India’s industrial dreams sputter

India’s industrial dreams sputter

There is an urgent need for manufacturing to expand to boost growth and create jobs. -ST
Krittivas Mukherjee
Sun, May 19, 2013
The Straits Times

NEW DELHI – A US$ 12 billion (S$15 billion) steel factory in eastern India was supposed to be the country’s biggest foreign investment, the symbol of a nation’s rush to become an industrial giant. Seven years on, the site is still a patch of sand with a few beat-up containers.

The steel mill that was to be built by South Korean giant Pos- co has been caught up in a drawn-out battle with villagers for land and for government environmental clearances. Thus it has become a symbol of all that needs to change if India is to become a global manufacturing hub.

India is expanding at its slowest in a decade. If it wants to revive lasting growth and absorb some 10 million Indians set to join the workforce annually over the next decade it must shift its economic engine towards manufacturing, industry and analysts say. Instead, factory output has steadily declined, underlining the challenge India faces in achieving its target of expanding manufacturing’s share of gross domestic product to a quarter by 2022 from about 15 per cent now.Manufacturing growth has slumped from 18.4 per cent in 2007-08, when India was expanding at a near-double-digit clip, to a mere 0.9 per cent in 2012-13, in an overall slide in industrial output during this period. Manufacturing accounts for 76 per cent of India’s industrial production.

“The challenges faced by the manufacturing sector emanate from the lack of an enabling ecosystem,” Mr Harsh Pati Singhania, director of JK Organisation, one of India’s biggest conglomerates, told The Straits Times. That ecosystem, he said, comprises robust infrastructure, quick land acquisition and regulatory clearances, a steady supply of raw materials and skilled labour, and simplified taxes.

“All these will help make Indian manufacturing more competitive thereby increasing its share in the GDP and in the process create more jobs,” he said.

But in a raucous, diverse democracy of 1.2 billion people, that is easier said than done.

A mine takes on average a decade to start operations and a power plant, seven to eight years, provided the projects do not face too many regulatory or land acquisition hurdles.

Infrastructure remains poor. India suffers from a costly talent shortage, restrictive labour laws and rampant red tape and corruption. Supply chains are underdeveloped, capital remains expensive as the country struggles to curb inflation, and conditions vary dramatically between states. Such constraints keep manufacturing operations in India small.

Manufacturing here accounts for roughly the same share of the economy as peers like Brazil and Russia. But unlike India, they are also big exporters of natural resources. By comparison, Thailand generates 40 per cent of its output from manufacturing, while it is 35 per cent for China.

In contrast, the services sector accounts for more than half of India’s economy, but a sector like IT/BPO (business process outsourcing) cannot be the sole engine of growth because it cannot absorb the millions of new job- seekers. It accounts for only 25 per cent of jobs. Farming accounts for 15 per cent of GDP but employs about 60 per cent of its population.

“Without manufacturing expanding significantly, we will be unable to absorb the more than 100 million young Indians coming into the workforce in the next eight years or so,” Mr Amit Sinha, head of the industrial goods and services practice at Bain’s India office told The Straits Times.

“We literally need to act on an emergency basis to lift manufacturing from the 15-16 per cent range to somewhere close to 25 per cent of GDP – piecemeal measures won’t cut it.”

The first wave of new industries was slow to come up after India liberalised its economy in 1991. A new wave of reforms to speed up the building of roads, ports and power plants and land acquisition could spur manufacturing growth, experts say.

“To add juice to the economy again… we need to see more implementation of key infrastructure-related projects,” HSBC said in a report this month.