Industrialising India

Written by Ajay Dua | Updated: Aug 31 2007, 04:29am hrs
Last year, Indian manufacturing grew by over 12% and by almost 14% in the last quarter of fiscal 2006-07.

This is a rate which the approach to the Eleventh Plan had envisaged touching by the terminal year rather than at its beginning. The year gone by saw transport equipment and its component industries, basic chemicals and chemical products, machinery and electrical equipment continuing to record high double-digit growth rates. We seem to be on our way to becoming a global auto hub, with Volkswagen, BMW, DaimlerChrysler, Suzuki, Honda and Toyota, besides Ford, GM and Hyundai deciding to expand their Indian operations. The rapid growth of the pharma industry is as much due to the expansion of the domestic market as the increased overseas acceptability of Indian drugs.

Manufacturing growth, as indeed the overall industrial growth, is spreading out and becoming spatially more even. The continuation of the package of fiscal incentives in Uttrakhand and Himachal Pradesh has brought about more industrialisation of north India. Increasing wage costs, particularly of skilled personnel, and the real estate boom in south and west India, have contributed to the industrial spread.

But will the good times last One can only hazard a calculated reply. In the next 2-3 years, the present momentum is likely to be maintained, though not necessarily at rates as high as 14%. The buoyancy in demand for Indian manufactures should remain high despite the sharp appreciation of the rupee, which is beginning to affect the export prospects of products such as textiles, apparel, footwear and leather goods. FDI inflows are likely to remain substantial, which augurs well for manufacturing.

On the negative side, there is the possibility of domestic investment in manufacturing suffering a resource crunch with the monetary tightening. SMEs, which depend primarily upon local institutions, are most vulnerable. On a 5-6-year horizon, the issues of skill availability, inadequacy of electricity and high transaction costs are likely to come to the fore. Also, the cyclical nature of the world economy, which has already seen four years of boom, can be reasonably expected to have its effect on Indian exports in 3-4 years.

The continued availability of relevant skillsets is likely to become an issue. The Indian comparative advantage in manufacturing is based on low wage costs and the abundance of low and medium level skills. This should not be frittered away. The need to contemporarise the curricula of our technical training institutes has been already well emphasised.

The government has announced a capital grant to industry associations and other private bodies taking over the responsibility of managing the ITIs.

The ball is now in the court of the state governments that own these ITIs. They must grant operational autonomy to private managements. Also, a countrywide comprehensive vocational training scheme needs to be evolved at the earliest. Much of the industrialisation seen in post-World War II erstwhile West Germany is attributable to the compulsory vocational training requirement for all school-leaving youth. Also, detailed assessments of the skill requirements need to be made. Maharashtra undertook such an exercise in the mid 1970s, when Bombay High struck oil.

The availability of electrical power could soon become a major constraint, despite an 8% growth in generation in 2006-07. The Tenth Plan capacity addition of 22,000 odd mw was less than half of the original planned target of 46,000 mw, and just about the addition in the Seventh Plan. Creation of captive capacities is not an optimal solution, since the fuel usually used is an expensive oil derivative, and small-scale generation is costly. The two recently allocated ultra mega power projects would hardly help reduce the burgeoning demand-supply gap. We need many more such projects.

The coal-fired super-critical 800 mw units in such mega stations are economical in terms of heat rates and yield significant economies of scale. With captive coal blocks, the cost of generation comes down drastically. If all this leads to lower electricity tariffs, it would help improve the competitiveness of Indian industry.

As long as Indian manufacturing lacked global scale, and catered mainly to domestic markets, Indias high transaction costs did not make much of a difference to its competitiveness. But with globalisation, things are now different.

Take infrastructure. Inordinate delays at ports and during internal transportation can test the patience of any businessman. The 2007 World Bank report on Doing Business in India has succinctly brought out how difficult it is to set up a business in India, though some remedial measures have been taken here.

Several further reforms need to be pursued. Third party or self-certification systems, which are in vogue in many developed countries to ensure compliance with prescribed norms, have not found much acceptance in India. This is both because of lack of provisions in the various statutes and the reluctance of the authorities to give away their powers of inspection. The persistence of such archaic practices can cost us dear as we endeavour to emerge as an industrial society.

Dr Ajay Dua was, until recently, secretary, industrial policy & promotion, with the industry & commerce ministry. These are his personal views