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Indian Manufacturing Sector: What it is, and What it Can be
Whereas almost without exception, every developing nation has made manufacturing one of three growth pillars, we in India seem to have skipped it almost altogether. As it stands the manufacturing sector accounts for just 28 percent of India's GDP and 14 percent of the work force. Its participation in India’s export basket too is marginal" says Pothen Paul, Chairman & Country Manager of Aker Solutions. He holds the central government’s lack of a well thought out industry strategy, responsible for this unfortunate state of affairs.
He is convinced that a much stronger (partly export driven), manufacturing sector will be critical in the days to come for increasing India’s GDP growth rate and creating enough gainful employment opportunities in the organized segment. Without it, India will struggle to address the demographic windfall, which will call for the generation of as many as 10 million new jobs year after year in the combined manufacturing and services sectors. A much stronger export drive is also necessary for improving our product quality standards and trade balance.

As far as the future of manufacturing sector is concerned, India really is in a sweet spot. Among its current and potential strengths are a huge domestic market, a fast growing economy, a very favourable demographic profile, a fairly large educated pool of people, and a competitive wage structure. Demand growth is taking place across the board and so the market for modern technologies is also equally broad. Having said that, coal gasification, coal to liquids, poly-silicon for solar cells, etc. are a few untapped areas where opportunities exist.

“In the coming years, by far the biggest opportunities for our manufacturing sector will emanate from a favourable combination of impending demographic dividend, and the graduation of a large proportion of our population to a per capita income of USD 1500+, at which point, the disposable incomes become capable of accommodating some discretionary purchases” states Paul. The biggest beneficiaries of this transition will be the FMCGs, consumer durables, clothing, pharma and personal mobility equipment such as two wheelers and cars.

The quickening pace of growth of the housing, infrastructure and public transport sectors and mechanization of agriculture too will generate many options. In addition, the somewhat unexpected development of India being made an export hub for small cars by the likes of Hyundai will not only generate great many opportunities, but also strengthen the ‘made in India’ brand.

However there are downsides too like poor infrastructure including unstable and inadequate power supply, shortage of trained manpower, and low levels of commitments to innovation and R&D. In the latter area for instance, whereas most of the successful Korean companies keep aside as much as a 5 percent share of revenues for R&D, regretfully their Indian counterparts make do with just a fraction of it. Such a strong commitment to product development and innovation is what has enabled Korea to become an industrial giant owning a large portfolio of globally well-known brands, in a very short period of time.

In China too, at national and corporate levels, huge sums are now getting spent on very outcome focused R&D work. In the chemical and petrochemical segment alone much work is going on in coal gasification, coal to liquids, materials for solar cells etc. It goes without saying that in today’s scheme of things, manufacturing the very same products year after year with little or no design changes and improvements in production efficiencies has no relevance.

What is probably needed for us to change our competitive position is to become a lot more committed to investments in R&D, innovation and talent generation and management. Obviously the Government should also chip in with proactive infrastructure support, industry policies, labour training institutions such as ITI’s and pragmatic labour laws.
China learned a lot about manufacturing technologies and processes by creating a welcoming environment for multinationals to set up their own or outsourced manufacturing operations there. It also enabled China to generate employment opportunities and get millions of its work force trained in modern manufacturing and assembly processes. India too can follow the same route and gain in a similar fashion.

Our aims should be global competitiveness in terms of product quality, innovation and pricing. But as long as we continue to remain domestic market focused, it will be a challenge to get there, in spite of the advantages of our favourable wage structures. The distance Indian manufacturing sector needs to travel is obvious from the fact that products not only from China, but also from smaller developing nations such as Thailand find a ready market here.

Fortunately there is a strong recognition that competitive process, product and production technologies are a must for business success. If we look around, it becomes obvious that the likes of Reliance always opt for nothing but the very best, in spite of the fact that they are invariably expensive. It can also be seen that most of those who stayed with outdated or copied technologies have not done well or fallen by the way side.

"Entering the manufacturing sector in India is not for the faint hearted" quips Paul. Although in the chemicals sector, joint ventures with established overseas players for the manufacture items for which good opportunities exist might be an appropriate way to start. Product buy back arrangements with the overseas partners can be an added advantage.
Paul truly does not subscribe to the relevance of small-scale manufacturers in the process industry sector, as their constraints in managing quality, health, safety and pollution far outweigh the benefits.

Large integrated players are volume focused and so products of smaller volumes and speciality categories are more relevant to mid size players. But as it stands, they are not well placed with regards to sourcing of certain types of feed stocks. To address this issue, it is high time that the Central Government formalised a feedstock policy, which mandates integrated players to keep aside a portion of the intermediate feed stocks they produce, for allocation to mid sized enterprises.

He is a strong optimist though, "The steep growths of our auto, consumer durables, FMCG, pharma, garment and to an extent the housing sectors, which are major end users of products of the chemical and petrochemical industries, are good signals" says Paul.

Consequently the next five years and five more years thereafter during which period, India is expected to become a USD 5 trillion economy (near what China is today) will be very good for the chemical and petrochemical sectors. It is also likely that this period will see many multinational companies either opting for major expansions or setting up new manufacturing facilities in India.