There's Might in Manufacturing

Production of goods should be India’s core activity if it is to improve growth and emerge as a top economy. Here’s how we can go about achieving that goal

Published: 21st April 2014 06:00 AM  |   Last Updated: 20th April 2014 10:45 AM   |  A+A-

country as large and diverse as India, with a huge population, cannot aspire to become economically strong without a presence in all the key sectors of the global economy. While our growing strength in services, particularly information technology based, is something to cherish, we need to focus on other important sectors as well. Manufacturing is one such in which we have lagged behind. This sector is particularly important, as there is no large economy in the world that has reached maturity without a strong manufacturing base.

Manufacturing is too important to be left to market forces. Recognising this, the government has taken several initiatives, including setting up the National Manufacturing Competitiveness Council. However, we still have a long distance to cover. The share of manufacturing in GDP is around 15 per cent, and experts feel it ought to be a good 8-10 points higher. How do we get to where we want to be?

Most economies developed a strong manufacturing base on the back of low-cost manufacturing, with cost of labour being the key arbitrage.

As one country after another moved up the cost ladder, the opportunity opened up for the next one to leverage its low cost. As cost of manufacturing in China increases, many feel it is India’s turn to leverage its lower cost advantage, despite its relative infrastructural weaknesses. India’s infrastructure is also improving, although too slowly to dramatically impact this sector. Power, roads and ports continue to be bottlenecked, and in recent years, land acquisition has also become fractious.

In this model for the growth of manufacturing, it is assumed that most, if not all, of the growth will happen on the back of large volumes and low value addition. Typically, the intellectual property (IP) is imported. The bill of materials favours the IP owner. The sourcing of raw materials and sub-assemblies is done with a view to maximising profit for the IP owner, subject only to being globally competitive. Even raw material is often routed through the IP owner with a markup, if this is the optimal way to maximise profit. Nevertheless, there is growth

to be had, and high-volume, low-margin, highly competitive manufacturing can drive economic growth, as China has demonstrated.

India too can follow this path, but only up to a point. Our infrastructure bottlenecks will continue to hamper us, and the clock cannot be turned back with regard to issues such as land acquisition. What then is the way forward?

The answer lies in the simultaneous growth of our technology services sector. The point on the economic evolutionary timescale at which India seeks to scale up its manufacturing sector by 50-60 per cent coincides with its technology services sector reaching a fairly high state of maturity. There is hardly an industry vertical today, ranging from aerospace to automobile, pharmaceuticals to telecom, construction to electronic design, where significant design services are not being carried out from India. Much of the IP belongs elsewhere, but the nitty-gritty of design for manufacturing is now well understood by thousands of engineers in the country.

We are, therefore, one crucial step away from large value addition — design of products based on IP that is also homegrown. This is already happening, but not on the scale needed to make a huge impact. This calls for innovation, but also self-belief and daring. The government too must take steps to encourage such IP creation, through assistance for R&D directed towards innovative IP creation. Hitherto, such assistance has been available primarily to public academic and research institutions. It must now be extended to industry, if need be, in partnership with the public organisations.

Academic research institutions such as IIT-Madras have a big role to play in enabling this transformation to take place. At IIT-Madras, we are already engaged in this effort, through the collaborative R&D we undertake with industry, creation of large inter-disciplinary research centres, and our incubation cell that is witnessing a surge in startups. We are also partnering with IIT-Kanpur and IIM-Kolkata to run the Visionary Leadership in Manufacturing Programme in collaboration with the Confederation of Indian Industry and the Japan International Cooperation Agency. IP-based value creation for manufacturing is an important aspect of our strategic focus in the coming years. IIT-Madras hopes to play a key role in making Indian manufacturing globally competitive.


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