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Amitabh Kant, CEO, NITI Aayog.
Amitabh Kant, CEO, NITI Aayog.

Low-value manufacturing is finally getting a boost: Amitabh Kant

To emerge stronger, Indian MSMEs will have to adopt a three-pronged strategy—innovate, diversify and re-strategize their plans, says NITI Aayog CEO Amitabh Kant

MUMBAI : While India has excelled in the manufacturing of high-end products, low-value manufacturing has not received the required impetus, but that is set to change now, said Amitabh Kant, chief executive of government think tank NITI Aayog. The government’s recent measures, including labour and land reforms, will go a long way in making India’s small and medium businesses cost-competitive against cheaper imports, he said. Edited excerpts from an interview:

How can India’s small businesses pivot to convert the current crisis into an opportunity?

The outbreak of covid-19 has affected the global economy negatively, and unfortunately the ripple effects of this crisis are felt by Indian MSMEs (micro, small and medium enterprises) as well.

Under such circumstances, the consumer behaviour is undergoing rapid changes.

Broadly, we categorize consumers into three categories—need-based consumer, mood-based consumer and impulsive consumer. For the next one year, impulsive buying will not happen among consumers and they will seek value in all their purchases.

Therefore, to survive and emerge stronger out of the current crisis, Indian MSMEs will have to adopt a three-pronged strategy, which includes innovate, diversify and re-strategize their plans.

Can India truly become a global manufacturing hub?

Yes. It is true that the Indian manufacturing sector has been unable to grow as successfully as the Indian services sector.

However, the reason for this is structural. India has all the necessary drivers needed to become a manufacturing hub for the world, and with the right policy initiatives, this goal can be achieved very quickly.

If you recollect, India was a major importer of mobile phones till a few years ago. However, with the right policy push, now India has become a major mobile phone manufacturer in the world. We just need to emulate this success in other sectors.

Let us understand the problem of the manufacturing sector before we venture into the diagnosis. When we liberalized the economy in the 1990s, a significant amount of importance was given to the services sector and high-value manufacturing sector.

How is the government looking to boost low-value manufacturing?

The low-value manufacturing sector did not get the impetus that it required. Hence, even though India has done considerably well in certain manufacturing sectors such as automobiles, pharmaceuticals, etc., the low-value manufacturing sector did not catch up.

The government is trying to address this problem by bringing about structural reforms and by providing the right incentives.

First, most state governments have reformed their labour laws, which were a huge impediment to the growth of the manufacturing sector.

Second, India has earmarked land pools the size of Luxembourg specifically to address the issue of land acquisition and is moving towards providing plug-and-play models for many sectors.

This will reduce the transaction costs of doing business in India.

Thirdly, India has done stupendously well in improving its ease-of-doing-business scores in the global arena.

Finally, foreign direct investment norms have been liberalized in almost all sectors of the Indian economy.

How can India’s MSMEs become more cost-competitive?

Scale and innovation are the two sides of the coin that could unlock the puzzle of competitiveness.

First, let’s understand the growth of China. This will help us understand the linkage between competitiveness and scale.

A company that starts manufacturing in China tries to achieve scale to cater to their domestic market of 1.4 billion Chinese citizens. This brings economies of scale and greatly reduces the per unit manufacturing cost of products.

Once scale is achieved, then capturing the international trade markets is just a matter of technical specification, which is not so difficult.

Second is innovation. When we look at MSME units in Japan, we learn that the levels of innovation undertaken by the Japanese firms have ensured their survival despite the demise of their big brands.

For example, even though China is considered the hub for manufacturing mobile phones in the world, some of the critical components such as the chips are still manufactured in Japan.

Therefore, for every iPhone that is consumed in the world, Japan earns more per phone than that of China. This is due to the innovation and product improvements taken forward by the MSME units in Japan.

So, it is very clear that competitiveness is a function either of scale or innovation. In the Indian context, we need to concentrate on both.

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