Manufacturing Should Drive Growth

Updated: Apr 25 2002, 05:30am hrs
You are naive if you think that you can transform yourself from an agrarian economy to a service economy in one decade without passing through a manufacturing boom was the exasperated comment of a slightly irritated CEO of a MNC after spending a few months in India. And I wonder if there is not some grain of truth in what he said.

I have always been a votary of the service sector not only because I belong to it but I see it as a sector where India has a competitive advantage. We have a huge urban work force, which is educated, and boast of the highest number of technical institutions in the world. The English language has become the language of commerce world over and, here too, we are better off than the rest of Asia, Latin America who are our competitors in the global work place. Having said this, I believe that in the last few years in our enthusiasm to get the service sector to grow, we have tended to ignore the potential of manufacturing. I am not talking about agriculture. Whatever one may say, agriculture will decline in importance over time as the country goes up the value chain as an economy.

It is now fashionable to talk of China and I will also do the same to take my point forward. China did have a head start compared to us in reforming its economy but they went about it with great deal of planning. They invested heavily in the manufacturing sector and created impressive capacities in almost every sector of the economy. True, they had a huge domestic market. But so do we. They were looking at the global market when they created these capacities. They also took their time to get into WTO so that they could practice some amount of protectionism in the intermediate period.

The impact of this policy is there for all to see. Firstly, the emphasis on manufacturing is confirmed by the fact that among the three sectors in China, manufacturing takes the largest slice of the pie, while in India, it is third behind services and agriculture. Apart from this, the Chinese are so competitive on a global basis that most nations, including India, fear them. They are a force to reckon with in textiles, consumer durables, steel, etc. An essential offshoot of this is the huge trade surplus China enjoys. Its exports race ahead despite global slow down and its foreign investment figures are much higher than India.

And when we look at India, the situation is pathetic. This year, our industrial growth is a miserly two per cent and we have grown as an economy on account of agriculture. Our exports are flat and we continue to have a very low portion of global trade in my view the best indicator of a nations competitiveness in the ultimate analysis. One may ask why do we need to put the emphasis back on manufacturing. I see several reasons for this. Firstly, we need to clothe and house our people and also improve the per capita consumption of cloth, paper etc . For quality of life to improve, we need to do this. More importantly, for agriculture and services to grow, we need more manufacturing. We have seen how the software industry and its bed mate, the internet industry, are in the throes of a massive over capacity on account of lack of orders; and these orders are not coming because domestic industry has stopped spending. Further new jobs are just not getting created and the ranks of the unemployed is still very high in spite of consistent growth of around six per cent during the last decade.

One may argue that we are focussing on manufacturing, but the sector is not able to compete. But that is not so. The number of statements about how important agriculture is to the nation far out number those that glorify manufacturing. Apart from that, wherever there is a tug-of-war between agriculture and manufacturing, the government always takes the side of agriculture. The price of cotton, sugar cane, fertiliser policy are only a few examples of this short sighted approach. How do we think that our sugar mills will make money if we play around with their input costs And if sugar mills do not pick up cane, it is the worker in the mill who suffers first but very soon the sugar cane grower also suffers. The same is the case with the cotton growers. Our efforts to help the service sector are laudable but the pampering has gone on too long. Why should we, for example, give every imaginable tax benefit to the software industry and give the worst possible treatment to the textile industry This does not make sense. China is planning to increase its textile exports to $ 50 billion in the next three years. It is already preparing for the global textile market opening up totally. And in India we tax polyester fibre and other raw materials at the highest possible rate. In many other ways like income tax benefits, we have bent over backwards to please the service sector and are paying for it now.

We need to immediately set right this situation and give primacy to manufacturing as China has done. Three areas cry for attention. Firstly we need to get interest rates down a lot more. At real interest rates of 7 or 8 per cent, manufacturing companies will never be able to compete globally. There are many arguments for keeping interests rates high and all of them are short sighted. Interest costs, as a percentage of total cost, is way too high.

Secondly, we need to ensure mobility of labour. There has to be the will to put through a modern labour policy, which will ensure that industry has the right to move labour in and out. Ganga, when it flows through the Himalayas is vibrant, but a stagnant pool of water in a pond soon stinks. Nature supports flow and abhors stagnation. The only way employment will increase in the manufacturing sector is if we give the comfort to the owner that his labour is a variable cost. Lastly we need to tax our industry less. The indirect taxes are way too high and need to be brought down to international levels. We are wrong if we believe that revenues can be increased at these levels. By having high excise duties, we are killing domestic demand, the key component of our growth.

Indian industry has had an ancient past, but is struggling. It is showing some signs of recovery as the upturn in the working of leaders like Tisco, Telco and Reliance as compared to the lacklustre performance of Infosys and Satyam shows. We need to give a locomotive effect to this so that we can put the economy into an eight per cent growth track and become a global player.

The author can be contacted at pnvijay@vsnl.com