India needs Manufacturing

There has been a hot discussion on allowing Foreign Direct Investment in multi-brand retail industry in India. I am not going into the details of the same in this blog post, but the point to be emphasized is that while India does need foreign investments, these are most urgently needed in enhancing India’s manufacturing capabilities and infrastructure. Retail industry is not to be sniffed at either, as that would generate millions of jobs for young people.

Coming to manufacturing, it is pertinent to note that the share of manufacturing as a whole in India’s GDP for 2011 – 12 is only 16%. Most fast-developing countries such as China, Brazil, Korea, etc., have that percentage as more than 25% of their respective GDP – in the case of China it is 34%.

So, India is far from becoming a manufacturing powerhouse of the world. The goal that the government has been setting in various policy documents is a 25% share by the year 2020, which would mean that Indian manufacturing has to grow by not less than 15% every year going forward from its poor showing currently.

It is very urgent that government puts in place policies that would facilitate investments by both domestic and foreign players in high-end manufacturing with high value addition. India is not destined to be a “toy” manufacturer, but more of a high-end manufacturer such as automotive forgings, automotive components, electronic components, pharmaceuticals, etc.,

The key thing for the government to note is that we have to find jobs for some 10 – 12 million young folks joining the workforce every year, and that cannot be achieved just by retail industry and services industries such as IT/BPOs. Highly skilled manufacturing jobs need to be created and that can come about only by urgent investments in identified manufacturing areas where India has a potential and sustainable competitive advantage over other countries. At the end of the day, people need jobs and it is the joint responsibility of government and industry to ensure that actions are taken on a war footing.

The sad thing is that there is no sense of urgency anywhere at this moment. This needs to be tackled immediately, and I hope that the new Finance Minister (actually the Prime Minister acting as Finance Minister) would immediately ensure that urgent actions are taken at his level to increase investments in manufacturing. No successful economy in the world today has made it without a big share of manufacturing in the economy, and it would be wrong to think that India alone can make it via services alone dominating the economy. Services will always be a major part of the Indian economy, no doubt about it, but it would not be sufficient to meet the country’s overall economic objectives.

Government should think primarily about economic objectives and removal of hurdles which cause obstructions to investors. Are we going to see a sea change in the government’s approach ? The next couple of months should tell us.

Cheers,

Vijay Srinivasan
Mumbai
8th July 2012