CSO) is at Annex-1.

2.3.2. Between 1993-94 and 2003-04, the annual average real rates of growth

which yielded a real GDP growth rate of 6.24% were:

2.66% for agriculture (excluding mining),

5.41% for non-manufacturing industry,

6.92% for manufacturing industry and

8.03% for services,

2.3.3. Among the major contributors to the GDP in 2003-04, industry with a

share of 27% comprised of manufacturing which contributed 17% to

GDP and non-manufacturing (mining and quarrying; electricity, gas and

water supply; construction) which contributed 10% to GDP.

Manufacturings share is a function not only of manufacturing growth,

but also of growth in the other sectors.

2.3.4. It could reasonably be assumed that over the next 20 years the share of

services in GDP could go up to 60%, share of agricultural in GDP could

go down to 10% and the share of non-manufacturing component of

industry in GDP would be at least 10%. This would leave

manufacturing contribution in GDP at 20%.

2.3.5. The historical trend shows that it has taken more than 20 years to

increase the manufacturing share in GDP by five percentage points to

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around 17%. Trend growth rate in manufacturing over the last ten years

has been around 7% and the desired growth rate over the next decade

is 12%. Given manufacturings present share of 17% of GDP, the

difference between 7% and 12% translates into 0.9% incremental GDP

growth. On this basis, at best the share of manufacturing in GDP could

be 23% by 2015.

2.3.6. An overall or aggregate target of 12% growth, needs to be decomposed

or disaggregated according to manufacturing sub-sectors. For instance,

in the index of industrial production (IIP), there are 17 industry groups at

the 2-digit level of classification5 based on the National Industrial

Classification (NIC). Based on the manufacturing sector performance in

2003-04 and 2004-05, the table at Annex-2 shows aspirational growth

targets for the 17 industry groups ranked in descending order. As the

table shows, 10 per cent growth rate in manufacturing is within the realm

of possibility and aspirational target of 12 per cent can be achieved by

sustained implementation of various elements discussed in section 3 of

this paper.

5 IIP only covers 80% of manufacturing.

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3

3. Challenges facing Indian manufacturing

3.1. Creating conditions for growth, investment &

employment

3.1.1.

3.1.2.

While government policies would influence the market environment in

which the businesses will operate, the growth of manufacturing sector is

dependent to a large extent upon the role played by the industry

themselves. The Industry would not only need to think big in terms of

scale but also need to :

invest in R&D and technology,

have a continuing commitment to skills development & education,

benchmark their performance against the best in class,

adopt best manufacturing practices & production techniques, and

deliver on globally acceptable quality levels.

The extrapolations by Goldman Sachs in their BRIC report on Brazil,

Russia, India and China6 makes the point that in the period leading up

to 2050, India alone, among the BRIC countries, is unlikely to face a

labour constraint. A labour shortage in developed countries means

scope for immigration or for outsourcing manufacturing activities. The

next wave of off shoring is expected to take place in skill-intensive

industries and India has an advantage in this segment. Further, global

6 Dreaming with BRICs: The Path to 2050, Dominic Wilson and Roopa Purushothaman, GlobalEconomics Paper No. 99, Goldman Sachs, 1st October 2003. There have been two subsequent follow-

up BRIC reports also.

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buyers are increasingly recognizing the perils of single county sourcing

and are looking at alternatives to their existing sources. There are

enormous opportunities for India in this context which needs to be

accelerated through greater showcasing of Indias competitive

advantages and through wider participation of Indian firms including the

SME sectors in the global value chains.

3.1.3.

3.1.4.

The National Sample Survey (NSS) held in 1999-20007 shows a labour

force of 363 million and a workforce of 336 million, with an

unemployment rate of 7.32% and number of un-employed to be 26

million. The work force of 336 million comprised of 190 million in

agriculture, 59 million in industry and 86 million in services. The survey

points to a slowdown in the annual average growth in employment.

While the average annual growth rate in employment was 2.89%

between 1983 and 1988 and 2.50% between 1987 and 1994, it was

1.07% between 1993 and 2000. The history of development is one of

pulling people out of agriculture, into non-farm activities, into

manufacturing and into services, not retaining them there. If 10 million

new jobs have to be created a year, manufacturing has a major role to

play.

Within industry, the employment in manufacturing was 40 million in

1999-2000. Between 1993-94 and 1999-2000 the employment elasticity

in manufacturing was 0.33 as compared to 0.59 during the period 1983

and 1988. Manufacturing would need to grow at 12% p.a. compared

to the trend growth rate of 7% achieved during the last decade in

order to create 1.61 million employment with present employment

elastic ity. If the employment elasticity were to improve to theearlier higher level of 0.59, the 12% growth in manufacturing would

result in 2.9 million new direct jobs per year in manufacturing

sector alone. Hence it is recommended that an aspirational growth

rate of 12% in manufacturing sector should be aimed at along with

its contribution to GDP at 23%. These are figures on direct job

7 Large NSS surveys are roughly held at five-year intervals. Before 1999-2000, the last one was in

1993-94.

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creation. In addition, indirect jobs would be created as a result of

multiplier effects8.

3.1.5.

3.1.6.

3.1.7.

3.1.8.

3.1.9.

Therefore, in order to achieve a 12% growth rate, It is essential that a

thorough review of the past policies which discouraged growth of

manufacturing is undertaken and recommendations arrived at to rectify

and improve conditions that not only encourage growth but also bring in

investment and generate employment potential. Towards this, the

policy framework shall encourage manufacturing sector to become

competitive by allowing it to build up global scale of operations

and also enable financial institutions to finance such projects.

Further, it should also be able address issues such as risk

management and debt restructuring faced by companies.

Large scale investment, both domestic and foreign would have to

be attracted into the manufacturing sector to enable high-levels of

growth envisaged.

It is also essential that in order to be globally competitive, the

manufacturing sector needs to be modernized through infusion of

modern technologies.

There is also a need for the Manufacturing Sector in India to design,

produce and offer at affordable prices products suitable for Indian

conditions and appropriate for people at the bottom of the pyramid. This

large potential market still remains to be exploited and can be serviced

by creating a competitive manufacturing sector which can meet the

demand from this section of the society.

