The pace of manufacturing activity in India has been subdued in recent years despite the new policy introduced by the previous UPA government. The Narendra Modi-led administration has, however, spurred industrial output which, as announced last month, jumped to a 19-month-high in May; factory activity, as per HSBC Manufacturing Purchasing Managers’ Index, is at its highest level since February 2013.
This uptick also comes at a time when China is grappling with shortage of labour and rising wages. But will India’s higher-than-expected manufacturing data sustain? To that end, what does the government and the states need to do to improve labour-related laws and the ease of doing business?
Forbes India–in the second session of the Forbes India CEO Dialogues: The Leadership Agenda–invited top business leaders to discuss ‘The Manufacturing Challenge’ faced by the country. Adi Godrej, chairman of the Godrej Group, Harsh Goenka, chairman of RPG Enterprises, Ashok Wadhwa, group CEO of Ambit Holdings, and Sunil Kaushal, regional CEO (India and South Asia) of Standard Chartered Bank, identified the solutions and long-term reforms necessary to boost manufacturing activity and help kick-start growth.
Excerpts from the discussion, moderated by R Jagannathan, Network18’s web and publishing editor-in-chief:
R Jagannathan: India has been a no-show in manufacturing for quite some time. Now that there is a new government and a hope that things could change, Mr Godrej, do you sense a qualitative change in approach?
Adi Godrej: The new government has enunciated that growth needs to improve. The earlier government had announced a manufacturing policy and said it wanted the share of manufacturing in GDP to go up to 25 percent by 2020. Clearly, there is tremendous scope but, currently, there are several constraints. This government will take the steps required; let’s hope that the implementation is good.
Jagannathan: Mr Goenka, was there anything in the budget that indicated that the government is thinking manufacturing?
Harsh Goenka: The biggest bottleneck in Indian industry has been infrastructure, its quality and the cost. Our roads, railways and highways are in a pathetic condition. The good thing that the Modi government has done is create focus on new infrastructure and remove the bottlenecks for power projects which were stuck due to coal linkages and environmental issues. The most significant aspect of the budget was the [plan for] 100 smart cities; it will change the configuration of the country, address the rural-urban migration issue and quality of life; also, employment and manufacturing in those areas can become cost-competitive.
Jagannathan: Mr Wadhwa, if you were advising someone to set up a project, will you tell them to come to India or go to China?
For too long, we have focussed on getting foreign investment, without considering the value of foreign direct investment (FDI) versus foreign institutional investment (FII). Because our attention is so much on current account deficit, we don’t care which form it comes in. Which is why, I think, we have done nothing to facilitate FDI.
Today, processing and getting approval from the government is as complicated and difficult as it was in 1991 when we liberalised. The applications of rules (such as GAAR, or general anti avoidance rules which limit tax avoidance) and the lack of transparency around them, whether it is for Vodafone or another company, creates suspicion about long-term investments in India. We have to change that attitude, or else why would FDI come? Godrej:
The ease of doing business will improve, companies will want to invest more and expand. But other things need to be done. For instance, GST (Goods and Services Tax), which I think will come next year. This will facilitate manufacturing, especially for exports. Labour laws need to be simplified. India is competitive in pharmaceuticals and auto parts because we are better at engineering-oriented labour. But in manual labour, China beats us. However, China is short of labour—a lot of its manufacture is moving to Indonesia and Vietnam—so this is a great time for India to attract labour.Jagannathan: Mr Kaushal, do you see a greater sense of interest from overseas investors towards manufacturing?
It is imperative for India to create one million jobs each month. If we need physical elbow room over the next 10-15 years to get our finances in place, we should look at China which doubled its GDP in 12 years when it was industrialising, according to a McKinsey report. India has to identify the right industry and the cluster approach it needs to adopt. Look at Bangladesh in the garment sector. They are double our size and second only to China. Bangladesh’s infrastructure is far worse than ours, but they are focussed on capacity and price. And now they are even building their infrastructure.Jagannathan: So should we set up shop and infrastructure will come later. Will that work?
