The document outlines the current state and future roadmap for India's manufacturing sector, emphasizing the need for growth to boost GDP and employment while addressing issues like trade deficits and competitiveness. It highlights India's potential in engineering, the challenges faced by small and medium enterprises, and the necessity for policy reforms to increase exports and improve infrastructure. Key recommendations include strengthening the manufacturing ecosystem and aiming for a 25% GDP contribution from manufacturing by 2025.

1. Road Map for the Manufacturing Sector in India for years to
come….
Introduction
The realization that there is a need to boost the manufacturing output in the
country, to effectively address the problems of unemployment and ensure inclusive
growth is reflected by the National Manufacturing Policy which is being
formulated by the government. Manufacturing production and exports have been
driving the rapid growth of many dynamic emerging economies. However, it has
not contributed perceptibly to Ind ia’s growth story; nor has it been up to the urgent
task of shifting surplus work force from the agriculture sector.
Manufacturing exports constitute the lion’s share of merchandise exports of
countries. During 2010-2011, in the case of P.R. China, for example, the share is
93.1 per cent against India’s 61.5 percent. While India’s exports have picked up
very well in recent years (during 2006-10 Ind ia’s exports rose by 15.4 per cent
against global export growth of 5.9 per cent), with our share in global exports
moving up from around 0.5 per cent in 1990 to 1.3 per cent in 2009.
Output is the most important determinant of exports. But India’s experiment with
SEZ’s cannot be the sole pillar for long term export growth strategy.
Unfortunately, manufacturing as share of GDP remained low at around 1/6th in
India and India’s share in world manufacturing is only 1.8%. This is in stark
contrast to China; where manufacturing contributes 34% to the GDP and is 13.7%
of world manufacturing; up from 2.9% in 1991. In fact contribution of
manufacturing to GDP for 2010 is higher for countries like Thailand (36%),
Malaysia (25%) and Indonesia (25%) than India (15%) (World Data Bank).
Further, the importance of manufacturing sector to the domestic and global
economy is set to increase even further as a combination of supply-side
advantages, policy initiatives, and private sector efforts set India on the path to a
global manufacturing hub (IBEF 2012). Manufacturing is likely to contribute 25
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2. percent to the GDP by 2025 as per the target set by the National Manufacturing
Competitiveness Council (NMCC) report. However, in order to attain a ~25%
share of the GDP by 2025, manufacturing would need to grow at a rate of ~2-
4% higher than the GDP. In absolute terms, manufacturing industries are
expanding year by year from Rs. 1263 billion in 1990 to Rs. 28100 billion in
2011 and Rs. 28156 billion in 2012. In contrast, the contribution of
manufacturing sector to the GDP of the economy is decreasing in percentage
terms.
However, imports have been rising faster, driven largely by the demands of a
growing economy. With the result the trade balance has been widening and in
2004-05 the current account balance turned negative and has remained in the
deficit zone ever since. This has important implications for macroeconomic
balance on the external front, which invariably affects the internal balance and
price stability in the economy, with resultant adverse effects on growth and
welfare. Substantial increase in invisibles has not been able to help. Foreign
investment flows have limitations since a substantial part of it comes in as short
term flows, adding to volatility. There cannot be any close substitute for trade
surpluses.
Department of Commerce recognized the un-sustainability of the emerging
scenario and prepared a Strategy paper for Doubling Ind ia’s Exports in three years
(2010-11 to 2013-14 which recognized that widening trade deficit is unsustainable
and that there is urgent need to accelerate exports from the level of US$ 246 billion
(2010-11) to US$ 500 billion in three years (in 2013-14). Merchandise exports
need to grow at Compounded Annual Growth Rate (CAGR) of 26.7 % to achieve
this target. The manufactured exports have been considered in an inclusive manner
covering sectors like Engineering and Electronics; Drugs, Pharmaceuticals, Fine
Chemicals, Other Basic Chemicals; Plastic & Linoleum; Textiles – Cotton
Yarn/Man–made Yarn/Fabrics/Made-ups, RMG of all Textiles; and Leather, Gems
& Jewellery, Jute, Carpets and Handicrafts.
The Micro, Small and Medium Enterprises (MSME) sector, which has substantial
employment and export potential, has been also looked at closely.
Manufacturing exports grew by a compounded annual rate of 16.2 per cent during
the first four years of XI Plan (2007-08 to 2010-11). Engineering products
emerged as the most dynamic sector with its share in total manufacturing exports
increasing from 35 per cent in 2007-08 to 39.8 per cent in 2010-11.
A number of constraints faced by the various manufacturing sub-sectors are
common, and include stiff competition from other emerging market economies,
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3. especially China, high cost of funds, low technology intensity, inadequate
infrastructure, scarcity of skilled and semi-skilled manpower, high input
costs, high transaction costs and the slowing down of world demand.