What are the constraints in pushing up manufacturing growth still

further? The constraints themselves suggest the solutions. Some of the

constraints are generic in the sense that they cut across all

manufacturing sectors. The others are more specific and pertain to

specific sectors.

8 CII-McKinsey Report suggests two to three times the direct figure.

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3.2. Driving cost competitiveness and domestic demand

3.2.1.

3.2.2.

3.2.3.

Recent studies have shown that India suffers on competitiveness due to

various 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 labour productivity

higher cost of capital

inadequate infrastructure

One such study9 points to the Chinese products being lower in cost by

30% in general in comparison to Indian products inspite of similar labour

and other input costs. Further, Total Factor Productivity (TFP)

comparisons establish that productivity of Indian manufacturing10 is

about one-fifth of US levels and about half the levels in Taiwan and

South Korea.

Indian manufacturing would be competitive only when the cost of

manufacturing is low. Further, scaling up of operations would be difficult

to achieve without a strong domestic demand and policies for enhancing

domestic demand must be expeditiously considered as this would also

drive an increased share of manufacturing in the economy. While one

can comment about variables included (or excluded) and the

methodology used in Global Competitiveness Report (GCR), thereought not to be any great debate about the heads that aid or constrain

manufacturing competitiveness. Therefore, lowering cost of

manufacture and improving quality in India should be one of the

prime focus areas to work upon in the council.

9 Learning from China to unlock Indias manufacturing potential, CII-McKinsey Report, October 2002.10 Making Indian Manufacturing Globally Competitive, ACCENTURE

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3.2.4.

3.2.5.

3.2.5.1.

3.2.5.2.

3.2.5.3.

For stimulating domestic demand, while the focus could be on reducing

indirect taxes and import duties, following generic heads need attention:

Import duties

The argument that import duties need to be reduced is usually

advanced when items imported are raw materials and

intermediates and not finished goods. The Kelkar Task Force11

recommended a four-tier import duty (that is, for manufactured

goods) structure in 2006-07 5% for basic raw materials (coal,

ores and concentrates, xylenes, etc.), 8% for intermediate goods

(capital goods, basic chemicals, metals, etc.), 10% for finished

goods other than consumer durables and 20% for consumer

durables. It is evident that the peak import duty will be no

more than 10%. In the interest of a stable policy regime, it is

recommended that stage wise downward duty reductions

should be calibrated so that the Indian Industry gets time to

readjust to the trend.

Added to that a plethora of Free Trade Agreements (FTAs)

outside the WTO system, which invariably involve manufactured

products, with eventual zero duties. Some of them have given

rise to inverted duty structures which needs to be addressed. The

policy problem is the following. Should we standardize or should

we attempt to differentiate? And as long as we resist reduction of

general import duties, the FTA problem will remain. However the

inverted duty structure caused by FTAs need to be minimized.

While the basic customs duty may be zero, imported products

should face duties equivalent to domestic indirect taxes paid by

domestic manufacturers. The countervailing duty (CVD) is meant

to be precisely this, but is presently only equal to central excise

and ignores State-level sales tax and other local levies. The

2005-06 budget has a provision for an additional CVD of 4%, but

11Report of the Task Force on Indirect Taxes, Ministry of Finance and Company Affairs, December

2002.

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that is presently restricted to IT products. Unfortunately, this

reform gets linked with reform of the domestic indirect tax

system.

3.2.5.4.

3.2.6.

3.2.6.1.

3.2.6.2.

Continuation of inverted duty structure in certain cases is a cause

for concern and needs to be addressed.

Domestic indirect taxes

Domestic indirect taxes are often singled out as a major reason

why Indian manufacturing is uncompetitive. For instance, many

studies argue that total taxes on manufactured goods are 25 to

30% of the retail price in India, compared to 15% in China.

Indirect taxes contribute 50% to the difference in retail prices

between India and other low-cost countries. Lower duties would

have boosted the domestic market and permitted synergy

(exploitation of economies of scale, attracting FDI) between

domestic and export markets.

Reforming indirect taxes is also contingent on reforming direct

taxes. In 2004-05, total tax revenue is 10.2% of GDP, if one

includes Central taxes alone.12 If state and local level levies are

added, then the figure is more like 15%. Given expenditure

commitments and demands on the government, this ratio

probably needs to be 3% more as share of GDP. Finance

Ministrys Task Force on implementation of the Fiscal

Responsibility and Budget Management (FRBM) Act, 2003 also

argues that fiscal consolidation will primarily have to occur via therevenue route rather than the expenditure contraction route.13

Central tax revenue as a share of GDP has stagnated at around

10% (sometimes even 9%) of GDP since 1990-91. FRBM

projections visualize an increase to 12.96% in 2008-09, provided

that tax reforms take place. The simple point is that the indirect

12Economic Survey 2004-05.13Implementation of the Fiscal Responsibility and Budget Management Act, 2003, Report of the Task

Force, July 2004.

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tax contribution to GDP must also increase. The argument for

reducing multiplicity and increasing transparency should not be

confused with a drop in this share.

3.2.6.3.

3.2.7.

3.2.7.1.

The broad shape of indirect tax reform is clear. Indirect tax

reform will perhaps work only if all exemptions are terminated

over a period of time viz. product-specific exemptions, SSI

exemptions, location-based exemptions. Further, as per the

FRBM, the total tax burden on most goods by Centre and

States would in any case it may not go below 20 %. There

should be an all India combined Goods and Service Tax

(GST), with service sector taxation integrated into the VAT

framework instead of being a tax on turnover. This should

be accompanied by a withdrawal of all other taxes like

central excise, central sales tax, octroi , State-level sales tax,

entry tax, stamp duties, transportation taxes and so on.

However, under the given Constitutional framework the

comprehensive tax on goods and services would be difficult and

it would be better to talk of a national VAT that would run in

parallel at both and Central and State levels achieving at the

same time the same objectives of the GST.

Export incentives/export subsidies

Sustained export growth is crucial for maintaining and

accelerating the GDP growth momentum. Export subsidies

involve differential treatment to exports as compared to sales in

the domestic market and are in general WTO-incompatible,

although there are some exemptions for India. Export incentives

are WTO-compatible, as they involve reimbursements (such as

DEPB, DECG, Target Plus and Duty Drawback Schemes) or

waivers (advance licensing scheme) for duties paid in exported

products. Export procedures continue to be cumbersome

because of procedures connected with export

incentives/subsidies. Implementation of both DEPB and duty

drawback will become simpler if there is a complete VAT system.