Both. It depends on the sector. Looking at the large-scale manufacturing coming into India from overseas, we face a challenge with issues such as land acquisition, labour laws and prices as compared to China. Look at mobile phones; we have 900 million subscribers, but we don’t make any components here. Even for local brands, everything is imported. In certain areas, we have missed the boat. Like building world-class operating units for, say, mobile phones. We had one Nokia factory which got so badly disrupted that I don’t know how many will come in. There is an opportunity and many challenges.
Jagannathan: Mr Goenka, do you get a sense that in the last 10-15 years, Indian manufacturing has followed out. Large segments of the industry have become traders or re-badgers. Do you see this reversing?
We need to create our own niches and see where our competency lies. There is no point trying to do everything well. We are ranked 134th in the world in ease of doing business. The biggest challenge is to create employment, otherwise there will be strife. We also need jobs to be created in the manufacturing sector; most jobs are created in the services sector. Engineering services outsourcing is an area for growth where we can go up the value chain.
Jagannathan: Mr Godrej, what are the three things which stop industrialists from setting up a new plant in India?
The ease of doing business has deteriorated so much and some of the latest legislations such as amendments to the Land Acquisition Act and the Companies Act make things worse. Labour legislation needs to be eased up. Every time you want to reduce the size of a factory or relocate it, you should not need government permission. In [some countries in] Africa, you can stop manufacturing, compensate the workers and go on. If India improves the ease with which business can be done, and when GST comes in, things will improve. Jagannathan: Mr Wadhwa, the Congress had announced the new manufacturing policy two years ago but we don’t see action on the ground.
History repeats itself. We are a brilliant nation with a vision, but we don’t know how to implement it. To give the previous government the benefit of doubt, the last two years were difficult throughout the world—geopolitically, financially and in terms of regulatory issues. Demand slackened; countries and currencies got decimated. I am not worried that the policy was announced two years ago; given the headwinds, it could not have taken off better than it did. But we need to stop knee-jerk reactions and gleaning at the periphery.
Take a look at Bangladesh in the sector where it is believed to be competitive. Despite its [inadequate] infrastructure and poverty, it is still the second largest exporter of textiles. This is because all the arms of its government have supported this. It stumped India by signing FTAs (free trade agreements) with the US, which put India in the backseat.
India prefers to deal with issues for today and now, rather than looking at new areas and creating economic clusters to gain competitive advantage. If we decide on a product that we should be competitive in, we should do everything possible to protect that industry and give it a competitive edge.
We supported infrastructure in the [Union] budget by bringing in long-term bonds. We sent the message that we mean serious investment and are trying to support banks and encourage finance for infrastructure.
In recent years, raising capital through equity/debt has been either difficult or expensive. We don’t see companies that can make significant investments or raise capital. We need to create methods and a mechanism to encourage India’s top industry groups. We went through a phase in the last two years where we were nearly back to Emergency days where ‘if you were rich, you were rogue’. We cannot recreate that environment. India has the ability to take entrepreneurial risk and also has domain knowledge… if we are still not competitive, something is missing.
The budget move is a plus. India needs to invest $ 1.2 trillion in infrastructure in the 12th Five-Year Plan. We have to ease financing for infrastructure. The long term bonds coupled with the 5:25 structure will be very powerful. (A 5:25 structure allows a bank to give a 25-year loan to a developer for a project, with the option to rewrite the terms of the loan or transfer it to another bank after five years.). I don’t expect an immediate upturn as a backlog of projects needs to be cleared. In terms of real action, we are 9-12 months away. Godrej:
The major issue of taxation has to be addressed if we want to industrialise rapidly. We introduced the minimum alternate tax (MAT), which we increased in 2011. It is now at 21-22 percent. A company cannot take advantage of government incentives because it is hit by MAT. This must be reduced to 10-12 percent. It is crucial to help people invest more in industry. When you collect MAT, you lose a lot of indirect taxes. Experience shows that lower rates of tax have led to higher revenues.
