Manufacturing: What India needs to do post-Covid-19

April 28, 2020 6:15 AM

Getting big-ticket investments would be challenging; focus on investments that are modest in size and low in resource demands.

In the last two decades, most Indian manufacturing has drifted away from its classical definition.
By Ashok Barat

India’s role post-Covid-19, particularly in the industrial sector, is a subject of great interest, hope and speculation to the rest of the world. Many believe India will emerge as one of the preferred centres for manufactured products vis-a-vis China, if not the foremost choice. This is a sensible and reasonable aspiration to have as a nation. But this is an outcome, not a strategy. The most appropriate strategy for India would be to assume greater self-control over its national value chain; embrace and enhance, what is often alluded to as the Nehruvian approach of ‘core self-sufficiency’, by augmenting domestic value addition in its manufacturing industry.

This discussion has two elements:

1. Manufacturing versus assembly;

2. Expanding domestic capacity and capability—augmenting current ones, and adding fresh (in a planned, focused and strategic manner).

In the last two decades, most Indian manufacturing has drifted away from its classical definition. Manufacturing is the process of converting the bounty of Mother Nature into a man-made product. Assembly is a subsequent step of putting together various manufactured elements and creating a new product that is closer to and more convenient for human use and consumption. For a variety of reasons, both good and bad, many if not the most recent success stories of Indian manufacturing have been more in the nature of assembly. In other words, large number of, and usually critical components and inputs of the value chain, are imported. Many experts suggest that, to be truly called a domestic manufacturer, local value-addition must be at least 50%.

This definition (the right number may be debated, and may vary across sectors) must be clearly established, agreed upon and communicated to create a measurable strategic intent if India wants to achieve ‘core self-sufficiency’. If a milestone and roadmap is not built around a numerical target, and as part of national agenda, the aspiration to attain destiny control over the manufacturing value chain will remain a vague desire or a wish and not a plan. Today, we need a plan!

The second part focuses more on strategic execution. The author’s case is that the right answer to this opportunity is a ‘string of pearls’ approach as opposed to a ‘mining for gold’ approach. Shorn of the metaphor, it is a ‘many medium and nuanced’ versus ‘few big’ choice.

Post Covid-19, getting big-ticket greenfield investments, domestic or foreign, would be challenging. Domestic investors have an issue of affordability; there are few local industrialists who have the ability to make large long-term investments and leverage themselves further. Suffice to say, conceptually domestic play is a part of the approach but there are issues; they should not be ignored but may not be the answer in the short term. On the other hand, getting overseas ‘big boys’ is an entirely different game—it involves global politics, competitive bidding, (in a post-Covid-19 world that will involve ‘home’ nations too), and grants of significant sops and concessions.

In a democracy like India, choices exercised in favour of a few, besides being prohibitively expensive, are politically unwise, always likely to be construed as subjective and susceptible to protest, eventually making implementation bitter, unpleasant and frustrating. The whole ambience of ‘ease of doing’ business is compromised, consequently delaying rollout. The question of how many will India get and at what price, still remains?

A ‘string of pearls’ approach is more nuanced, sharper and targeted—it involves carefully identifying a few priority or relatively capable industries (to begin with), mapping their value chains and attracting strategic medium-sized investments in those critical and high-value elements of the value chain; an exercise similar to analysing the Bill of Materials and Services, where there is total or substantial dependence on imports. These handpicked items to be focused upon, attracted and incentivised to establish manufacturing in India.

These investments are likely to be modest in size and low in resource demands (smaller land parcels, attractive for states to also pitch in, etc), making it faster to operationalise. These will get seamlessly retrofitted into an existing value chain as market is assured. This initiative should also include augmenting the strength of existing players, in capacity, capability, technology, scale, etc. Such value-chain-linked projects are more viable and attractive for lenders, and eventually can be a source of exports to other nations.

This approach has many collateral advantages and risk management dimensions.

—Medium-sized enterprises generate more employment per unit of investment, a crucial factor for India post-Covid-19;

—Land requirements are easier; it is a challenge in India to get large contiguous land parcels;

—Such enterprises can be spread throughout the country, decongesting cities, widening distribution of economic prosperity, thereby encouraging and enabling a dispersed growth of services and social sectors;

—Multiplier impact of common elements in value chain across industries, if chosen and planned well;

—Mitigating the risk (at a country level) that India may face of its IT sector possibly suffering the consequences of a similar global action of reducing dependency concentration.

In summary, India needs to articulate a measurable roadmap to increase its current domestic value addition by at least 500-600bps in the next five years. A large part of this has to come from a ‘string of pearls’, i.e. need-driven, technology-based medium enterprises interwoven with existing domestic manufacturing value chains, and not just from a few large greenfield projects. If the ultimate outcome is to become a preferred global source of choice, the plan has to be a part of a well thought out strategy and not influenced solely by political and ideological rhetoric.

The author, a former corporate executive, is president, the Council of EU Chambers of Commerce in India

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