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3.2.7.2. With liberalization across the board, liberalization in selected

enclaves (EOUs, SEZs and AEZs) has become somewhat

irrelevant. If customs duties have come down and are going to

drop further, what is the added attraction of these schemes,

especially if there are going to be restrictions on sales in the

domestic tariff area (DTA)? Quite often, debates about

SEZs/AEZs vis--vis EOUs are about equal treatment in sales to

the DTA and about concessional customs duties on such DTA

sales. With import duties declining, restrictions on DTA

sales need a relook in order to ensure competitiveness.

Further, it is suggested that the concept of economic

regions with world class infrastructure but with no fiscal

concessions could be considered.

3.2.8.

3.2.8.1.

FDI and procedures

Foreign investments mean both foreign portfolio investments and

foreign direct investments (FDI). FDI brings better technology

and management, access to marketing networks and offers

competition, the latter helping Indian companies improve, quite

apart from being good for consumers. This efficiency

contribution of FDI is much more important. FDI inflow figures

are 3.40 billion US dollars in 2001, $ 3.45 billion in 2002, $ 4.27

billion in 2004 and $7.5-8 billion in 2005, there being a gap

between approvals and inflows. This is still a far cry from Chinas

$ 53.51 billion in 2003 and the target of annual FDI inflows of $

10 billion a year. As per the UNCTAD FDI performance index,

Indias FDI ranking was 114th

out of 140 countries14

in 2002-03 ina large country like India, FDI as a share of GDP may not be very

high and barring certain sectors, FDI as a share of total

investments will also not be very high. But there is no denying

that India has under-performed and there is a need to attract FDI

as it is a catalyzing factor for growth.

14World Investment Report 2004, The Shift Towards Services, UNCTAD, 2004.

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3.2.8.2.

3.2.8.3.

3.2.8.4.

There are procedural problems at all three levels of an

enterprises functioning entry, functioning and exit, although

foreign investors often tend to focus on the first. The expression

transaction costs is sometimes used and such an expression

also subsumes under it costs associated with inadequate

infrastructure. A recent World Bank report benchmarks Indias

transaction costs with some other countries in the world.15

According to this, it takes:

89 days to start a business in India, compared to 41 days in

China.

67 days to register property in India, compared to 32 days inChina.

425 days to enforce contracts in India, compared to 241 days

in China.

10 years to complete insolvency proceedings in India,

compared to 2.4 years in China.

According to the latest World Bank Report16 India is ranked 116th and

China 91st among the 155 economies studied on the ease of doing

business.

Conversion ratios (percentage of approvals converted to inflows)

vary widely across States because of the fact that different States

did not implement procedural reforms uniformly.

Some of the procedures at the State government level where

appropriate reforms are necessary inc lude:

Providing the necessary investment climate for the growth

of manufacturing in the states

Providing infrastructure, particularly in respect of power,

water, roads, etc.

15Doing Business in 2005, World Bank, IFC and Oxford University Press.16Doing Business in 2006, World Bank, IFC and Oxford University Press.

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Development of a common format for computerization of

required records.

Doing away with multiplicity of inspections by large

number of inspectors.

Farming out to recognized private agencies, various

inspections.

3.2.9.

3.2.9.1.

3.2.10.

3.2.10.1.

3.2.10.2.

Interest rates

High interest rates and availability of credit are problems which

hinder growth of Industry. Whichever index one uses to measure

inflation, annual inflation is around 6% now. With a PLR of

10.25%, this means a real rate of interest of 4.25%. Thus in a

capital scarce country, real interest rates will never be as low as

global interest rates, although this is qualified by the

harmonization that has taken place between global and domestic

interest rates. Some parts of the Indian corporate sector are now

allowed to borrow globally, though not all. Therefore, the

importance of good macro-economic management to contain

interest rates needs to be realised.

Labour laws

With the focus on creating an enabling environment that

encourages new employment as a result of increased growth in

various constituents of the manufacturing sector as well as skill

development/ upgradation to enable such a growth to happen, it

is essential to look at various labour related issues.Labour law reform is usually equated with Chapter V-B of the

Industrial Disputes Act (IDA), but the issues are more

complicated. Subject to the caveat that labour is on the

concurrent list of the Constitution, there are 45 Central Acts and

16 associated rules that deal directly with labour. There are

others that indirectly deal with labour, like the Boilers Act (1923),

the Collection of Statistics Act (1953), the Dangerous Machines

(Regulations) Act (1983) and the Emigration Act (1983). There is

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thus an issue of unification and harmonization. Reforming labour

law has many dimensions and issues.

3.2.10.3.

3.2.10.4.

3.2.10.5.

3.2.10.6.

It is no one's case that welfare provisions should not exist. Each

labour legislation has a separate inspector and visits of

inspectors are not synchronized across all labour enactments.

Barring the Payment of Wages Act, where a maximum period of

three years is stipulated, no other labour statute prescribes a

maximum period for which records and registers must be

maintained. Compliance thus becomes difficult. This system is

not distributionally neutral as it tends to hurt the small-scale

sector much more than it hurts large-scale industry. One view is

that the existing labour laws by encouraging industry to go for

contract labour are proving to be antithetical to the interest and

welfare of labour.

Three statutes that impinge on industrial relations are The

Contract Labour (Regulation and Abolition) Act, 1970, The Trade

Unions Act, 1926 and The Industrial Disputes Act, 1947.

The Contract Labour (Regulation and Abolition) Act, 1970 was

never meant to prohibit contract labour. Section 10 provided the

appropriate Government the discretion of prohibiting contract

labour in selected areas. The Contract Labour Act allows

flexibility and permits outsourcing. However, a few court

judgments have affected this flexibility. It is recommended to

retain the 1970 Act and tighten up Section 10 so that

ambiguity about continuance of contract labour andabsorption following abolition is removed.

In respect of The Trade Unions Act, 1926 following

recommendations of the Second Labour Commission, the

government has introduced amendments to the Act. The number

of persons required for registration of a trade union will change

from seven to 10 per cent of the labour force. Not more than

one-third of office bearers (subject to a maximum of five) can be

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outsiders. And the holding of annual elections and auditing of

accounts will be mandatory.

