Column : Can India be Germany of East

Written by Arindam K Bhattacharya | Updated: Jan 2 2013, 09:27am hrs
Germany had a social contract between govt, industry and unionsIndia has mainly mistrust

Germany of the East and not Factory for the West. In a recent survey of CEOs in Indias manufacturing sector carried out by the Boston Consulting Group in partnership with CII, this came out as a clearly articulated aspiration. The CEOs want to build high value manufacturing sector based on Indias perceived advantage in engineering and jugad skills, and not on the large-scale low labour cost driven manufacturing growth model of China. They see the current churn in global manufacturing industry as the best opportunity to shape Indias position for next two decades, an opportunity that was grabbed by China two decades ago when the western world discovered low-cost manufacturing. Thus, China became the factory to the West.

That is the aspiration. What is the reality Three years ago, the Indian manufacturing was flying high. The growth rates in one quarter touched a high of 10% and performed consistently around 8%. The National Manufacturing Plan was announced last year targeting a contribution of 25% of GDP for the manufacturing sector in 10 years from current level of 16% and to take India to the forefront of global manufacturing giants. In just three years this high flying sector has come crashing down with IIP growth becoming negative (minus 0.35% over April-September 2012, compared to 5.5% and 8.9% in the same period in preceding years), flat manufacturing GDP growth in FY13 so far and falling investment to GDP ratio (from 38% to 32%).

Perhaps there is no more disturbing data than a comment by an industry leader at a recent manufacturing summit when he said that the number of manufacturing jobs in the organised sector in India today is the same as the number 40 years ago when he joined the industry after passing out from college. As another participant in the same summit said, the labour laws have done a great job in protecting the interests of less than 5% of the total workforce at the expense of the 95% rather than creating new jobs!

Many reasons have been put forth for this short-term decline in performance and the long-term jobless growth in the manufacturing sector. Most of these issues like access to land, raw materials like coal and iron ore, lack of power, cascading taxation, poor infrastructure or stifling business regulations etc are clearly understood, and there are plans and/or bills under way to try and fix them. Except labour, which has been one topic where there seems to be a distinct lack of enthusiasm to move forward.

At the same manufacturing summit I had the opportunity to ask the CEOs two questions. The first was what the industry can do within these constraints to move towards their aspiration. The second was what would be one advice that they would give to the government if they had an opportunity. On the first question, it was no surprise that the answer was improve productivity towards global standards. The CEOs felt that they had much room for improvement on quality and product and process innovation and it was critical to improve productivity faster than growth in wage rates to remain globally competitive. On the second question, the response was more interesting. One CEO put it, his one sentence advice to the government would be listen to the industry, we are not adversaries.

Clearly, there is a growing belief in the industry that many in the government do not trust them as another CEO put it. This widening gap is not just between the industry and the government but also with other stakeholders like civil society and labour. Germany of the East is a wonderful aspiration to have, but Germanys success has been underpinned by the amazing social contract between the government, industry, labour unions, banks and research centres, which has created an industrial ecosystem that is the envy of the rest of the world.

This social contract was formed by a common sense of purpose among all the stakeholders, forged in the aftermath of the World War when the entire country was united by the desire to collectively rise from the ashes, which trumped any personal agendas that may have existed. Organisations, societies and nations develop common objectives driven by a crisis like Germany or Japan did post the World War II, or by powerful or charismatic leaders of totalitarian states like Korea or China did in more recent years.

There is a third, perhaps more sustainable but certainly more difficult way, when multiple stakeholders align their interests through a series of dialogues and discussions. But that calls for trust driven by the belief that all the stakeholders have the same aspirations at the end of the day. This is the biggest leadership challenge for India. Also perhaps the greatest opportunity for an India way to forge an alliance among the different stakeholders, based not on best practices of the last century but showing the way forward for the present one.

The author is managing director, the Boston Consulting Group, India. Views are personal