this backdrop, the constitution of the National Manufacturing
Competitiveness Council (NMCC) recently is a welcome development.
The Council is earnestly applying itself to identifying
areas of core competence, and is evolving sensible strategies
for rapid growth of manufacturing sector.
economists argue that India already missed the bus in the
manufacturing sector. China, which has emerged in the past
two decades as the manufacturing hub of the world, has 35%
contribution of manufacturing to its GDP. Other emerging
Asian economies - Indonesia (25%), Malaysia (31%), and Thailand
(34%) - show similar trends. Not surprisingly, as the NMCC
report points out, our share of global trade, though it
has risen from an abysmal 0.5% in 1991, is still at a low
1%. Our manufacturing exports account for only US $ 40 billion
in 2002-03, as opposed to China's $ 300 billion, Taiwan's
$ 140 billion, Mexico's $ 141 billion, Malaysia's $ 78 billion
and Thailand's $ 55 billion. Therefore, these economists
contend, we should focus on services sector where we seem
to have competitive advantage, and India must aim to be
the world's back office and services hub.
such an argument suffers from there fallacies. First, growth
in services is welcome and necessary. But services and manufacturing
are not mutually exclusive. Second, in every large economy,
it is manufacturing that provides productive employment
for a large proportion of semi-skilled and skilled workers.
If we focus only on high end services involving highly skilled
workers, inequities will grow, and unemployment will lead
to serious social and political instability, not to speak
of human misery. Third, while we can offer good quality,
low cost services to the developed world, there is a limit
to back office operations, and therefore expansion of exportable
services in India. But manufacturing, which involves physical
transfer of goods, suffers no such limitation, provided
our products are competitive in cost and quality.
points out several advantages of a strategy to promote manufacturing.
Revival of manufacturing can create 2.5 million new jobs
each year as opposed to one million jobs created per year
over the last decade. Manufacturing promotes growth of agriculture
and service sector too, and every rupee invested in this
sector adds four rupees to GDP. Goods produced meet the
basic needs of our population, eliminating poverty and improving
standard of living. And a large economy of India's size
and diversity cannot afford to ignore the vital manufacturing
sector, particularly at our current phase of development.
can the Finance Minister do to revive manufacturing? There
are four areas which need urgent attention. First, indirect
tax administration needs to be simplified, and made more
transparent and industry-friendly. There has been significant
improvement in the direct taxes regime in recent years.
Even central excise and customs improved to some extent.
But extortion, harassment and corruption continue in indirect
taxes administration. Transparency, simplication, digitization
and revenue neutrality should be the watch-words. In fact
with an honest regime, revenues will significantly grow.
In the earlier license raj, entrepreneurs enjoyed monopolies
- through Internal entry barriers on account of licensing,
and external barriers of trade and tariffs. Therefore extortion
of tax inspectors was merely an added cost passed on to
the hapless consumer. Now that both barriers are dismantled,
we need to transform indirect tax regime to allow manufacturers
the breathing space to focus on production and marketing
in a rapidly changing, competitive scenario.
as NMCC points out, India has a unique window of opportunity
now in certain sectors like textiles and apparel, leather
and leather goods, food processing, gems and jewellery and
handicrafts. The recent removal of quotas under WTO gives
us a great opportunity to expand our market share in garment
industry. But we need rapid creation of infrastructure and
promotion of skills in order to capitalize on our competitive
advantage. Modest investments strategically made can stimulate
manufacturing in these sectors, and create a large, skilled
workforce which can be productively employed.
while our banks are flush with funds, the small and medium
enterprises (SME) are starved of credit. In a highly competitive
global economy, rapid response to market forces is vital
for the survival of a SME. But banks are often lazy and
risk-averse, and genuine enterprise is stifled. Our credit
policies must be aimed at supporting manufacturing, particularly
in a market economy a large number of businesses fail even
as new businesses emerge. Risk and failure are the inevitable
consequences of competition and free markets. When a business
fails, the manufacturer must have a quick exit to cut his
losses and start all over again. We made such exit excruciatingly
painful and slow, deterring enterprise and employment. Our
workers and managements have learned in the past two decades
that the old, adversarial approach is counterproductive.
As a result, industrial peace is now the norm. But when
a unit has to close down, there must be painless way of
dealing with workers. Reasonable ex-gratia, swift closure,
rapid retraining to prepare workers for new jobs, and a
security net to help those retrenched tide over the crisis
are crucial for encouraging investment and minimizing misery.
Otherwise, investment will shy away from manufacturing,
and go into speculative areas like real estate, creating
government still has a crucial role in promoting manufacturing
and helping generate employment. Modest allocations strategically
made, and farsighted policies can give us the competitive
edge, and absorb tens of millions in the work force. Will
the FM shed our economic orthodoxy, and bite the bullet