Manufacturing ecosystem in India Dr. Sunitha Raju, IIFT, reflects upon the lessons that India can learn from China to be the world’s next factory

Manufacturing ecosystem in India: Lessons from China

Developing a manufacturing ecosystem in line with Indian conditions is the need of the hour. It is important to understand what China did right while developing the roadmap ahead.

India’s share in world manufacturing value added (MVA) was merely 2.84% in 2018. The share of manufacturing in GDP is 17%, in spite of the vision statement of increasing the share to 25% by 2020 (Niti Aayog, 2018). India, with its domestic market base, does have opportunities to enhance its manufacturing performance. This requires a policy framework that is in line with ground realities. As such, it is important to question what made China a manufacturing hub and why India was not able to achieve the manufacturing targets it set for itself.

China’s emergence as a global production hub is primarily on account of developing the manufacturing sector and focusing on manufacturing & exports. Its share in world MVA increased from 11.6% in 2005 to 24.8% in 2017 (CIP UNIDO, 2018). Manufacturing exports of China as a share of the global total increased from 0.8% in 1980 to 17% in 2018, the highest in the world, outpacing the US, Germany and Japan. As such, China acquired the first rank in Global Manufacturing Competitiveness Index (Deloitte 2016) and as per the recent UNIDO data on CIP, it is ranked 3. In China, manufacturing accounts for over 40% of the GDP.

China has emerged as the world’s factory by following a planned strategy. The MIC 2025 clearly highlights the future de-

THE MADE IN CHINA (MIC) 2025 CLEARLY HIGHLIGHTS THE FUTURE DEVELOPMENTS OF CHINESE INDUSTRY, WHICH ARE CENTRED ON HIGH TECH AND EMERGING SECTORS LIKE ELECTRIC EQUIPMENT, FARMING MACHINES, ETC.

velopments of industry, which are centred on high tech and emerging industries – electrical equipment, farming machines, new materials, energy saving, information technology, aerospace, railway and ocean engineering equipment. This is also in line with the future demand structure. Such foresight is also necessary for India.

A CUSTOMISED APPROACH

In all these, innovation has defined the competitive advantage. The targets are clearly set in MIC 2025, where the focus is on strengthening microelectronics, aerospace, computing, robotics and renewable energy. The government’s developmental initiatives – industrial regions with concentrations of assembly plants, skilled workers and material and component suppliers, provide immense scale economies.

Imbibing from China is not the answer, but developing a manufacturing ecosystem in line with Indian conditions is the need of the hour. The focus should be on sectors that

have wide industrial applications & need immediate attention. These include electronics, chemicals, machine tools, steel & telecommunications. A detailed policy framework for electronics, pharmaceuticals and telecommunications was drawn in 2012, but most of the proposals are yet to be implemented.

A standard setting body needs to be ensured at the earliest, since without such a framework, imports and exports are not subjected to indigenous standards. With a high rate of obsolescence, continuous investment in technological upgradation is necessary, which is not happening due to uncertain investment climate. The Make In India initiative needs to be supported by technology transfer under joint ventures.

END-TO-END SUPPLY CHAIN

Developing export competitiveness with quality and cost, would provide India a better opportunity when global trade normalizes. The policy challenge is to support the domestic industry without compromising on cost efficiency.

Further, despite the COVID crisis, export promotion should be a conscious policy agenda. The underlying objective is to expose the industry to a market discipline that can promote productivity, cost efficiency and product development (as with the experience of Asian tigers). In this regard, scale of operation would be an important determinant. The difference in the scale of operation between India and China is an eye opener. The consolidation of industrial establishments since 2010 has made the difference for China. Similar efforts for critical industries like electronics, machine tools, chemicals need to be worked upon,

NIC04

2411 2423

2429 2710 2899

2915 2922 2929 2930 3110- 3120 3210 3140

UNIT LABOUR COSTS FOR SELECTED INDUSTRIES INDIA VS CHINA (2004 – 2014) India China Description 2004 2014 2004 2014

Chemicals 2.34 4.80 1.80 7.89 Pharmaceuticals, medicinal 2.50 5.26 1.91 8.36 chemicals and botanical products Other chemical product n.e.c. 1.09 3.33 1.66 7.58 Basic Iron & Steel 2.90 5.18 2.46 8.31 Other fabricated metal products. 1.3 2 2.84 1.52 7.34 n.e.c. Lifting and handling equipment 1.97 4.96 2.06 9.40 Machine-tools 2.07 5.62 1.75 7.79 Other special purpose machinery 2.50 5.59 1.97 8.72 Domestic appliances, n.e.c 1.84 3.65 1.75 8.24 Electric motors, generators and 4.85 5.27 2.87 8.43 transformers Electronic valves and tubes 2.56 4.77 2.04 8.39 Accumulators, primary cells and 2.04 4.00 1.64 7.55 primary batteries

Source: INDSTAT 4, UNIDO

EXPORT PROMOTION SHOULD BE A CONSCIOUS POLICY AGENDA FOR INDIA IN ORDER TO EXPOSE THE INDUSTRY TO A MARKET DISCIPLINE THAT CAN PROMOTE PRODUCTIVITY, COST EFFICIENCY AND PRODUCT DEVELOPMENT

as these industries supply intermediates to most consumer goods sectors.

Currently, India’s manufacturing exports are dominated by low technology intensive manufactures, which account for almost 50%. We should consciously upgrade to medium and high skill products. This would not be possible if a fractured value chain exists. The focus should be on critical intermediate goods industries like electronics, chemicals and machine tools.

To sum up, while learning from the experiences of China and ASEAN countries, India should develop its own policy framework that is line with the right fundamentals and context. The policy outcomes need to be carefully monitored. Make In India and Skill India are conceptually good programmes, but there should be greater compulsion towards developing manufacturing capability in India as opposed to just assembly. A serious introspection is necessary on this front.

Dr. Sunitha Raju is a Professor at IIFT. She has 30 years of extensive experience in Education, Research, Policy formulation and Evaluation. The views expressed in this column are her own.