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How can the new government make India a Global manufacturing Hub CRISIS Young Thought Leader Senile Abraham Contents Executive Summary 2 Introduction 3 Labor Law: 4 Labor Productivity 7 Infrastructure 8 Taxation Laws 10 Frugal Innovation 10 Conclusion 11 References 12 Executive Summary India has always been known as the services economy. Most of the Investment Inflows have been In services sector while the manufacturing sector has been left behind. This has resulted in lesser contribution by the manufacturing sector to GAP growth.
Going forward, however the “Make in India” campaign might become the next gig success story. With India maintaining its cost competitiveness, all global players are looking at it as the next opportunity destination. It could attract an Investment of about $300 billion by 201 5 leading to an overall Increase In the share of manufacturing output. However there are various hurdles to achieve this target. This paper tries to analyze the key issues underlying the slow growth of the sector and tries to suggest various solution for a sustainable growth.
The paper tries to understand the Implications of labor laws on the manufacturing sector. How It has De to an increase in the informal sector and what all changes can be made in the been looked upon in depth and various global best practices applicable to it has been suggested. Paper draws upon the critical aspect of infrastructure and the various processes that can be implemented to make it world class. It analyzes the current bottlenecks and tries to find a way to implement the projects effectively.
Finally, the paper looks upon the USPS of India, “Frugal Engineering” and suggests how it can leverage this advantage to make itself globally competitive country. Introduction Economist Nicholas Sailor had proposed that growth in GAP is positively related to growth in manufacturing sector. Manufacturing exhibits faster productivity growth and thus helps in faster growth of GAP. In India services contributes to about 57% of GAP whereas manufacturing contributes only 15%. Indian’s share in global manufacturing can be summarized as below.
Indian’s Manufacturing sector at a glance Share of GAP Share of Global Manufacturing 2. 1% Growth 2013-14 Average hourly compensation $1. 50 Key Industries Textiles, Engineering goods, automobiles, electronics, chemicals, paper Indian manufacturers have always performed below their potential. Most of the manufacturers have not been able to return their cost of capital, a factor that dampens the investment in the sector and makes it less attractive. However during the past decade India has been growing at an average of 7 percent and has also maintained its cost competitiveness.
With the increase in labor cost and raw material cost in manufacturing hubs like China, Thailand etc. Major manufacturing companies are looking into destinations like India wherein the cost has remained almost stable ND also large human resource is also available. However the economic condition in India has not been conducive for manufacturing and also investors have not been able to get the required returns from their investment. If India has to become a manufacturing hub, it has to remove all these hurdles and make major reforms in the sector so as to make it conducive.
Some of the areas which need to be looked upon are labor laws, productivity, and infrastructure and tax laws. In the next sections we will be analyzing each aspect and suggesting some reforms and changes that can be implemented. Labor Law In India, since the time of liberalizing there has been inconsistency between economic growth and employment creation. During the period of 1992-2000, GAP 2000-05 period wherein employment grew at 1. 6% whereas GAP grew to 7%. However post 2005 employment rate declined even though GAP grew at 8%.
There is no denial that there was Job creation, but mainly it occurred in the informal sectors. The below graph shows the percentage of people in informal sector as of 2004-05. Informal sector workers can be classified as farmers, ebbed packers, fishermen, laborers, loaders, unloaded etc. Slow rate of growth in formal sector low table shows comparison between employment during the period 1999-00 to 2004-05 and 2004-05 to 2009-10. As can be seen from the table, the rate of growth in formal sector Jobs has declined from 4. 9% to 0. 2% during the period.
The main reason for this decline was because of the rise in informal Jobs. Today, out of the total working population 93% work in informal sector. This growing informal sector has had indirect implications on the Norfolk security, productivity of the economy. Only 7% of the workforce has direct access to unemployment insurance, skills or training programs, standard wages as ere the legislation. Rest 93% are deprived of these benefits. The main reason for growth in informal sector is due to the restrictive and archaic nature of labor regulation.
The legislation that governs the employment regulation, Industrial Disputes Act (IDA) 1947, was conceived during the British Raja. Also, certain amendments were made in 1982 wherein firms employing more than 100 people need to seek permission from the government to effect layoff, closures and retrenchment. This made hiring and firing of workers extremely difficult even though these workers were not efficient enough. Also the labor laws created a negative reception about the private sector employers among laborers.
Most of the laborers had the belief that, 1) Employers are exploiters 2) They don’t have alternative career option 3) Shareholders paid the salaries and not the customers ere multiple definition of wages also acts as a hindrance. The law states that employers confiscate 49% of employee’s income at source for various employee benefits. Since most of the laborers cannot live in half the salary, they choose informal employment. As a matter of fact almost 85% of the employment in manufacturing comes from informal sector enterprises which employ less than 50 people.
