If India wants to become a globally competitive manufacturing hub, it will have to rethink the notion that the traditional SMEs will form the manufacturing backbone, argues Prosenjit Datta.
The government is trying one more time to super-charge India's manufacturing story. It is a goal that multiple prime ministers have tried with limited success in the past.
In Prime Minister Narendra Modi's second term in office, and perhaps spurred by the economic problems that have been accelerated by COVID-19, his administration has made a flurry of policy announcements. These include higher tariffs to protect manufacturers in India; licences and quotas for some imports; some tinkering with labour laws; and finally the announcement of production-linked incentives on a range of sectors.
And last year itself, it had taken the decision to stay away from being part of the Regional Comprehensive Economic Partnership, to protect domestic manufacturers.
These have evoked mixed reactions because most of these strategies have been tried out earlier as well with decidedly poor results.
Protectionism and quotas in the past have led to inefficient monopolies, high prices, and shoddy products.
Higher tariffs have often hurt India's exports more than any good they did to domestic industry. Production-linked incentives can be gamed by businessmen.
The changes to the labour laws seem to reduce protection for workers without really making things much easier for manufacturers.
Easier loans and help with provident fund requirements have also been announced for small and medium enterprises, but they have too many conditions attached.
How all these announcements will play out will be apparent only after some time -- when the fine print is out.
No doubt the government will make even more announcements in the coming days. While doing so, however, it needs to understand three things that are changing in global manufacturing.
We are not the only fish in the sea: Many people have expressed the sentiment that the COVID-19 induced supply chain disruptions as well as China's deteriorating relations with many countries will see a host of big producers move out of the Middle Kingdom and India is the most logical alternative.
Nothing could be further from the truth. Many big companies have started de-risking their supply chain operations from over-dependence on China. But many of them do not plan to shift lock, stock and barrel out of the country just yet -- just some portion to reduce risk. And they are looking at multiple options.
Malaysia, Indonesia, and Vietnam are making a strong pitch as manufacturing bases in Asia.
In Europe, Poland, the Czech Republic, Slovakia, and Hungary have emerged as centres of manufacturing innovation and they are attractive to many western European countries because they offer the advantage of near-shoring.
In Africa, countries such as Ethiopia and Kenya, with some Chinese help, are also positioning themselves as low-cost production hubs.
India's big advantage is that it offers a huge potential domestic market for some goods, like mobile phones or consumer electronics.
The disadvantages are also many -- problems in enforcing contracts, too much bureaucracy and corruption at ground level, lower productivity of Indian labour, poor infrastructure, and policy instability. All these will need fixing.
This is not your grandfather's manufacturing: Traditionally, over the past 50 years or so, manufacturing shifted from one country offering low-cost labour to another. Developed nations were always on the lookout for the next low-cost production hub. But that alone is no longer the consideration any more.
This is because new manufacturing facilities are depending increasingly on automation, robotics, and digitisation to reduce long-term operating costs, increase reliability, and cut down on wage bills.
The new manufacturing is technology-intensive and depends on scale. It trades upfront capital expenses with lower running costs and higher efficiencies.
China, in fact, initially became a low-cost hub because of cheap labour, but has increasingly retained its competitiveness by investing heavily in industrial robotics and factory automation. For several years, it has been the biggest buyer of industrial robots, even as it loses its demographic and low-wage advantages.
This also means that if India wants to become a globally competitive manufacturing hub, it will have to rethink the notion that the traditional SMEs will form the manufacturing backbone. In fact, SMEs will be at a tremendous disadvantage unless they can access capital and technology, and scale up.
Not your grandfather's job: The old thesis that manufacturing creates the kind of shop-floor jobs that allow people to move from agriculture to factories is also not going to hold in the future. Jobs will be created but not necessarily at the shop floor.
As factories become more technology-intensive, they will create more jobs that require IT and digital skills. Jobs will be created in factory automation, digitisation, robotic programming, digital maintenance, Internet of Things, and other such areas.
All sorts of ancillary services and companies will crop up to support the new manufacturing. And the government needs to factor that in while making integrated policies.
In the past, few Indian governments have thought long-term. This has typically meant that much of the progress India has made has been because of the reforms that were forced on it when it faced a crisis. It has also shown up in the inability to grow consistently over the long term.
This needs to change. Otherwise, we will be condemned to remain a shoddy manufacturing nation.
Prosenjit Datta is former editor of Business Today and Businessworld and founder and editor of Prosaicview, an editorial consultancy.
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