3.2.10.7.

3.2.10.8.

3.2.10.9.

In The Industrial Disputes Act (IDA), 1947 following is a list of

sections which require a re-examination - Section 9-A, Section

11, Section 11-A, Section 17-B, Sections 22/23 and Chapter V-

B/Sections 25-K, 25-L, 25-M, 25-N and 25-0. The argument

about Chapter V-B of IDA is indeed a valid one. The provisions of

the Act make recourse to the government and thus to Labour

Commissioners, mandatory. Unless this rigidity in labour

markets is removed, higher growth will not necessarily translate

into greater employment. What is involved is not primarily an exit

policy for labour. The statute makes it impossible for companies

to exit. It is recommended that given the other provisions of

labour legislation, the requirement of governmental

permission can be dispensed with, without adversely

affecting the interests of labour. Competition cannot

function without free exit. Hence it is suggested that while a

consensus on Chapter V-B is being arrived at, the need is

for quick amendment of the other sections of IDA and

implementation of other labour law reforms.

If the recommendations of the Second National Commission

on Labour submitted in 2002 are implemented, they will

harmonize labour laws under five heads of industrial

relations, wages, social security, safety and welfare and

working conditions. While flexibility will improve in the

organized labour market, there will simultaneously be bettersocial security provisions in the unorganized one.

While the focus is on dealing with Labour laws to make them

growth f riendly, there is no denying that Labour productivity

which is normally sector specific needs to be constantly

improved in order to sustain competitiveness.

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3.3. Investing in innovations & technology

3.3.1.

3.3.2.

3.3.2.1.

3.3.2.2.

3.3.2.3.

3.3.2.4.

3.3.2.5.

3.3.2.6.

Investing in innovations is one of the pre-requisites to attain global

competitiveness. The experience of the industry has been that being

low-tech does not make them globally attractive. Investing in R&D by the

corporate and by the government to adopt technology ahead of markets

should be encouraged.

For this purpose it is recommended that:

Existing policies relating to R&D funding, incentives for

supporting generic technologies, engineering and physicalsciences should be reviewed and steps taken to encourage

better coordination of efforts and greater focus on

innovation and product ivity enhancing technologies.

Priorities should be established for support of advanced

manufacturing technologies.

The need for creating a coordination mechanism on

Manufacturing Research and Development should be

pursued.

Support Prototype development and design innovations

through fund sharing/ enabling establishment of references,

etc.

Create common testing facilities and centres of

manufacturing technology excellence. Management of these

by the beneficiaries themselves would encourage the Indian

manufacturing industry to invest in innovations,

Strengthen the Intellectual Property Rights framework by

providing necessary infrastructure and human resources

particularly in the case of the Patent and Trade Mark

systems to encourage more Patenting and Trade Mark

registrations.

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Establish Technology parks on the lines of those existing in

USA

3.3.2.7.

3.3.3.

3.3.4.

3.3.5.

3.3.6.

In critical areas, in addition to tax relief measures on R&D expenditure

enhanced government funding of research & development activities

becomes crucial to support the efforts of the manufacturing sector,

especially if innovation and R&D is to form the basis of building

comparative advantage. This would call for sector wise study of

technology status and building a future model for R&D support by

the government, especially in the areas of emerging technologies

which have the potential to transform products, processes and

services. Attention is required to be paid to incentivisation of R&D

in National R&D Laboratories and provide greater market

orientation to Government funded R&D. The merger or

consolidation of national technology institution in similar areas of

work also requires consideration in order to derive synergy and

economies of scale.

Current business realities may call for technology acquisition as

an alternate strategy. Hence, it is recommended that a Global

Technology Acquisition Fund be set up, which would enable

Indian industry to acquire very high technology intensive

companies abroad, when ever such opportunities arise. Framework

for administering such a fund needs to be separately worked out.

This would also incorporate a national knowledge management

centre with a technology-tracking cell.

Specific needs of small businesses need to be attended to. SmallBusiness innovation Research and Small Business technology

transfer focusing on Manufactur ing need to be addressed. The

unique capabilities of the National Laboratories and the IITs and

other Technical Institutions need to be leveraged to benefit the

Small and Medium Manufacturing Industries.

Special incentives may also be provided for Innovation and

Development of products which has an appeal for the larger

section of Indian society.

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3.4. Strengthening education & ski ll building

3.4.1.

3.4.2.

3.4.3.

Isolation of education (even training) from the production sector is the

basic flaw of Indian system. For the Indian manufacturing to be globally

competitive, it needs to attract the best brains. In spite of surplus

graduates in popular engineering streams, deficits were witnessed in

computer, metallurgy, mining, sugar, paper, leather and rubber

technology between 1997 and 2002. Serious mismatch is observed

between the needs of the Industry and the availability of skilled

engineers and technicians for Manufacturing Industry. Conditions of

service in the manufacturing areas should be improved to attract better

candidates to this area of operations.

Hence, it is recommended that a close interaction is initiated

between academia-industry-government for creating Centres of

Excellence in manufacturing technologies. The quality of

Technical education at the vocational level as well as the

University level needs to be addressed. Special focus needs to be

given to issues relating to the emerging requirements of Industry

while designing the syllabus by these insti tutions. A concerted

national initiative is required to be taken to revise the curriculum at

degree and diploma levels for all technical courses to keep in step

with the changing requirements of the Industry.

Skill development is important especially for the manufacturing sector. If

Indian manufacturing has to meet its aspirations, it will require to

produce 1.5 million technically skilled people every year in order to meet

the incremental requirement of 20 million skilled technicians by 201516.

As the country moves up the technology ladder and begins to produce

more complex products in greater volumes, manufacturers will require

workers able to use judgment and other thinking skills in the operation of

advanced manufacturing processes and in the maintenance and repair

of complex automated production equipment. Hence, qualitative growth

16 CII-McKinsey Report Made in India

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in skilled manpower is considered essential. The issue is, who will

deliver these skills?

3.4.4.

3.4.4.1.

3.4.4.2.

3.4.4.3.