The global economic outlook is a major determinant of export performance.
The outlook is currently subdued and the west is struggling to recover from the
effects of the financial crisis and is faced with the prospects of a double dip.
Inflationary pressures are weighing heavy on the growth prospects of emerging
economies in general.
SWOT Analysis of the manufacturing sector
Here we try to capture the major insights of the manufacturing sector- its strength,
challenges, its major imperatives, improvement areas and etc. These issues and
challenges have been faced by the manufacturers and in particular exporters while
exporting to different countries.
Strengths
 India’s capability to deliver high-end engineering solutions: Ind ia’s
capability to deliver high-end engineering solutions presents India with more
opportunities in the engineering services outsourcing business. India has the
potential to provide solutions involving high engineering complexity,
especially in the automotive and aerospace sectors. With the development of
world’s cheapest car and other low-cost products, India is said to have
pioneered frugal engineering. This is attracting a number of players to enter
India and set up their manufacturing exports bases leveraging the low cost
production capabilities.
 India’s capability to process customized orders: One of the biggest
strengths of India is its ability to re-engineer and re-design components for
processing customized orders. China is unable to maintain its cost
competitiveness in smaller orders due to its scale, and India, which has
around 70-80% of engineering exports coming through SMEs, can become a
major player in processing orders, which require customized designs.
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4.  Large pool of working and young population: More than 60% of India’s
population is in the working –age group of 15-64 years. (India has 20% of
the global population under the age of 25).
 The average age of India is 24 and is expected to go up to only 29 by
2020, when the average Japanese would be 48years and Chinese 37
years old.
 By 2050, India is estimated to have over 550 million people below 25
years of age and more than 800 million people in the working age
group.
 Availability of low-cost skilled labour:
 0.4 million engineers pass out every year
 7 million enter workforce every year
 Cost of entry level engineer is USD 8,000 p.a.
 Indian engineering talent is 45% cheaper than his American
counterpart
 High quality perception: Over 80% of Fortune 500 companies are
outsourcing to India at present and over 125 have R&D centers in India
 At 13, India has the highest number of Deming award winning
automotive companies outside Japan
 Most leading component manufacturers are aligned to globally
accepted standards and ISO
 India’s strong reputation in the IT/BPO sectors: India has established
itself as a preferred destination for IT/BPO sectors. Availability of large pool
of English-speaking work-force along with good information technology and
communication infrastructure has enabled it achieve significant growth in
this field. The country is also being perceived as a supplier of high-quality
processes. The success in the related field of IT/BPO provides India an edge
over its competitors for outsourcing of engineering processes.
 More than 125 Fortune 500 companies have their centers in the
country
 Emerging global compact car hub with a number of OEMs planning
to launch ultra low cost cars in the country.
 Growing domestic market: After China, India is the second –most
populated and one of the fastest growing economies in the world. Growing
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5. per capita income has raised living standards and the purchasing power of
the country‘s large middle class, making Ind ia a big market. Companies are
opening up manufacturing bases in India, and also outsourcing their
engineering services to India, in order to gain better market access to a
growing economy. A number of companies have now started exporting
from India.
 Availability of raw material: India has large metal reserves, which bodes
well for growth of engineering exports.
Weaknesses
 Labour related issues: Despite the abundance of low-cost labour, the
industry faces plenty of labour-related issues.
 Multiplicity of labour laws.
 Lay-offs and retrenchment of permanent labour difficult
 High skilled sectors are facing shortage of labour
 Lack of adequate infrastructure: Traditionally, the spending on
infrastructure by the Indian government has been low by global standards.
Though the country has realized the importance of the development of the
sector and has announced huge investment plans, currently the lack of world
class infrastructure acts as a deterrent towards the growth of the engineering
sector.
 Roads, railways, seaports and airports face capacity constraints and
have high turnaround time, which makes Indian exports less
competitive in the global market.
 There is acute power shortage in some states. Moreover, the frequent
power cuts, which make it mandatory to install captive back-up
power, further raises the production costs.
 Lack of economies of scale: Most of the Indian SMEs function
independently in different geographies and as a result fail to build up
capability and skill leading to lower competitiveness in the global market.
 Not an export-driven economy: Domestic demand accounts for 85% of
India’s economy, much higher than its As ian peers such as China, which are
much more reliant on exports.
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6.  China is the most-integrated economy among the BRICS. Chinese
merchandise trade amounts to 2/3 of its GDP compared with ½ in
Russia, 1/3 in India and a mere 1/5 in Brazil.
 Low presence in high- technology products: India’s manufacturing
exports largely comprise low-technology induced goods. High-technology
exports are products with high R&D intensity such as aerospace, computers,
pharmaceuticals, scientific instruments, and electrical machinery. In world
trade, where primary products and resource –based manufacturers have
steadily lost their importance, high-technology exports are the largest
foreign exchange earners for other India like countries.
