Making Indian manufacturing more ‘valuable’

For India to increase ‘servicification’ of the manufacturing sector and become a more valuable contributor in the global supply chain, it needs to bring about certain structural changes to the industrial ecosystem. Some of these are:

-Improving the ease of doing business in India: India jumped from a rank of 142 in 2014 to 63 in 2019 in global ease of doing business rankings. While this illustrates that India has come a long way, there is still significant headroom for improvement especially if India is rooting for a 70% growth in GDP / capita by 2030. Some specific areas which will improve the experience of multinational firms opening shops in India are:

-Overhaul of existing labour laws: The multiplicity of rules and procedures that employers need to adhere to, and high costs associated with hiring and firing labourers make it difficult for global multinational firms to operate nimbly in India. While the labour reforms bill passed in 2020 tried to address some of the issues, but a number of structural improvements are still required to encourage firms to set up large manufacturing units handling critical parts of value chain in India.

-Streamlining land acquisition process: Land acquisition is a complex issue. Foreign firms consider land acquisition as a high-risk transaction due to lack of clear titles (land related disputes form 60-70% of total civil litigations), difficulty in acquiring agricultural land for non-agricultural purposes, issues in access due to inadequate infrastructure etc.

-Incentivising MSMEs to automate / digitise production facilities: Given abundantly available cheap labour, there is little incentive for MSMEs to incur capital expenditure and make their manufacturing units more digitised / automated and simultaneously invest in up-skilling / training the labour force. This makes it important for the government to educate MSMEs of the long-term advantages of improvement in productivity and profitability and subsidise the cost of such one-time upgradations, thereby eliminating the myopic view that exists today.

-Realigning SEZ incentives to promote manufacturing units: ~60% of Indian SEZs cater to IT or business services (global capability centres). India has been unable to attract high value manufacturing businesses in SEZs due to lack of fiscal and non-fiscal incentives which MNCs would need to set up manufacturing units. For example, given high logistic costs (as % of GDP) due to under development infrastructure, Indian manufactured exports are uncompetitive. While India will continue to develop infrastructure in the longer term, the government should subsidise a portion of logistic costs for exports in SEZs as a tactical measure. Additionally, while India has increased its focus on Free Trade and Warehousing Zones (FTWZs), which allow duty / tax free import and export of goods, it would be helpful to examine fiscal and non-fiscal policies offered to FTWZs by other countries.

-Improve the ecosystem for promoting deep tech startups: India is home to world’s third largest base of tech startups, with most of them being software related. As per a report by NASSCOM, India added 1,300 active tech startups in 2022 taking the total number of startups to 25,000-27,000. However, less than 5% of these startups are deep tech startups. This is because:

-While India has requisite qualified graduates to build deep-tech startups, there is a need to provide them with adequate safety net to improve the risk appetite. Government’s ‘Atal Innovation Mission’, ‘Startup India’ etc. are a step in that direction. However, India would also need an equivalent of ‘Universal Basic Income’ scheme, which provides a regular and unconditional cash transfer, for entrepreneurs to safeguard them against failure.

-There is a need to develop adequate infrastructure for carrying out R&D, hardware development etc. with a long-term view which will require substantial investment and support from the government. Once infrastructure is in place, Venture Capital (VCs) funds would need to bring in long term capital as deep tech startups typically take longer time than software related startups to break-even, given they are more capital intensive.

The government has been working towards taking India to the forefront of global manufacturing supply chain. The big infrastructure push has been coming through to improve India’s image as a favoured investment destination at the global stage. With demographic dividend on the right side and a favourable investment climate amidst faltering western economies, it is a golden chance for India to race ahead of Asian competitors with whom India has always been playing a catch-up game. At this juncture, it is important for all stakeholders involved in India’s growth story to realise that true economic value addition will happen if India is able to leverage its robust services exports platform and embed that into manufacturing to improve productivity. With the dawn of automation and GenAI, the world is moving towards leaner and more efficient supply chains, especially post COVID, and that is where true value lies for India’s manufacturing sector.

semi-conductors

Reshape Indian economy by ‘servicification’ of manufacturing