India is expected to be in the top 5 manufacturing nations by 2020, which is six notches up from its current position, according to the Global Manufacturing Competitiveness Index report by Deloitte. This is an encouraging sign as manufacturing is the backbone of any modern economy and it adds to national wealth, gets foreign currency into the country, boosting the cash reserves, is the largest creator of organised sector jobs, influences greater infrastructure and adds to the GDP growth rate.
India, post liberalisation, has seen remarkable rise in all sectors associated to business and manufacturing. The Gross Value added in the manufacturing sector has recorded a growth of 9.3% in 2015-16, much higher than the 5-6% growth in the previous three financial years [6% in 2012-13, 5.6% in 2013-14 and 5.5% in 2014-15]. This is despite the fact that internationally, the overall economic scenario has not been very encouraging in recent years.
If we compare India’s manufacturing sector to the other developed nations, currently India offers the 3 'Ds' for business to thrive— democracy, demography and demand. The low cost of manpower but high quality and productivity of the workforce is poised to make India a favorable place to manufacture. Electronics, industrial manufacturing, transport and logistics, chemicals and real estate, according to the report, are five sectors projected to enjoy a high growth rate till 2025.
India — preferred manufacturing destination
As many as five nations (China, Japan, South Korea, Taiwan and India) in the Asia Pacific region are expected to factor in the top 10 by 2020. With Asia developing as the outsourcing hub of the world, India is fast becoming the preferred manufacturing destination for a large number of global corporations. However, we are still outranked by China, mainly due to cost competitiveness. India needs to improve its competitiveness in the areas of physical competitiveness where it scores 10 versus 55.7 for USA and 24.7 for China. Further in the area of innovation, India is at 32.0 versus 98.7 in the United States and 32.8 in China.
The government has set an ambitious target of increasing the contribution of manufacturing output to 25 per cent of GDP by 2025, from 16% currently. India’s manufacturing sector has the potential to touch US$ 1 trillion by 2025. There is potential for the sector to account for 25-30 per cent of the country’s GDP and create up to 90 million domestic jobs by 2025. Therefore, for India to improve its manufacturing competitiveness, some of the key things it needs to focus on are talent, increase in local sourcing, focus on innovation and technology that will lead to energy efficiency and a simple and uncomplicated tax structure.
Highest drivers of growth in manufacturing sector
Out of the above, talent is the highest growth driver for manufacturing industry. Therefore, we must focus more on talent and their skill development providing industrial hard and soft skill to empower labour, in order to work in a global setting. Under skill development, we must also focus on the SME segment and provide training not only in skill but also in digital and technology application to prepare the workforce for the upcoming opportunities ahead.
The second highest driver of growth in manufacturing will be cost competitiveness. India is fast becoming a dominant global player for R&D and a host of cutting-edge ideas. Raw material and process costs are coming down as the government is providing various subsidies and tax reliefs to the manufacturing community under the ‘Make in India’ initiative. The focus here, however, needs to be on innovation, not just in technology, but also in policies, framework and infrastructure.
The offerings from the government is terms of SEZs, industrial parks, national investment & manufacturing zones or NIMZ and trade corridors with enhanced lines of communication and logistics are adding to the wealth of this sector, and can be seen as policy innovations. Along with these, the several incentives in R&D, export, employment of workforce etc. are developing an environment to incubate future innovations and possibilities to drive the success story for the ‘Make in India’ initiative. All of these policy innovations are helping Indian manufactures remain cost competitive and relevant in the domestic as well as international market.
Improving energy efficiency
However, as the manufacturing demand increases, the consumption of energy and power will also increase. Improving the energy efficiency meets the dual objectives of promoting sustainable development and of making the economy competitive. Recognising the formidable challenges of meeting the energy needs and providing adequate and varied energy of desired quality in a sustainable manner and at reasonable costs, improving efficiency have become important components of energy policy by the Government of India.
In addition, the environmental and health burdens arising out of the use of hydrocarbons is making us shift towards energy efficient, clean energy systems and greater use of renewable energy. According to ACEEE data, China occupies the sixth position and India has the 15th spot on the same list. Therefore, if India wants to gets close to competitive prices versus the biggest in the world, then it does need to invest in energy efficiency, especially in power intensive industries like steel, power and cement. Mechanical innovations in terms of green energy source propelled manufacturing units and energy efficient technology is the need of the hour.
The change in policy and overall mindset for conservation, innovation and energy efficiency is a result of globalisation of the economy. The government needs to look at a more proactive approach to ensure a sustained period of growth for manufacturing, which will not only help the GDP but also help create the 20 million a year job target, which is so essential for our country’s youth.
The article is authored by Anil Gopinathan, Vice President & General Manager, Ingersoll Rand Engineering & Technology Centers, India