Some of the amendments that can be brought about in Labor Laws are 1) From central to state legislation: The power to implement procedural reform should be shifted from central to state. These reforms may not require changes in the law but simply initiatives to simplify multiple labor laws so as to maintain compliance. Currently a pilot level implementation has been done in the state of Restaurant and gradually it should be implemented in other states as well. One of the advantages of this reform is the harassment by the government officials will be reduced to a larger extent thus resulting in a safe environment.
Also there will be increased competition among the states so as to improve their ecosystem for attracting investment. 2) Increase in social security benefits: While the informal sector constitutes to about 33% of the total manufacturing sector, social security coverage is miniscule in this 1948; The Employees Compensation Act, 1923; The Payment of Gratuity Act, 1972 is almost miniscule in case of informal sector. Scaling up security for informal sector could reduce the tension between the trade union and government. ) Ease of Hire and Fire policy: As per economist Bike Debtor, layoffs and retrenchment are more laudable to trade unions and political parties than closures thereby making it easier to make reforms on hire and fire policy. It was studied that by increasing the compensation for layoffs and retrenchments to 45 days from the current 30 day period, resistance from the trade unions could be decreased. 4) Like minded unionism: Creation of unions from similar industry should be encouraged to reduce herd mentality and lack of credibility. This will reduce unnecessary unionism and hence will reduce the impact on productivity. ) Welfare schemes: Making marginal investments in employee welfare will reduce unnecessary bargaining from the borers. Some of the investments may include community development program, work benefits and flexible employee leave option. Labor Productivity The below graph shows the average manufacturing cost index among different countries by keeping US as the base country. Source: BCC As can be seen from the above chart, India, Indonesia, Mexico and China have held its cost competitiveness steady since 2004, compared to other countries and is amongst the low cost manufacturing economies.
Since India is having the cost advantage when compared to other developed countries, the factor that is going to ad value is labor productivity. It is not only about the cost benefit, but also the value addition which one gets. This can be achieved through improved labor productivity and enhancing the skills of the laborers. Workers in India are four to five times less productive than the workers in Thailand and China. Indian manufacturers lag behind their global competitors in terms of planning, supply chain management, quality and maintenance.
This difference in the productivity levels can be bridged by taking measures like 1) Establishing human capital strategy that supports the aspirations of the economy. This strategy involves continuously assessing the supply and demand gaps and planning to mitigate the gap. 2) Public private partnership in education, which can help improve the management of education and also help develop human capital based on the supply – demand gap. Also assign high priority to basic education because if only higher education is targeted then the return on investment won’t be that effective. ) Make teaching careers as lucrative as possible by providing value propositions so as to attract good talent thus enhancing quality of education. 4) Promote vocational courses so as to develop candidates for specific skills. ) Promote an environment favorable for R and entrepreneurship with the help of universities and industries. Set up business incubators for entrepreneurs to help and promote their ideas. 6) Improve the quality of public services by adopting lean-process techniques and also by setting up effective e-governance. Rage scale skill development. They should build in house training centers to promote ‘ITIL manufacturing roles. This solution will not only lead to good business sense but also help prevent displacement of people due to land acquisition by manufacturing companies (e. G. Data Anna car plant in Gujarat). Continuous learning can be bolstered by implementing field and forum approach which helps in linking class room teaching with hands on experience. Infrastructure ere importance of infrastructure development for the economic growth of a country is well established.
The productive capacity of an economy is directly related to the adequacy and quality of infrastructure. Infrastructure is one of the key element for any manufacturing company. In case of India, infrastructure acts as a bottleneck to the overall development of the country. Poor infrastructure saps the industrial radioactivity and makes the country less competitive. As per McKinney reports if the current trend continues then India is bound to suffer a GAP loss of USED 200 billion in the fiscal year 2017. In India, inefficiency in implementing infrastructure project starts from awarding projects to executing the project.
The common challenges that have been observed in all the projects are 1) Project plans are of poor quality which makes it very difficult to handle track changes during the execution of the project. 2) Approval process is centralized and involves multiple bodies like Public Investment award, External Finance committee, Economic Affairs etc. Which adds to the delay of pre-tendering process. 3) Land acquisition problem is common in India. Global standards suggest that land acquisition should be completed before a project is tendered.
In India, projects are sometimes awarded to the providers even if they have acquired Just 30% of the required land. The common factors that lead to delay in land acquisition are dependence on state government for approval, under ‘ululation of land price and the requirement of acquiring an unencumbered land. 4) Lack of value engineering leads to below par design and quality of the infrastructure. Most of the time providers under-utilize the available resources thus resulting in increase of cost. These issues can be addressed by implementing certain key initiatives adopting certain best practices around the world.
Since infrastructure is necessary for a sustained growth, these initiatives need to be acted upon at the earliest. Some of the measures that can be implemented to have immediate effect include 1) Land Norms: The condition for land acquisition norms to allocate projects would be changed from 30% to a higher percentage, say 90%. Also once the project has been approved, if there is a delay in delivering the residual land by the responsible agencies, penalty should be levied on them. 2) Committee to monitor projects of national importance: A committee should be set up which will look after all the projects of national importance.
