Photo: Mint
Photo: Mint

What’s needed to boost manufacturing

With almost a million people joining the workforce every month, a vibrant manufacturing sector is needed to absorb them

The recent thrust on manufacturing is timely and much-needed. Only about an eighth of India’s workforce is in the manufacturing sector, against a third in China. Yet, with almost a million people joining the workforce every month, and employment in agricultural sector not growing, a vibrant manufacturing sector is needed to absorb them.

Every manufacturing job creates three-four jobs in the wider economy. This is the reason that at a similar stage of development, countries such as China, South Korea and Indonesia had a share of manufacturing in the economy at upwards of 25%. In India that share has stagnated at around 15% for the past few years.

The opportunity for India is staggering. Besides serving a large domestic demand, exports of Made-in-India goods is an attractive proposition. Geographically advantaged with a long coastline, India can target to serve markets from the Philippines in the east to Africa in the west. This would translate into serving a population of over three billion across economies that are collectively growing at more than 5% annually over the next five years.

Interestingly, the recently published BCG Global Manufacturing Cost-Competitiveness Index, which tracks the direct manufacturing costs of the top 25 exporting nations, indicates that India is the second lowest cost manufacturing destination globally among them, even lower than China. This competitive advantage can be further enhanced if access to abundant raw materials and natural resources can be streamlined.

So, why do we have an insignificant 2% share of global manufacturing exports?

Competitiveness on “within the factory gate costs" is offset by the total cost of doing business. Time and cost escalation due to long gestation periods for capital projects, complex procedures and compliances, and poor logistics infrastructure reduce the overall competitiveness.

The shifting economics of global manufacturing, led by lower energy costs in North America and productivity-adjusted labour wages, is putting traditional low-cost countries such as China under pressure. Manufacturing is returning to several locations such as the US, Mexico and the UK, bringing supply chains closer to large demand centres. As companies rethink their global manufacturing footprint, the cost and raw material advantage of India will bring it in their consideration. However, what will it take to get them to invest in India?

I believe we should focus on five areas.

First, focus on reducing the skill gap. Less than a fifth of the workers entering the workforce annually are skilled. If we have to improve productivity, we need to invest in vocational training not just for new entrants into the workforce, but also for retraining existing workforce.

Second, with product life cycles reducing by up to half, we need to invest in innovation and research and development (R&D) if we have to ensure long-term competitiveness. In a recent survey of CEOs of over 70 manufacturing companies, we found that about 75% of respondents felt that India needs to focus beyond low-cost labour on technological innovation and quality to maintain long-term competitiveness. Currently, India spends less than a percentage of its gross domestic product (GDP) on R&D, significantly less than in China or developed economies.

Third, India’s micro, small and medium enterprises (MSMEs) account for about half of its manufacturing output and over 40% of its exports. They are an important part of the manufacturing value chain, often acting as supply-chain partners and outsourced processing agents for larger companies. Yet, the sector is in distress, with MSME defaults among the highest across all credit classes. If India has to revitalize the manufacturing sector, it cannot ignore these individually small but collectively large group of companies. The German Mittlestand, similar to the MSME sector in India, accounts for over 50% of its GDP and employment, and forms the backbone of that country’s manufacturing sector. Its success is underpinned by razor-sharp focus on innovation and efficiency, apprenticeship model supported by collaboration with local universities and tailor-made financing schemes.

Fourth, large-scale investment in infrastructure is needed to build highways, expand the capacity of the rail network and build ports. In addition, India should look to develop inland waterways as it can provide the cheapest mode of transportation across locations, as much as a third lower than rail. Countries such as China and the US use inland waterways very effectively, especially to connect ports to inland warehouses. India with its network of rivers should tap the latent potential to reduce cost, provide better access to inland locations and decongest other modes of transport.

Finally, besides simplifying policies and procedures, we need to leverage technology to reduce the cost of doing business. E-governance can provide transparency as well as reduce the time and cost of compliance. Several government agencies, both at the state and centre, have launched successful e-governance initiatives. We need to now broad-base the roll-out by leveraging these existing centres of excellence.

India has the necessary pieces of the manufacturing jigsaw to revitalize the sector. Will it be able to put it together before global supply chains get fully re-defined? That could be worth more than a few billion dollars!

The author is partner and director at the BCG. Views are personal.