Any effort to improve human capital has to take into account the needs

of not only the domestic market but also the increasing opportunities in

the global market. The public sector driven initiative, through the

Apprentices Act and ITIs (Industrial Training Institutes) has not been

able to keep pace with changing requirements. The upgradation of the

Industrial Training Institutes should be pursued vigorously through

public-private partnerships, if not outright private sector provisioning,

with training authorities de-linked from certifying ones. It is

recommended that:

Rationalize the complex procedures for changing curricula

and course syllabi to enable institutes keep pace with

developments in technologies.

Encourage the private sector to establish and operate

demand driven technical training centres through financial

and other incentives, under a carefully designed industry-

managed, and government supported, quality control and

accreditation system.

Develop a comprehensive National Vocational Education

Qualification System and set up Vocational Education &

Training Institutes in each State. In addition large private

sector manufacturing/ engineering organizations must be

encouraged to adopt Vocational Education Institutes

through appropriate schemes.

3.5. Benchmarking against best practices & breakthrough

thinking

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3.5.1.

3.5.2.

3.6.1.

Adoption of global best practices in manufacturing is another area which

requires attention for ensuring sustainable competitiveness.

Benchmarking and standard setting has to begin from building the

human resource and extended to the entire value chain. In this context,

all organizations should collaborate in the development of relevant

sub-sector data bases that could help the industry to benchmark

and measure itself against the best in class performances. A

Manufacturing Advisory Service should be established to deliver

practical help to manufactur ing SMEs.

A paradigm shift in manufacturing sector can be achieved, if

manufacturing is not just viewed as a process in the factory, preceded

by design and followed by sales but as a new way where R&D is as

critical a component of product design to supply chain management and

customer relations17. Conceptually, it is a movement from products to

architecture (concept: classification based on the system of production)

where sector wise competitive advantages can be derived. It is

recommended to set up a group to study the concepts and

applicability of manufacturing architecture18 (integral vs. modular)

as relevant to the Indian conditions and take suitable policy

initiatives.

3.6. Providing right market framework & regulatory

environment

Access to technology, larger investments that drive exploitation of

economies of scale and scope, accessing market information and so on

are in the private domain, although there is often a tendency to expect

the government to provide or subsidize these efforts. But given fiscal

and other limitations, there are constraints on what the government can

effectively do. However, further work towards providing the right

market framework and regulatory environment that provides

impetus to the manufacturing sector is essential.

17 Shoji Shiba, Professor emeritus of University of Tsukuba18 Prof. Takahiro Fujimoto, University of Tokyo

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3.6.2.

3.6.3.

3.6.4.

3.6.5.

3.6.6.

The frame work would, need to ensure fair competition, better access to

markets both domestic and foreign, trade negotiations that ensure a

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

and examine the issues relating to regulatory accountability.

One of the areas impacting the industry includes procedures

related to compliance with environment & safety regulations. In

this respect, it is recommended that on the lines of financial audit

firms, certain special institutions or firms of reputation specifically

in the area of environment & safety could be identified to carry

out necessary certifications.

The recommendations of the high powered committee19 set up for

improvement in the extant procedures for investment approvals

and implementation of projects and for simplification of the

procedures for both public and private investments needs to be

implemented.

Enable Consolidation of regulatory frame work by weeding out

legislations that have outlived their utility, bringing others in line

with the present day technological, environmental, competitive and

social requirements to make the administration as well as

compliance, effective.

Transformation of regulatory processes through re-engineering of

procedures to reduce discretion through clear cut rules,

rationalising approval/permission requirements of manufacturing

industries, optimizing inspections by Regulatory Authorities etc.

needs to be done to minimize the transaction costs to the

manufacturing sector.

19 Report on Reforming investment approvals and implementation procedures, Dept. of IPP, November

2002.

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3.7. Enhancing the role of Small & Medium Enterpr ises

(SMEs)

3.7.1.

3.7.2.

3.7.3.

3.7.4.

Over the last five decades, the small scale segment has acquired aprominent place in the socio-economic development of the country. The

segment plays a crucial role in spreading the benefits of economic

growth among the masses by drawing surplus work force from the

primary sector to productive non-farm employment, including

manufacturing and service/business activities. The definition of the

segment has thus evolved in the recent past to include not only the

traditional Small Scale Industry (SSI) units but also Small Scale Service

and Business Entities (SSSBE). The segment is, therefore, appropriately

termed as small enterprises.

It is estimated that in 2003-04, small enterprises segment consisted

of 113.95 lakh units, employed 271.36 lakh persons and contributed

nearly 6.71 per cent of the countrys gross domestic product and

39.42 per cent of its total industrial production. Small Scale must be

seen as breeding grounds for innovation and technology

development where they become the technology sources for

larger companies. It is necessary to incentivise technology

development in SMEs to enhance their competitiveness.

Government has introduced the Small and Medium Enterprises

Development Bill, 2005 in Parliament which seeks to facilitate the

promotion and development small and medium enterprises and enhance

their competitiveness. What is needed is focus on assisting the tiny

component of the small enterprises because it constitutes over 98 per

cent of the small enterprises engaged in 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

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rules and regulations. Because of the fact that small enterprises

constitute the largest number of production units across practically all

components of the manufacturing segment of the economy, they need

special focus and support to enhance their competitiveness and that of

manufacturing as a whole.

3.7.5.

3.7.6.

The current approach does not address the general problems of

taxation, interest rate or FDI policies, and experience shows that the

cluster methodology can help introduce harmonised and simpler

procedures, including those relating to labour laws. Similarly, flow of

credit to small enterprises in clusters can be considerably smoothened

and enhanced if steps are taken to encourage credit rating of these

enterprises in conjunction with cluster-wide measures to minimize credit

risks through capacity building of associations/self-help groups of small

enterprises. This approach can also facilitate cost effective investment

for improvements in common physical infrastructure, enhancement of

skills, upgradation of technology and addressing the disadvantages of

fragmented markets that small enterprises face individually. One of the

effective measures for accelerating manufacturing growth in this

segment lies in promoting growth poles or industrial clusters, referred to

in the PURA (Provision of Urban Amenities in Rural Areas) context, in

the 2005-06 Union Budget speech. The growth poles can cover all three

(albeit somewhat overlapping) elements of the cluster approach

industrial clusters, artisan clusters and agro-based clusters.