 Less effective FTAs: India’s FTA partners only account for 11% of all
engineering exports from India as compared to more than 20% for all other
India like countries, ind icating that India’s FTAs have not been effective and
have not targeted the right market.
 Complex taxation policy: While exports are tax-neutral, the rebate policy
of the government regarding taxation is complex and time consuming.
Moreover, the state taxes are not rebated, further reducing competitiveness.
Opportunities
 Huge planned infrastructure investment: Infrastructure is in focus in
terms of specific projects and size of outlays on a time-bound basis. The
expected improvement in infrastructure in the next few years will provide
the strongest impetus to India’s manufacturing sector, and make Indian
exports more competitive in the global space.
 Enabling the SMEs: The manufacturing sector In India is characterized by
a significant number of small scale and unregistered manufacturing firms.
The SMEs sector is a very vital constituent of the Indian economy with a
share of over 40% of the gross industrial value added in the economy.
However, the SME sector is beset by a number of problems such as lack of
credit availability and lack of economies of scale. Enabling the SMEs will
help them become more competitive globally and open avenues for further
export growth.
 High production costs in developed economies: India is being favored as a
low-cost production base and a number of global companies are either
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7. sourcing or are setting up engineering hubs in the country-potentially
boosting India’s exports globally.
 Increasing bilateral relations with other economies: India has started
exploring Free Trade Agreements with major markets and once these
agreements are implemented: the exports from India can become more
competitive in these markets.
Threats
 Large number of NTBs: The rapid growth in Indian exports has also
increased the number of non-tariff barriers imposed by countries against
India.
 Anti-dumping and anti-subsidy cases reduces India’s global brand:
India is facing a number of anti-dumping and anti-subsidy cases at the WTO.
 Decreasing FDI: China is a major competitor for FDI flows into India, and
offers a stronger infrastructure and lesser bureaucracy as compared to India.
This might lead to diversion of investments from India to China.
 Rising crude prices: India’s dependency on oil imports is an issue. This
undermines the trade balance and makes India vulnerable to energy price-driven
inflation.
Major Recommendations: Since India considers growth in the
manufacturing sector important for the overall development of the
economy. The government is extending support through training
programmes in order to ensure availability of skilled workforce. For India to
evolve as a key manufacturing hub, focus should be given to not only
‘vertical ‘sectors but also ‘horizontal ‘issues that cut across sectors. A
national ecosystem that facilitates competitive abilities of enterprises is
widely accepted and the following recommendations have been made on
the same line as follows:
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8. Strengthening the Manufacturing Ecosystem: Hard Infrastructure
NIMZ
•Special National Investment andManufacturing Zones in key areas across the country
Clustering
&
aggregatio
n
•ClusterCoordinationCell at apex level to build capacity of ClusterAssociations
Land
•DevelopNational LandUse policywith framework for land valuation and acquisition
Environme
ntal
sustainabil
ity
•Green Technology Fund, National Waste Regulator, overarching Water Act, and mandate
Water returns forwater intensive industries
Water
•Develop a National Water Regulator, overarchingWater Act, and mandate 'Water returns' for
water intensiveindustries
Strengthening the Manufacturing Ecosystem: Soft Infrastructure
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9. Technology &
Depth
•Improve industry academia collaboration, FDI policies to facilitate technology transfer,
strengthen IP regime and standards
Human resource
development
•Skill development with industry participation, reducing cost of compliance with labour
laws, institutionslizing social security, and improving institutions of employer-employe
relations
Business regulatory
framework
•Mandate ' Regulatory Impact Assessment', create a 'National Business Facilitation Grid'
and National Policy on BusinessDevelopment&Regulation
Expected Outcomes: 5 key long-term objectives
1. Increase the rate of job creation in manufacturing to create more
than 100 million jobs by 2025.
2. Increase ‘depth’ in manufacturing, with focus on the level of
domestic value addition.
3. Enhance global competitiveness of Indian manufacturing through
appropriate policy support.
4. Ensure sustainability of growth, particularly with regard to the
environment.
5. Increase manufacturing sector growth to approximately 2 to 4%
more than the GDP growth to make it the engine of growth for the
economy and increase share to approximately 25% of overall GDP by
2025.
India’s manufacturing sector is vital for its economic progress. The government
has realized the importance of this sector to the country’s industrial
development, and has taken a number of steps to further enhance the industry.
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10. Today, the country’s attractiveness as a manufacturing centre for foreign
companies is clear. India has emerged as a global manufacturing hub due to its
cost competitiveness, skilled workforce and favourable government policies.
Furthermore, the most fundamental factor fostering growth in the sector is the
presence of strong market locally. It is one of the fastest growing economies. The
Consumer trend in the country is enabling domestic players to flourish and also
attracting international players.
Done By-
Sidhant Chadha
***************
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