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The stalling of India's industrial engine

S Sivakumar

There is a growing concern among economists that India is rapidly losing the competitiveness of its industrial base to China and other low cost producers.

True, Indian industrialists are saddled with low labour productivity, high cost of capital, an appreciating real exchange rate, infrastructural inefficiencies and inflexible labour law regulations that make Indian products less competitive compared to products from other countries.

The purpose of this article is to carefully study the pattern of industrial growth in India, a sectoral view of industrial slowdown, anecdotal success stories of firms overcoming inefficiencies and finally how economic policy can invigorate industrial growth in India.

India's services sector has seen a steady increase in growth rates, share of GDP and contribution to GDP growth. More than half of the GDP growth in the '90s came from the growth of services sector.

Industry has not been able to replicate the growth magic of the services sector. While industry share of GDP has increased over the years, its growth rate has dropped in the 90s and its contribution to GDP growth has more or less remained constant over the years.

It is agriculture, which has seen a real decline in terms of its contribution to GDP growth and its share of GDP.

However, in the '80s both agriculture and industry grew faster than their average historical growth rates.

Till the 1990s, India emphasised on heavy industry, public ownership and import substitution. The reservation for the small-scale sector resulted in absence of scale economies and an inordinate number of sick enterprises, which are now on life support.

Overall as industrial development was divorced from efficiency and productivity, India's ability to compete globally has been seriously compromised.

Data shows that six major industry groups - such as food products, cotton textiles, textile products, wood, paper and basic metal and alloy industries - have experienced a sharp slowdown over the last four years.

The industrial slowdown has both demand and supply components. On the demand side the growth in industrial output is closely linked to growth in real private consumption demand.

The rapid industrial growth in the '80s and early '90s, is associated with a surge in real private consumption demand.

One of the channels by which real private consumption influences industrial growth is through its robust impact on capacity utilisation. Infrastructure remains the major supply constraint on industrial growth.

Industrial growth in India is closely linked to growth of the infrastructure sector especially power.

The sectoral performance during the '90s reveals that the average growth of all infrastructure industries except the steel sector has remained significantly lower than in the 1980s.

The major contribution to the decline in growth rate comes from the decline in growth of electricity, coal and petroleum. The power sector grew at a rate of 6.6 per cent in the 1990s as against 9.2 per cent in the 1980s.

The revival of industrial growth needs massive domestic and foreign direct investment in infrastructure, enhancement of labour market flexibility by pushing privatisation and restructuring the public sector.

Despite the inefficiencies, there are Indian companies, which are overcoming these constraints and establishing globally competitive manufacturing operations.

Moser Baer India Limited is the third largest CD-R maker with a 11 per cent global market share. MBI is leading supplier to global brands such as Mitsubishi Verbatim, Emtec, Sony, BASF, Samsung, etc. MBI plans to increase capacity from 700 million units to 1,000 million units by 2003.

In an industry where average selling price of discs keeps falling, it is only by sustaining manufacturing efficiency that MBI has been able to retain its market share and profitability.

MBIs gross margin is 48 per cent whereas the market leader Ritek of Taiwan has a gross margin of 20 per cent. MBIs higher gross margin comes from lower equipment and labour costs. MBIs worker wages are a mere 15 per cent of its Taiwanese competitors.

While many have declared that India can never be successful in hardware, MBI is a counter-example.

Emphasising this manufacturing advantage, India needs to target some of the lucrative opportunities in the emerging outsourced manufacturing services.

The electronic manufacturing services industry continues to grow rapidly as OEMs (original equipment manufacturers) are outsourcing their manufacturing activity to specialist firms. This enables the OEMs to focus on their core strengths, product development and marketing.

According to recent analysis, Technology Forecasters Inc, Dataquest and Electric Trend Publications Worldwide, the EMS industry in 2000 was valued at about $100 billion and is expected to grow at a rate of 28.5 per cent each year resulting in a $203 billion market by 2004.

One of the successful firms in this sector is Solectron, which has grown in revenues from $3.23 billion in 1996 to $18.7 billion in 2001.

Solectron gets 28 per cent of its total revenues from the Asia Pacific region. They have large manufacturing units in Malaysia, China, Taiwan, Japan and Australia and have a marginal presence in India through an acquisition.

Dr Chakravarthy Rangarajan, an eminent economist and central banker has addressed the issue of industrial slowdown in a recent article in the Survey of the Indian Industry. His core thesis is that we need a strategic plan for growth of Indian industry.

The emphasis should be on our sustainable competitive advantages in major industries and how we could harness domestic and foreign investment to upgrade technology, create viable enterprises, target exports and compete with the best in the world in terms of productivity and efficiency.

The Planning Commission, which is languishing in obscurity after liberalisation, can undertake the needed role of 'indicative' planning as against their traditional 'allocative' planning.

Also instead of harping on India as a generally favourable destination for foreign direct investment, we need to get to the details on a sectoral basis and then focus on specific areas where India offers maximum long term sustainable benefits.

Some states such as Andhra Pradesh have taken aggressive steps and to a large extent have successfully created a conducive environment for foreign direct investment but have still not seen large scale investments.

This anomaly can be remedied only if we pursue a targeted approach.

The present slowdown must serve as a warning that the absence of a policy direction to deal with it would mean that the Chinese juggernaut of low-cost manufacturing will steam roll India's industrial potential.

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