It should monitor the project and also ensure transparency in the process. Committee should have power to escalate matters of discrepancies to relevant decision makers and also expedite their own resolution. 3) Selection of engineering consultants: The selection of engineering consultants should be based on quality UCM cost competitiveness. Traditional method of allocation on Al basis should be scraped. Evaluating the consultants based on their past performance could help increasing relevance and accuracy.
The above mentioned reforms are objective following measures can be implemented 1) Special Purpose Vehicles: Projects of national importance should be identified and tagged as Special Purpose Vehicles. The governance of such high profile projects should be world class and processes should be transparent. ) Training & Development: Government should initiate training programs to generate 2 to 3 million skilled/semi-skilled workers every {ear for construction industry. There should be a viable public private partnership so that training is given by industry experts and thus contributing to quality education. ) Risk assessment and management: The consultants or providers should improve their risk assessment and management capabilities. This can be done with the help of advanced tools and systems and also institutionalizing the processes at different stages of development. ) Apply Lean Operations principle: Lean operations principles like Construction Flow Balancing (CB) should be implemented by the providers so as to increase efficiency and reduce wastage. Milestones should be created as part of execution plan and adhered to by achieving targets for a specific period. Action Laws Retrospective taxation is a controversial yet well-known concept in the world. What it means is old proceedings are being taxed as per new rules. It has an undesirable effect of creating uncertainties in business environment and acts as a disincentive for foreign investors. In India, the cases of Avoidance, Monika have created a sense of skepticism for investors thus resulting in lesser investments. The brand image of India as an investment destination has been tarnished because of it. With the new government taking into control, investors had hopes that retrospective taxation will be scrapped.
But with the announcement of no changes in the laws as of now by Finance Minister, investors have again turned skeptical. For India to remain as the best investment destination and to bank on the current opportunity, amendments have to be made to the tax laws and with immediate effect. Rather than making the taxation retrospective it should made prospective. Also changes to the laws have to be made with utmost care so that there is no loop hole for any tax avoidance. India should emulate China’s success of manufacturing by increasing local demand.
This can be stimulated by reducing the indirect taxes and import duties. Goods and services tax should be implemented so as to avoid double taxation from state and central government thus reducing the overall taxation and hence increase in consumption. Frugal Engineering One of the major strengths which India possesses is the art of frugal engineering. It Involves reducing the complexity of the manufacturing process and increasing the durability with better and cheaper services. It helps in minimizing the usage of resources at development, production and delivery stage, thus making the goods and services affordable.
Some of the successful examples of frugal engineering from the Indian stable include Arriving eye care, Data Anna, Awash Tablet etc. Many multinationals like Milliner, Ionians – Renault have realized the importance of Frugal frugal engineering, but rather than simply cutting the existing cost it avoids needless cost. Frugal Engineering by contrast addresses the consumers at the bottom of the pyramid in developing countries like India, China, and Brazil. The population at the bottom of the pyramid constitutes to around 4 to 5 billion of the total population thus creating a huge market opportunity.
Government can help and support this methodology through various schemes and financial support. Awareness about the grants that are already in place to support frugal innovation like Technology Development Board (TAB), Techno-entrepreneurs Promotion Program (Deep), Home Grown Technologies Program (HOG) etc. would be increased. Some of the measures Inch Indian companies can incorporate to support frugal engineering include 1) Cross Functional teams: Co-ordination between the different departments of the company should be increased. Generally it is observed that the bigger the organization, departments work in isolation.
This acts as a hindrance to innovation as there is no clarity of thought and each functional department works on its own terms. Companies by changing the organizational structure can help mitigate this gap and increase the interdepartmental coordination. 2) Non-traditional Supply Chain: Traditional supply chain setup includes Memos ordering from the suppliers at lowest bid. In this methodology the cost cannot be lowered below a particular level since that will deter the quality of the supply and hence the final quality of the product as whole.
What organizations can do instead is team up with suppliers and build more efficient and cost effective supplies so that innovation happens from the scratch thus leading to production of more value added products and giving a competitive edge. Also, courses on “Frugal Engineering” can be included in the curricula of schools and alleges so that the skills be harnessed and polished since the young age. Conclusion Ninth the current governments ambition of increasing the manufacturing contribution to 25% of the total GAP by 2022 it’s a no easy task.
Several recent developments like ‘Make in India” campaign, changes in labor laws in states like Restaurant are nascent steps towards creating a sustainable growth in manufacturing. By implementing structured processes, removal of red tape and introducing reforms in laws, business environment in India can be made conducive and attract global players into manufacturing sector. India is being keenly observed by the world and would do well if it uses this opportunity to make itself a globally competitive manufacturing center.