Making in India beyond jugaad
While manufacturing itself is getting increasingly intellectual and would need a skilled workforce, innovation is an area we need to build on aggressively
Stripping World War II motorbike engines to fit in autorickshaws is jugaad. Creating an engine for Indian conditions with high load factor, but reduced fuel consumption is creativity. Jugaad is at best a stop-gap measure. To move forward, encouraging creativity and innovation at an affordable price point through serious research and development must become the cornerstone of “Make in India”.
The Make in India campaign has been getting a lot of jugaad reaction, particularly in the case of capital goods, to raise import barriers and to go around World Trade Organization norms to impose forced localization.
There is no doubt that many countries around the world are getting more protectionist. Bilateral trade agreements, regional trading blocks, bilateral energy supply agreements, export subsidies and so on, have all distorted global free trade. All these arrangements are built around some inherent advantage or competitive edge that countries have.
What is, therefore, the inherent advantage that India has to offer?
The basic factors that drive global investment in manufacturing are demand (not just the need, but need coupled with the ability to pay), a skilled workforce and efficient governance. Any one of these factors, when maximized, can be global drivers in themselves. Scandinavia and Germany are global manufacturing bases essentially on the basis of their highly skilled workforce, despite negligible local demand. Singapore and Dubai are global manufacturing bases owing to super-efficient governance and again despite negligible local demand. Brazil is trying to leverage its domestic demand to encourage manufacturing. China is trying to push on all the three factors, but it is its domestic demand which is driving most of the investment in manufacturing.
Let’s look at these three factors from the Indian perspective.
The commonly held belief is that the Indian market is large. The fact is that while India has a large population and, therefore, a large need, the ability to pay is still modest and, therefore, demand is relatively weak. The size of the Indian economy is about the same size as that of Italy. In absolute terms, even 1% growth of the US economy is more than 10% growth of the Indian economy and, for a manufacturer, the US market offers far better profitability.
It is ironic that while the need for infrastructure in India is the most acute, the spending has been minimal. The demand for infrastructure-related products, therefore, has been woefully weak. In the case of power generation equipment, the country has over 30 gigawatts (GW) of production capacity whereas the maximum generation capacity that it has ever added in any given year has been less than 10GW. Over the last few years, the annual capacity addition has been an average of just 5GW.
The most significant challenge of our economy currently is sluggish demand. This is particularly so in the case of capital goods due to almost stalled investment in the infrastructure sector.
Even if we were to ban all imports, how can domestic demand alone utilize existing excess production capacity? Further how can we expect fresh investment in manufacturing if the investors don’t have a line of sight into future stable demand?
If we still force the localization issue and try to recover domestic manufacturing costs based on small volumes, it will inevitably result in higher product costs, which in turn will have to be recovered from consumers. Any step that increases the end cost to the customer while other competitive options are available implies compromising on productivity and makes us a nation that is globally non-competitive.
Kick-starting domestic demand, particularly in infrastructure, will have to be driven by government spending. Since there would be limits to government spending, manufacturers will also have to rely on exports.
We will have to find the right way to leverage domestic demand. The better way would be to make domestic manufacturing more attractive rather than imposing import barriers. Further, exports, too, will need to be supported with competitive financing because that’s what other competing countries are offering.
The intellect of our youth is the single most significant competitive advantage we in India have. To drive this advantage home, we need to focus on activities that maximize the application of mind like innovation, research, design, engineering and the high end of value-added manufacturing. Once again, we have completely ignored the dimension of research and innovation in domestic manufacturing. Most of the products and particularly capital goods are designed outside India.
While manufacturing itself is getting increasingly intellectual and would need a skilled workforce, innovation is a prelude to manufacturing and is an area which we need to build on aggressively. Make In India is important, but designed in India is the key aspect. Indian brands can occupy the world stage only if they are designed in India. Innovation, basic research, development of technology, etc., all need money. This money has to be generated from the sale of products. Brand India can only succeed if Indian companies themselves invest in manufacturing. Indian companies in turn can sustain investment in manufacturing only if they invest in basic innovation, design and technology. This process will take time and there is no jugaad available to fix this immediately.
There is no doubt that governance in India could be better, more transparent and more predictable. But then, governance is a challenge all across the world. Other emerging countries have challenges ranging from basic physical security, forex convertibility, and theft of intellectual property to a non-existent judicial system and so on. Developed countries suffer from hyper-regulation and have become extremely risk-averse. The bottom line is that India is not a bad place from a governance point of view given the strength of our institutions. If investors see adequate demand that can get them adequate financial returns, then they will be able to bear the pain of poor governance for some time.
Indians are inherently creative. The best expression of this creativity is to first design and then make things ourselves. Let’s build our future in channelizing this creativity in a structured manner rather than to use it for finding shortcuts through jugaad.
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