Indias manufacturing sector has grown at 7% over the last decade, the second fastest after China. Despite this growth, the sector has failed to build depth, which has manifested itself in the growing imports of capital equipmentthe building blocks of a countrys manufacturing competitivenessinto the country. For example, between 2003 and 2009, while the manufacturing GDP has grown about 2 times, the import of plant and equipment has grown nearly 8 times. While the downstream industries have grown rapidly, the core sector products like power, mining, port and telecom equipment, railway equipment manufacturing, and steel and chemical plants have remained underdeveloped. While Chinas overall GDP is 3.8 times that of India, when we compare machine tool production, Chinas production is 55 times that of India.
Should India bother about depth of the manufacturing industry as long as consumer demand is being met with competitive products at competitive prices, and employment is being generated and leave the level of depth in different industries to the market forces and continue to import to meet any gaps in our demand-supply of plants and equipment Or, is depth important for long-term competitiveness of the manufacturing sector and the government should play a more active role in shaping this policy area These are two fundamental strategic choices that face Indias policymakers.
Many countries take a view that depth is important for long-term competitiveness as it allows greater value capture and pricing flexibility is key to technological innovation, protects local industry from shifting global demand-supply situations and increasing volatility. In industries such as defence and telecom, it is important to control and keep the value chain indigenous from the perspective of national security.
The best example of how an emerging economy has systematically built depth through focused government policies is China. While China may seem the wrong benchmark, given the different governance model, it is instructive to note that strategic industries (defence, power generation, telecom) and pillars (automotive, steel, equipment and machinery) have built global leaders in industries like power, telecom and railway equipment. Now these industries can go bargain hunting to countries like India.
We cannot be world beaters in each and every industry. So where should we build depth Four industries pick themselves for consideration. First, defence equipment, where the need to control ones destiny is unquestionable, but there is also a strong economic logic as the country will make huge investments in these sectors over the next decade. Many countries have used offset strategy as a policy lever to build their defence production capabilities and which also has a multiplier effect on the countrys manufacturing industry. Second, a set of industries are the building blocks of the manufacturing sectorcapital goods, plants and equipment of core sectors like power, telecom, railways, oil & gas, mining and construction. Third is the critical electronics and hardware industry where India is just 0.25% of global industry and imports 50% of its demand. Fourth is selecting an emerging technology area like nano-technology, fuel cells, artificial intelligence, mega-scale engineering, etc, where countries are jockeying for leadership positions. Given the growing importance of sustainability, India could place its bet on the green technology space estimated to be about Rs 110 lakh crore and growing at over 15% per annum.
Building depth means making some tough policy choices, ranging from ownership rules, preferential customer access, setting industry standards customised to the country that favours local suppliers, fiscal incentives for specific industries and customs duty to protect them in their development phase, and support technology development through technology parks, easier access to funding for firms in these parks, creating a technology transfer market, etc. These policy choices will, by necessity, guide both Indian and foreign manufacturers in taking investment decisions that could be different if left totally to the market forces.
India has to grow its manufacturing sector at over 10% per annum to give credence to this years budget speech by our finance minister where he talked about the sectors emergence as the growth driver of our economy. To achieve this, Indian manufacturing sector will have to invest between Rs 55 and Rs 80 lakh crore over the next 15 years. Add to this the estimated Rs 40 lakh crore of investment in infrastructure that will require all manner of capital goods, and the huge investment in modernising our defence forces, it is no wonder that the global leaders and their manufacturers see India as the biggest market.
We can decide to remain a buyer in this mega-mart or seize this window of opportunity to become a truly world class manufacturing economy. It is for us to choose the path we wish to follow and set our aspirations accordingly.
The author is MD, Boston Consulting Group, India. These are his personal views