Jagannathan: A lot of states have different laws to encourage manufacturing. Changes in states could help the climate for manufacturing. Will manufacturing get concentrated in some states which make fast changes rather than be dependent on the Centre?Wadhwa:
There are some states which are historically bestowed with natural resources and help boost manufacturing. This government has recognised the need to create new economic clusters. The plan of 100 new cities is a very important initiative if we want to decongest India. I am in favour of Indian states coming up with legislative changes which will make them attractive in different areas. Manufacturing will only be made stronger by the competitive nature of the states. Jagannathan: Harsh, assuming that most of the issues we discussed are sorted out over the next 2-3 years, through policy intervention or regulatory changes, do you see industry really expanding labour intake or will job growth come from areas other than big organised industry?Goenka:
It will increase, but not substantially. One of the problems is the global perception—and our own—of Indian industry. I am reminded of an old Charlie Chaplin movie, where he tries to shoot a bad man… shoots once, twice, it does not work. He looks at the gun and sees ‘Made in Japan’. I am sure people laughed then; today, you will not laugh as the perception of Japan has changed. It is the same with brands like Samsung. We have to do a lot to change the perception of India as a manufacturing base. There is a possibility for India to create manufacturing excellence, but whether it will happen in pockets is the big issue.Wadhwa:
For too long, we have been obsessed with our comparison with China. You cannot recreate and replicate what was built years ago [by them]. We should think of ourselves as the biggest in the small and medium enterprises (SMEs) sector. We need to understand the importance of SMEs and recognise that we can be the most powerful SME nation in the world. We have the best entrepreneurs—we must facilitate their risk-taking capability, provide them with infrastructure and capital. We can then achieve what we want to without necessarily having to compete with China.
Jagannathan: What are the top three things in which you want to see changes in the next two years?
One is ease of doing business and two is in taxation policies and easing labour laws. We had 8.5 percent growth in 2009-10 when we announced the stimulus plans. However, we did not stop unnecessary government spending, which led to a fiscal deficit. We should not let politics come in the way of good policies. The good thing is that young voters are voting for people who they think will provide development, and not voting on caste or other parochial considerations. Wadhwa:
I think divestment is most important. Nine-hundred billion dollars of India’s market cap is in the private sector; about $ 1 trillion is government sector undertakings. Corporate sector earnings constitute the bulk while government sector earnings are a small fraction. For the single largest corporate, in this case the Indian government, there is no assessment of return on equity. I am not saying they should disinvest from everything, they must be partial towards infrastructure and focus capital investments in favour of development projects. Why be in businesses that are run more productively by the private sector? I am not saying give them up cheap; run a competitive process, sell them at the highest price.
We also need to have a robust bankruptcy law. The other side of wanting to be successful is to make sure that people who are not successful have a natural release. We cannot allow companies to continue to go on restructuring. This causes significant stress on a system which provides capital to everybody.Goenka:
For me, it would be good infrastructure. We must also get away from labour inflexibility and antiquated laws; the third is the sentiment for investment. It is there but, in India, we have a penchant to move two steps ahead and one step back. We need policies which are stable. Kaushal:
Access to capital and deepening of capital markets will be the key to boost manufacturing. Secondly, we have seen several projects which have got stuck due to lack of co-ordination between Centre and State. The third is the energy-supply chain where we have let ourselves down… it is the lifeblood of any manufacturing.Jagannathan: If we look at manufacturing, what are the 2-3 areas where we are most likely to succeed?
Our natural advantage is manufacturing where there is technology involved. But we should concentrate on all economic activities; we have to focus on basic industries. Wadhwa:
We should focus on engineering and re-engineering; on agriculture and manufacturing in farm products; take factories where the people are, close to the farmland. Goenka:
We should focus on light engineering and pharmaceuticals.
(This story appears in the 05 September, 2014 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)