Government has also set up a National Commission on Enterprises in

the Unorganized Sector to review, inter alia, the status of the

unorganized sector in terms of its nature, size/spread, employment, etc.,identify constraints with reference to the sectors freedom of business

and access to raw material, finance, infrastructure, technology, skills,

markets, etc., and examine the existing programmes relating to

employment generation, arrangements for estimating

employment/unemployment and social security system for labour in the

sector.

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3.7.7.

3.7.8.

3.7.9.

3.7.10.

3.7.10.1.

3.7.10.2.

3.7.10.3.

3.7.10.4.

3.7.10.5.

An issue which is often cited as an impediment to the growth of the

segment is that of reservation of certain products for exclusive

manufacture by the SSI units. To address this, the government has

commissioned an independent empirical study to assess the impact of

de-reservation on SSI productivity and employment.

Another strategic issue that would need to be addressed flows from the

fact that unregistered firms constitute a very large proportion of small

enterprises. Delivery of the benefits of support measures to enhance the

competitiveness of such enterprises, without making it mandatory for

them to register themselves with the state agencies at the district level,

would call for a study of the global best practices in this regard and their

adaptation to suit the local conditions.

Another aim would be to examine how more effective mechanisms can

be established for SME collaboration with selected countries in the

developed and developing world with a view to promoting closer

business ties, enhancing competitiveness and increasing the share of

Indian SMEs in global trade. Towards achieving these objectives,

consultation is underway to formulate the National Competitiveness

Programme with special emphasis on making the SMEs competitive.

It is recommended that further work should be done on:

Examination of the methodology for enabling better credit

delivery to the SSI sector by RBI

Designing a scheme to enable SSI units revitalize

themselves to face import competition

Restruc ture/ Revitalization of State Finance Corporations

(SFCs)

Giving a larger role to SIDBI in di rect lending to SSI sector

Mandatory registration of SSI units in which Industry

Associations could be empowered for fac il itating the

process of self registration.

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A separate law for small enterprises including chapter on

provisions of credit to the SSIs, be framed as prevalent in

several other countries

3.7.10.6.

3.7.10.7.

3.7.10.8.

3.7.10.9.

3.8.1.

One of the solutions for pushing manufacturing growth is

through growth poles or industrial clusters, mentioned in

the PURA (Provision of Urban Amenities in Rural Areas)

context, in the 2005 -06 in the Union Budget speech.

Examination of the policy of reservation of certain products

for exclusive manufacture by the SSI units and decide on

the pace and sequencing of future de-reservation also

taking into account the findings of the empirical study

currently under way to assess de-reservation.

Delivery of the benefits of support measures to enhance the

competitiveness to unregistered firms, without making it

mandatory for them to register themselves with the state

agencies at the district level, keeping in mind global best

practices in this regard and their adaptation to suit the local

conditions.

3.8. Enabling Public Sector Enterpr ises to meet competitivemarket condit ions

Given the type and range of problems faced by the country at the time

of independence on the economic, social and strategic fronts, it became

a pragmatic compulsion to use the public sector as an instrument for

self-reliant and accelerated growth of Indian Economy, Public Sector

Enterprises (PSEs) were central to Indias philosophy of development.

The dominant consideration for the continued large investments in PSEs

was develop the core sectors of economy and to serve the equipment

needs of strategically important sectors like Railways,

Telecommunications, Power, Steel, Coal, Defence, etc., and to provide

a spring board for the economy to achieve a significant degree of self-

sufficiency in the critical areas. In line with the mandate given to PSEs,

they have managed to meet to a large extent the objective for which

they were set up in the first place. However, over the years,

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performance suffered due to a variety of reasons. The PSEs as a whole

comprised of an admixture of better performing enterprises as well as

loss making enterprises, the proportion of the latter in terms of numbers

being larger. In spite of several initiatives taken over the years, the

operational efficiency of some of the PSEs has not shown improvement.

Further, PSEs continue to suffer from several disadvantages in terms of

over manning, empowerment and multiplicity of overseeing agencies.

3.8.2.

3.8.3.

Economic reforms being implemented by Government since 1991

across sectors have dramatically changed the conditions under which

the PSEs had to function. The amendments to the Industrial Policy in

1992 removed licensing requirement in respect of almost all sectors for

the domestic Private sector and unleashed a wave of fresh investment

and growth in manufacturing. Most sectors which were earlier reserved

for development only in the Public Sector were also opened to the

private sector. The manufacturing sectors have also been opened up

for Foreign Investment without any sectoral caps. Parallelly, tariffs,

which provided high level of protection from imports to the Indian

Industry including the PSEs, have been reduced very substantially since

1991 onwards. The average tariffs have been brought down to a level

15% in the Union Budget of 2005-06. All these factors accentuated the

competition that the PSEs had to face. The PSEs have been working

towards meeting these challenges by reorienting their functioning.

Government as the owner of the PSEs also realized the need for reform

and restructuring of the PSEs. In order to make them more efficient in

terms of decision-making, powers have been delegated to the Boards of

these Enterprises; the concept of Navaratnas and Miniratnas, etc. was

introduced in order to give these PSEs the much needed autonomy formore efficient functioning. In order to address the issue of high staff

costs, VRS was successfully implemented in many PSEs.

In the context of increasing economic integration of India with the rest of

the world, Indian Industry including the PSEs will have to continue the

adjustment process and improve its competitive edge to survive.

However, there are some basic disabilities under which the PSEs in

India continue to function and these would come in the way of orderly

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adjustment. Some of the important ones in which further reform of the

PSEs is needed to remove these disabilities are identified below:-

Autonomy: For a strong and effective public sector,

devolution of full managerial and commercial autonomy is

essential. This, however, needs to be closely integrated with

proper governance measures and accountability.

3.8.3.1.

3.8.3.2.

3.8.3.3.

3.8.3.4.

3.8.3.5.

3.8.3.6.

3.8.3.7.

Review Mechanisms: There is a need for rationalization and

optimization of multiple review mechanisms.

Delegation of powers: PSE Boards must be delegated with

appropriate powers to pursue J Vs, M&A, Technology Acquisition,

etc.

Cost and Productivity: The total cost of labour compounded

with low productivity of labour in PSEs needs corrective action.

