Column : FM aspires, industry perspires

Written by Arindam Bhattacharya | Updated: Mar 3 2011, 06:34am hrs
Our finance minister, in this years Budget speech, said ...it is imperative that the growth in manufacturing sector picks up. We expect to take the share of manufacturing in GDP from about 16% to 25% over a period of ten years. This is the first time that a finance minister has laid out such a bold agenda for the manufacturing sector. Is this an aspiration that is destined to remain on paper or an inspirational call to all stakeholders that the government means business in generating employment and unleashing the full potential for this sector

Let me put out the facts as I see them and then you can judge.

Indian manufacturing has grown at a robust rate of 6.8% per annum over the past 10 years, the second best performing country in the world. Yet, despite this stellar performance, the contribution of the manufacturing sector to GDP, at 16%, remains one of the lowest amongst the large and fast growing developing countries. Most countries in this peer set have contributions between 20% and 30%, with Thailand having the maximum contribution to GDP at 40%. The 25% target set for India by our finance minister has to be seen in this context. It is clearly a stretch, but achievable. However, this target does raise some fundamental questions.

First, what is the rate of growth required for the sector to achieve this share of contribution to GDP Is this growth rate achievable or over-ambitious Second, what kind of investments would be required to fund this growth and are they realistic Third, how many people would have to be hired to man this growth and can we train this large a number Finally, what are the other major roadblocks and are we putting in place the right strategies to overcome them

First, on the growth rate, it is seen that, generally, manufacturing growth is closely co-related to overall GDP growth. This has been the case in India. If the estimate of 9% is taken to be the trend rate of growth for the economy over the next 10 years, the manufacturing sector has to grow by at least 3-4% higher, i.e., 12-13% per annum for the next 10 years, to increase its share of GDP. Only China has achieved such a high growth rate on a sustained basis. Also, countries that have grown their manufacturing faster than GDP, have done so on the basis of higher exports. Indias manufacturing growth has been fuelled mostly by domestic demand. A key implication of this growth target is that the industry will have to pretty much double its manufacturing exports growth to accelerate to 15-20%. This is not an unachievable target, given the large scale shift of industrial capacity from the developed to the developing world, as long as we get our ducks in line, like removing infrastructural bottlenecksour ports still have a much higher turnaround time than their peersand reduce transaction costs.

The question on the amount of investment required is always a difficult one to answer in a developing country like India that has many demands on its limited capital. In 2007-08, Indian manufacturing companies had nearly R13 lakh crore of gross fixed assets, with asset productivity growth ranging between 3% and 7%. To fuel the growth target of 12-13%, assuming similar range of capital productivity, gross fixed assets will need to increase by R30-40 lakh crore in the next 10 years, of which about R10-15 lakh crore is required in just the next five years, as against an addition of R3 lakh crore of fixed assets over the previous five years. A tall order but again not unachievable if appropriate policies are implemented to channel both FDI and domestic savings into the manufacturing sector.

Turning to the question of skilled labour, this is perhaps a bigger challenge. In 2008, the manufacturing sector employed about 58 million people, or 12% of the total workforce. In the period between 1995 and 2005, manufacturing labour productivity was estimated to have grown by about 4-5%. Assuming that the industry will be able to achieve higher growth labour productivity of 5-7% per year, the manufacturing workforce would need an additional 40-50 million trained people in the next 10 years. This number can grow significantly if the productivity growth is lower. The current skill development capacity in India is estimated to be about 3-4 million per year. Again, not an unachievable target if we can get the skill development mission launched by the Prime Minister implemented successfully.

The numbers for growth of exports, investments and skilled labour are an arithmetic derivation from the growth target articulated by the finance minister. What was left unsaid was the numerous hurdles faced by the industry in acquiring land, getting raw material linkages, getting all the permissions to set up and operate a manufacturing plant, having greater flexibility in deployment of labour, besides the well known roadblocks posed by infrastructure and high transaction costs of doing business. The solutions to many of these hurdles are less in the economic and more in the political arena, and unless we find inspired solutions to them, I am afraid the laudable target of achieving 25% contribution to GDP set in this years Budget for the manufacturing sector may well remain aspiration on paper.

The author is managing director, Boston Consulting Group, India