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India needs to guard against technological disruption in manufacturing
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Amit Kapoor | 11 Jan, 2017
The most recent Purchasing Manager's Index (PMI) reflects a contraction in the manufacturing activity in India in December.
Most
domestic and international analysts and experts are looking at it from
the viewpoint of the move of the government which essentially removed 86
per cent of the currency as legal tender. The unprecedented move does
seem to have had an adverse impact on the manufacturing and investment
activity. Its benefits, at best, are uncertain at present though the
government has been lauding the move from the viewpoint of recovering
tax from income tax raids as well as the ability to levy tax on declared
income beyond a threshold.
Another positive the government has
been vocal about is the change expected in behaviour of people to a
less-cash economy. The All India Manufacturers' Organisation has,
meanwhile, issued a study which shows a 50 percent dip in revenues and
35 percent job losses for SMEs. The government must carefully look into
these figures.
Over the years, if one looks at the performance of
the manufacturing sector, it has not been among the best performers.
There are a number of reasons for this. A recent report by the Institute
for Competitiveness, an international think-tank, looks at some of
these aspects as well as compiles an index of manufacturing
competitiveness for Indian states. The report notes that the share of
manufacturing has been stagnant at roughly 15 per cent of GDP for the
past 30 years in contrast to services, which have grown, and
agriculture, which has shrunk during this period. The report brings out
four essential points on India's manufacturing competitiveness.
First,
it traces the development of the sector and notes that the possible
reason for its non-performance is due to crucial reforms not happening.
It notes that India's initial market opening process did include reforms
in the capital markets and FDI into distinct sectors. However, market
reforms initially remained untouched. These included labour legislation
and laws pertaining to land markets. Even today, they remain restrictive
for investment and competitiveness to grow.
The reforms largely
helped in the development of the service industry but could not enable
the rise of the manufacturing industry, which, in addition, required
critical linkages like electricity, water and reduction in burdensome
regulations. However, these were not initially available, which resulted
in services taking off while manufacturing lagged. Thus, only some
states are good in manufacturing.
The second point is the
important locations for manufacturing. The best states in this regard
are Maharashtra, Tamil Nadu and Gujarat, that can be thought to be at
the forefront of manufacturing competitiveness. They are also good in
industrial clusters and SMEs. The northeastern states and states like
Bihar and Jharkhand perform relatively poorly on the composite index.
The reasons for these are many and complex, but their inability to
provide a stable environment for investment in manufacturing to take
place is the primary factor.
Third, another major factor for
India to consider over the medium to long term is automation. Most
Indian businessmen and policymakers are not according it the attention
automation and the rise of the robots should be getting. The need for
paying attention to this is simple. The Make in India national
manufacturing policy aims to create 100 million additional jobs by 2022.
Even if the manufacturing sector has a multiplier of 5, generating 20
million jobs is not easy. And that too in an environment where
automation is fast replacing manual jobs.
China's manufacturing
workforce is under tremendous stress as technological innovation
disrupts manual jobs. India needs to adapt to this changing reality and
adjust its manufacturing sector considering the changes under way at the
technological level globally.
Finally, how does one create a nation that has manufacturing prowess? There
are three or four important points which should be undertaken by
governments as well as corporations. First, factoring market reforms
even at the state level will go a long way in boosting manufacturing
competitiveness. Some states have taken the lead; others need to follow.
Second, 8-10 states should take the leadership role and establish
collaborations with countries on furthering the Make in India
initiative.
Third, a branding and mindset reset is needed to
change India's image from a low-cost re-engineering country to one which
is known for quality, excellence and innovation. Fourth, skill shortage
is a major concern for the industry at present. The need for formal
skill training can hardly be over emphasised in the wake of automation.
Finally,
the focus of governments in India should be on a manufacturing
competitiveness ecosystem which thinks about the meaningful interactions
between humans, capital and factories for productive employment. Over
the years, India's policymakers need to be vigilant about the
technological disruption that could severely impact manufacturing and
job growth in India and align their policies accordingly.
(Amit
Kapoor is Chair, Institute for Competitiveness, India. The views
expressed are personal. Amit can be reached at
amit.kapoor@competitiveness.in and tweets @kautiliya. Sankalp Sharma,
senior researcher with the Institute for Competitiveness, contributed to
the article)
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