Sourcing decisions: The decision making process regarding

purchase of raw material and sale of goods depending upon the

market conditions should be streamlined. Most of the

Government guidelines and procedures have been evolved over

the years for PSEs carrying out production and sales in aprotected domestic environment. These guidelines and

procedures tend to make these PSEs globally uncompetitive

when applied to export/import. Hence, there is a need for

reexamination of extant procedures laid down by CVC.

Technology: Enabling policies that make technology transfer

mandatory to domestic enterprises in certain areas.

Anci llaries and supporting indust ry: For a PSE to becompetitive the ancillary units and all the supporting units also

need to be competitive. The location of these units could be in

India or in any part of the word and need to be competitive in

terms of price and quality. The PSEs have to work towards this

goal of procuring the best quality goods at the most competitive

prices to retain their own competitiveness. Many of the

operations of a company would need to be outsourced to places

where the cheapest and the best option is available in order to be

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globally competitive. This may require a change in manner in

which PSEs operate their obligations towards development of

ancillaries.

3.8.3.8.

3.8.4.

3.8.5.

3.8.6.

Preference: Parallelly, some issues that have been questioned

by some on economic grounds such as the purchase/price

preference for the PSEs would also need to be reviewed in the

overall context.

Towards achieving some of these objectives the Government has

appointed two Expert bodies, the first one being the Ad hoc Group of

Experts for making recommendations on some specific issues such as

the ownership, the autonomy issue and the delegation of powers. The

Ad Hoc Group of Experts has submitted its report20 to the Government

on Empowerment of CPSEs.

The second Expert body is the Board of Reconstruction of Public Sector

Enterprises. The Board is expected to advise Government on

strengthening the PSEs, suggest measures to make them autonomous

and professional, including delegation of powers, etc. The Board has so

far been making its recommendations on restructuring of specific

CPSEs for consideration of Government.

The National Manufacturing Competitiveness Council will take into

account all the work done so far in respect of reform of the PSEs, study

the remaining aspects, and make suitable recommendations for

improving the competitiveness of the PSEs. Towards this end, various

guidelines and procedures with respect to procurement, sales and

marketing, pricing, recruitments, manpower planning, salary structures,

technology transfer, outsourcing of production and production facilities,

outsourcing of sales and marketing and labour laws for PSEs which

make them uncompetitive would also be studied and necessary

changes would be suggested to make the PSEs globally competitive.

20 Report of Ad-hoc group of experts on empowerment of CPSEs, Department of Public Enterprises,

April 2005

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3.8.7.

3.9.1.

3.9.2.

3.9.3.

Hence, it is recommended that in order to make PSEs

internationally competitive, following areas need to be addressed:

Autonomy, review mechanism, delegation of powers, cost and

productivity, sourcing decisions, technology, ancillaries and

supporting industries.

3.9. Infrastructure Development

There can be no issue with the proposition that inadequate

infrastructure renders Indian manufacturing uncompetitive. Economic

Survey 2004-05 lists power, telecom, posts, roads, ports (airports and

seaports), civil aviation, railways, urban infrastructure and legal

infrastructure as infrastructure. As per the survey published in Global

Competitiveness Report21 2003-04, the top five problematic factors for

doing business in India have been identified as inadequate

infrastructure, inefficient bureaucracy, corruption, restrictive labour

regulations and tax rates.

As a generalization, the infrastructure area where there have been

visible improvements is telecom, with roads perhaps following as a

somewhat distant second. The contours of unbundling, user charges

and regulatory agencies are known. The issue is simply one of getting

infrastructure reforms implemented and some areas of physical

infrastructure are State subjects. From the manufacturing perspective,

perhaps the most important infrastructure areas where reforms are to be

speeded up are power, ports and railways, followed by roads. Among

these, power supply remains the main physical infrastructure bottleneck

to industrial growth on account of chronic shortages, high cost andunreliability. 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.

Energy availability is critical to sustain industrial growth and

competitiveness. Current energy shortages are seriously jeopardising

the industrial resurgence and need to be seriously tackled. The holistic

21 World Economic Forum, Executive Opinion Survey (2003)

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perspective on the issue of energy needs to be developed through a

comprehensive national energy policy to encourage investments in the

area. In addition to the electricity sector there should be added focus

on harnessing coal mining potential, developing pipeline infrastructure

for transportation of gas, encouraging renewable energy resources

including bio fuels etc.

3.9.4.

3.9.5.

3.9.5.1.

3.9.5.2.

3.9.5.3.

3.9.5.4.

The survey based approach22 comparing the investment climate across

Indias states ranks them from the top as Delhi, Punjab, Andhra

Pradesh, Maharashtra, Karnataka, Tamil Nadu, Gujarat, Haryana,

Madhya Pradesh, West Bengal, Kerala and Uttar Pradesh based on per

capita income distribution. The findings on states and cities further

reveals that there are significant gaps in manufacturing labour

productivity across states in India and there are larger labour

productivity gaps between cities than there are between states.

In this regard, it is recommend that:

Addi tional investments need to be made by the government

in increasing the port capacities (over and above the

currently p lanned expansions).

Further, port operations & procedures need streamlining by

simplifying the number of procedures, automating the

processes, etc. with a view to bring down customs clearance

time.

While the Golden Quadrilateral (GQ) and the east-west and

north-south corridor projects launched by the National

Highways Authority of India (NHAI) are steps in the right

direction, port connectivity to manufacturing clusters and

the GQ through targeted road development projects is

essential.

While the Electricity Act 2003 is a step in the right direction,

state level power reform supported by rationalized

22 INDIA : Investment Climate Assessment 2004 : Improving Manufacturing Competitiveness,

November 2004, World Bank

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regulatory framework needs to be put in place for enabling

better access to quality power.

The Energy sector should be looked at from a holistic

perspective in view of the fact that energy shortages are

seriously threatening the sustainability of industrial growth

resurgence and the competitiveness of the manufacturing

sector. The criti cal impotence of the reliable reasonable

cost power supply for healthy manufacturing sector growth

needs to be recognised strongly.

3.9.5.5.

3.10.1.

3.10.2.

3.10. Importance of Intellectual Property Rights (IPRs) inthe manufacturing sector

In today's knowledge-based economy, the ability of policy makers

to recalibrate policies to support technological innovation within

enterprises and to reconfigure existing competencies to create new

knowledge for (and from) innovation has become a strategically

important capability. In developing countries like India, this

recalibration and reconfiguration process is difficult because of

capacity constraints and economic, political and social complexities.

