Competitiveness and manufacturing growth

Competitiveness and manufacturing growth
RC Bhargava
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In the last seventy years India has made considerable progress in establishing manufacturing enterprises and industrializing the country. We make a large variety of sophisticated and engineering products. There is a thriving auto and globally competitive pharma industry. Despite this, manufacturing has remained stagnant at between 14%-16% of GDP whereas it needs to be at least 25%. Exports of manufactured products remain of limited value. There is a fairly large import content in many manufactured products. India is still not a preferred destination for foreign investments in manufacturing. Despite several major and substantive reforms during the last six years that have made it much easier to manufacture in India, the growth of manufacturing remains unsatisfactory. More needs to be done.

It is not easy to find any authentic studies that have correctly identified the root causes of why governments have, over decades, failed to adequately accelerate manufacturing. This is very surprising given the crucial importance of manufacturing in creating employment and eradicating poverty. The appropriate policy changes and reforms can never happen without a complete and accurate root cause analysis. In my book ‘Getting Competitive’ I have attempted to examine this issue. My conclusions are based on over sixty years of experience in government and in industry, which includes Maruti Suzuki since 1981. I would be very happy if this book leads to more research and debate on how India should become a manufacturing powerhouse.

Competitiveness and manufacturing growth
Manufacturing in India

If manufacturing in India could result in products being globally competitive, there would be a torrent of investments, both domestic and foreign. India has several factors that would make it preferable as a manufacturing destination compared to other countries. The negatives need to be identified and removed.

The first requirement is that policy makers and implementers should fully understand the critical role competitiveness plays in sustainable high growth of manufacturing, and what needs to be done to become competitive. It is easy to understand that the lower the cost of manufacturing a product, and the better its quality and performance, the greater is the probability of its sale volumes increasing. Consumers will prefer to buy products that give more and more value for money. This is the core of competitiveness. Continue to make products at lower cost and of better quality. Give customers higher value for their money. Customers will increase demand for such products and industrialization will be on its way.

Competitiveness and manufacturing growth

Our industrial policies in past have never focused on the need to improve competitiveness. In fact, most policies have led to the opposite result. Industrial policies that were framed from 1950 to 1991 deliberately ruled out creating competition between industries. This included the rapidly growing public sector. It was believed that competition led to a waste of resources. The absence of competition between manufacturers, and the resultant sellers-market led to higher costs and poorer quality. In addition, the taxes on most manufactured products were kept high in the belief that this would promote socialism as the ‘rich’ mostly bought manufactured products. The actual result was lower manufacturing growth and no real socialism.

Very little happened after 1991 to change the thinking of policy makers. Most policies relating to the operation of both public and private sector industries did not have increasing competitiveness as an objective. Industrial investments and growth remained low.

Competitiveness and manufacturing growth
Manufacturing unit in China

It is now accepted that manufacturing excellence and growth has to be led by the private sector as the public sector has not delivered the required growth. Unfortunately, private sector industrialists have always been distrusted by bureaucrats and politicians since they are wealthy and so not consistent with socialism. This distrust and fear of vigilance actions result in a reluctance among the bureaucracy to take responsibility for decisions to facilitate private sector business. This leads to delays and loss of competitiveness. Policy makers are also not trained and experienced to understand competitiveness.

The belief among policy makers continues to be that socialism requires that industry should be charged higher rates for inputs and infrastructure services and the weaker sections subsidized by supply at lower costs. Such policies lead to higher costs of manufacturing, besides corruption and waste. In seventy years, we have not achieved socialism as disparities have continued to grow.

Competitiveness and manufacturing growth

One of the consequences of civil servants being reluctant to take decisions involving money and the private sector is long delays in making payments and disputes. Government has become the biggest litigator. The cost of such delays and litigation is reflected in higher costs of production.

Policy makers do not seem to understand that manufacturing growth leads to higher employment. This is because a large proportion of jobs in the service sector are created because of manufacturing. Most retailing activity, where employment in the service sector is huge, is of manufactured goods. Thus, more competitive manufacturing would lead to more job creation. Labour intensive manufacturing often leads to higher costs and poorer quality. This aspect needs to be borne in mind in policies relating to SME’s.

Besides government actions that should lead to reductions in costs of manufacturing, the management effectiveness of industrialists is extremely important. India has traditionally adopted the western style of management-a style that not only has made these countries non-competitive in manufacturing, but is inconsistent with the Indian political, economic and social conditions. Managements need to look at management styles of countries that have become and remained competitive in manufacturing and also have a democratic form of government. Managements have also to work at winning the trust of the government and the people by their lifestyle and conduct.

In all areas of work and play good teamwork yields the best results. Industrial competitiveness requires that the political establishment, bureaucracy and industrialists work as a team to further national goals. Each has to act in a manner that would promote more cohesive team working and retain the trust and confidence of the partners. This is an area where all three have to change from the past and create a more productive culture in the interests of the nation.

(RC Bhargava is the Chairman, Maruti Suzuki India Limited)

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