On the face of it, this may seem paradoxical. The latest data made available by the Directorate-General of Employment and Training shows that the organised manufacturing sector lost around half a million jobs during four years ending 2001. Anecdotal evidence suggests that the trend continues and the figure of jobs shed may have grown over the last two years.
At the same time, the profitability of India?s corporate sector has shown a distinct improvement. Despite a sluggish monsoon, over 750 non-refining companies have increased their net profits by 22 per cent in the fourth quarter of 2002-3, recording one of the best performances over the last five years. And only a part of this profit growth has accrued from the sustained fall in interest rates. A good part is a product of growing efficiency and competitiveness of India?s large and medium manufacturing companies. With each passing day, progressive companies are exploring new ways of cutting costs. To take an indicator, the ratio of working capital to sales has more than halved for over 1,500 companies over the last five years. These companies are also increasingly looking at global opportunities and their exports as a proportion of sales have increased by nearly 4 per cent to reach about 12 per cent over the same period.
Unfortunately, this improvement does not cover a large part of organised manufacturing and in each of the previous five years, a large number of companies have been unable to face the onslaught of competition unleashed by domestic deregulation and falling import tariffs. Sickness is rampant and layoffs by unviable companies are growing.
Those who continue to look for formulae to reverse this trend need to rethink. India?s integration into the global system is irreversible and competition from imports would only intensify. Indeed, India is already exploring the possibilities of free trade agreements with the ASEAN region and manufacturers would have to continue to find innovative ways to enhance competitiveness. Expectedly, companies that cannot cope with changing times would perish and those employed by them would lose their jobs. This is how competition has enforced industrial restructuring in all market economies and India cannot expect to be different.
Does this mean that employment in manufacturing in India can only shrink? Nothing can be farther from the truth. The fact is that India has consistently failed to tap its potential in manufacturing and a right mix of policies can create new jobs in competitive units at a rate much faster than the ones lost in inefficient units that will perish. Comparisons show that the share of manufacturing in India?s GDP is way below what obtains in China, South Korea and other late industrialisers in ASEAN or Latin America. The improved performance by a section of our corporate sector shows that Indian manufacturers can compete across many sectors and if the disadvantages they face are reduced, there is tremendous scope for substantially enhancing manufacturing?s contribution to GDP and employment. The latest budget rightly recognises that despite years of neglect Indian manufacturing can be revived.
However, our fiscal regime still has a long way to go before this desire is even remotely fulfilled. Lowering of indirect taxes at all levels, including those levied by states, would play a critical role in global competitiveness. Over half the difference between manufacturing costs between India and China is explained by high taxes here, the remainder by high transaction costs imposed by the poor quality and high price of infrastructure and lower labour productivity. Fiscal rectitude would therefore have to be accompanied by reforms that promote investments in infrastructure such as power, ports and surface transport. Labour reforms would also make a big difference. Current policy on labour not only reduces productivity but also promotes capital intensity which prevents us from leveraging our labour cost advantage in light manufacturing.
Finally, speeding up of redeployment of capital from unproductive to productive uses would lessen the pain of industrial restructuring. Exit from unviable businesses takes too long and mechanisms for faster exit would compensate for jobs lost as redeployment of capital would create new jobs much faster than now. Also needed are short-term courses for acquisition of new skills by those who are forced out of the market by industrial closures.
The author is an advisor to Ficci. Views expressed herein are personal