Enterprises must be able to acquire new knowledge not only to

combine it with existing accumulated knowledge to create the

knowledge required for innovation but also in order to respond

competitively in a TRIPS-compliant IPR environment. Hence,

effective utilisation of intellectual property rights particularly patents,

has acquired great importance for technology upgradation and growth

in the industry as well as wealth creation and gaining international

competitiveness.

The Government has taken several initiatives in the IPR area including

revamping of all the laws and modernisation of the IPR/Patent Offices

as a strategic response to the globalisation and liberalization of the

Indian economy and given the increasing importance of IPRs. Some of

the key issues for the manufacturing sector to take advantage of the

Intellectual Property regime that require support through capacity

building are:

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3.10.2.1.

3.10.2.2.

3.10.2.3.

3.10.2.4.

3.10.2.5.

In a product patent regime, Indian firms will have to look for new

sources of growth in the future and the biggest source will be

productive R&D, which can deliver patentable innovations.

Similar to other industrializing economies, India will have to shift

the focus of industrial research towards the acquisition of a more

complex knowledge base for innovation.

At the macro economic level, the absorption, or assimilation,

of increasingly modern technologies, and adaptation to

change in industrial structure, are increasingly becoming the

critical components of competitive transformation. The

transition from the early stages of accumulation of

minimum knowledge levels of innovative capability and

adaptation; to the creation and management of

knowledge as a strategic asset must be accelerated if

India is to maintain and improve its growing competitive

position.

It is a positive sign that many Indian enterprises, particularly in

the knowledge intensive sector (pharmaceutical, biotechnology,

IT, automobiles, etc.) are developing competitive capability in

innovative R&D by acquiring new components of knowledge

and reconfiguring architectural linkages between these

components in new ways. The new components of knowledge

are acquired by increasing investment, by hiring new scientists

with knowledge about innovative R & D and crucial tacitknowledge particularly for the manufacturing sector.

The reconfiguration of the architectural linkages is being

accompanied by changing management and organizational

structures along with new mechanisms of knowledge transfer and

integration, as well as a policy environment more conducive to

innovation and IPRs.

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It necessary that knowledge-driven industries in India

should increasingly attempt to embrace the network model

of innovation and R&D by intensifying their collaboration

with research institutes, universities and other

counterparts. Such efforts need to be particularly

supported and encouraged for the manufacturi ng sector.

3.10.2.6.

3.10.2.7.

3.11.1.

3.11.2.

It is necessary for the Government of India and its concerned

Ministries jointly with relevant stakeholders/Industry

Organisations like CII, FICCI and ASSOCHAM to launch a

national campaign for Indian firms to invest in next generation

intellectual property in the product, process and practice

domain.

3.11. Importance of Information Technology (IT) inmanufacturing sector

Current Stage of IT adoption in Indian manufacturing sector is not

encouraging. Indian manufacturing industries are facing various challenges

in terms of global competitiveness partly due to lack of IT enablement of

their business processes and management practices.

In India, over 90% of the manufacturing enterprises fall under Small and

Medium scale categories and the majority of them are still undergoing

nascent stages of the IT adoption. They lack the knowledge of business

performance improvement potential of IT and it is still used as office

administration and accounting automation tools. However, the

manufacturing enterprises in developed economies are at stagescovering functional automation and cross functional process integration.

Hence, there is increasing need to create awareness about IT

application among Indian manufacturing firms. There is ample

consensus that proper adoption of IT requires knowledge transfer efforts

along with implementing common IT infrastructure in aligning with

industry clusters development program. Furthermore, it also requires the

involvement of top management, industry associations, business

partners etc. In many countries government and industry associations

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have played a vital role in IT adoption amongst the industries particularly

in the SME sector.

3.11.3.

3.11.4.

3.11.5.

3.12.1.

Even though there is a clear business case in favor of increased

adoption of integrated enterprise-wise IT application in the manufacturing

sector, in most organizations use of IT is limited to automation of specific

functions like inventory control, external communication, etc. Most of the

enterprises have not been able to adopt the IT architecture due to lack

of proper knowledge and unaffordability of the costs associated

with it.

The development of the e-economy can be seen as being of major

importance for the growth of Indian economy as a whole and would also

integrate local manufacturing enterprises more to the regional and global

markets. This will only be possible if investment and modernization of

production and services takes place.

A planned model of IT adoption needs to be implemented in the

current Indian manufacturing scenario. The relation between

quality and certification and the assessment process (auditing)

is also an extremely important element in the manufacturing and

movement of goods and in the whole supply chain. These

concepts have to be adapted in the e-business context too and

applied to the manufacturing sector in India in order to enable them

to be competitive.

3.12. Firm level competitiveness

In order to be successful, Indian companies will need to adopt a global

mind set to build scale and achieve cost excellence; acquire market

access rapidly; strengthen design and innovation skills; build a global or

regional operating foot print; and master the ability to manage a world-

class talent pool and organization. These actions will form the

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foundations for ambitious growth and will need to be supported by a

judicious choice of market segments and business models. Firms

normally have their own strategies for lowering cost, improving product

quality and finding marketing networks.

3.12.2.

3.12.3.

3.12.4.

Global Competitive Analysis of Indian Manufacturing Sector indicates

that the Total Factor Productivity (TFP) in Indian manufacturing sector

measured as the value of capital and labour deployed is one fifth of USA

and one half of that in developing economies with negligible change in

relative productivity during the last two decades. The technological

competitiveness is low with respect to both product and process

technology because the human resources allocated to design and

engineering activity is about 20-50% less compared to the industrialised

countries.

While initiatives are taken at the country and sector levels to enhance

competitiveness in the economy, maintaining firm level competitiveness

is equally essential for individual firms if growth aspirations are to be

realized. Individual firms can do this by way of building abilities to

acquire, assimilate, develop new technologies; reduce production costs;

cut down delivery time; practice Total Quality Management; enhance

productivity and customer service. Use and development of technology

is central to competitiveness. However, using technologies efficiently is

not a passive, automatic process of simply importing a set of machines

and instructions on how to use them. It involves building technical

understanding and information skills, managerial practice