Column: Mending manufacturing

Updated: May 14 2014, 09:30am hrs
As one of the most bitterly contested general elections ends, it was heartening to see that the major political parties spoke about reviving manufacturing growth, and creating millions of new jobs. Unfortunately, both the national parties were thin on details and showed less than desired appreciation that manufacturing growth and job creation do not always go hand in hand, as we saw in the last decade. If we do not crack the code, given Indias specific issues and challenges, we will end up fighting the next elections with the same good intentions but no action on the ground again.

Textile, as a labour intensive industry, is one of the leading segments in the sector for which we have to crack the code so that growth and job creation go hand in hand. In an industry where developing countries meet a significant share of global demand, India has an inherent advantage given that it has the largest production of cotton in the world, large capacities for polyester and other synthetic fibre production, low-cost labour and a large domestic demand. The sector has been a pillar of manufacturing growth and job creation in China, whose share of global trade in textile increased from less than 10% to nearly 35% in the last two decadesfrom $10 billion to over $150 billion. In the same period, Indias share of global exports has remained stagnant around 3-4%. It is not just our inability to emulate China or even Vietnam, which entered the global textile export market just a decade ago and has already built a share of close to 3% that is so worrisome, we also risk losing jobs in the sector as the larger firms replace low-cost labour with high-cost automation in modernising their factories, thanks to the shortage of skilled workers and the challenge of managing large workforce under the existing labour laws. An industry leader rhetorically asked me why he should set up capacity in India when he could do so in other countries where a container takes only a day to reach their plant from the port, and they can convert the cloth into garments and pack it into the same container and load it on to the ship before it sails, all inside one week compared to the week or more for the container to just reach a plant from the port in India

The textile sector could have been a game-changer for manufacturing growth and job creation. So could have been electronics manufacturing, another labour intensive industry, where imports are expected to be higher than import of oil and gas within the next decade given the growth in demand. This sector faces the usual issues of lack of scale, poor infrastructure and logistics, rigidities of labour laws and plethora of outdated regulations which police industry as opposed to facilitating investment and entrepreneurial activity. We have also scored a self-goal with the inverted duty structure where it is cheaper to import fully made products than components used in their assembly. This has been further facilitated by some of our FTAs which make it easier to import fully made products from partner countries at zero duty.

There are many drivers of manufacturing growth and employment generation. More investments, better infrastructure, easier business regulations are well recognized and find mention in the manifestos of our political parties. An effective policy lever used by countries like China,

Taiwan, Korea, Thailand and Malayasia is the setting up of mass manufacturing zones and enterprises which house focused industry clusters with large plants employing over 4,000 non-contract workers.

India has had industrial development agencies in different states that have developed many industrial parks over decades now. We have experimented with policies like SEZ to promote exports. The manufacturing policy adopted by the present government proposed National Manufacturing and Investment Zones to create new mega manufacturing centres. But we have to ask ourselves whether they are conducive to all the key factors necessary to create the successful mass manufacturing zones when the average size of an Indian textile factory is less than fifty workers despite many so called textile parksa far cry from building large-scale textile plants of 4,000 workers.

There are certain themes which are common to the successful mass manufacturing zones. These include sector- and region-specific policies, liberal and uncomplicated FDI norms encouraging and incentivising global companies. China made liberal use of tax breaks to attract export-oriented investments in labour-intensive industries in its special industrial parks. Refining the labour laws to promote large-scale plants and provide flexibility to address global market fluctuationsgoing as far as helping in the hiring of local labour and ensuring labour supplyhas been another important element for the countrys success. These are all known policy elements, though they are implemented in different forms and intensities in different countries.

But one common thread which runs through all these zones and policies is the primary role of the government, be it the Central-, state- or municipality-level. These zones are government-owned and operated as profit-driven companies and highly commercialised with clear KPIs (viz. occupancy rate, land price, revenue, tenants satisfaction) to ensure quality in performance and often have centralised processing of approvals, resulting in easier and better business operating environment. They often grow in phases and as each phase develops, they can share the higher monetisation of land with their shareholders. In China, these are often the municipalities. In India, these could be the farmers who contribute their land to the zones.

If we are serious about going beyond rhetoric and creating large-scale manufacturing employment, the core goal has to be setting dozens of mass-manufacturing zones. Acquiring the land and developing these zones will not happen if we develop a policy on paper and then leave it simply to private companies, as the new land acquisition act proposes to do. The new government has to assume the primary role in making it happen. The future of millions of young Indians depends upon it.

Arindam Bhattacharya

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