India, like the US, has now realised that the services industries and government jobs do not increase wealth—they just circulate money. Manufacturing creates wealth because it uses knowledge and labour to add value to low cost materials, creating innovative products of much higher value
For me, the launch of ‘Make In India’ on September 25, 2014, was a gift on my eightieth birthday, especially since my team and I have so far spent 54 years of those in manufacturing high tech products based on Indian research and development (R&D). I know what a struggle it has been! Producing world class products has always been engaging, challenging and enjoyable, but dealing with the complex tax regime, problems arising out of flawed policies, labour laws and nagging corruption dampens the enthusiasm and takes a toll on operational efficiency.
Post the 1991 period, for 23 years, it was especially harrowing for India’s manufacturing sector when millions of manufacturing units had to pull down their shutters and millions lost their jobs. Luckily, however, during this period, a whole lot of tenacious manufacturing units also managed to survive in spite of political apathy, industry-unfriendly laws and the complex tax regime, to name just a few handicaps. Added to that were the bureaucratic extortion practices that lined civil servants’ pockets. This led to industry losing profits and the government its revenue. However, I still see great potential in manufacturing, unlike the services sector, since the former creates some real wealth using manpower of all types. For millions of technical entrepreneurs like me, the ‘Make in India’ launch has therefore created fresh hope.
In 1992, when I was in Delhi heading the panel to privatise the electronic media, I recollect complaining about the neglect of the manufacturing industry to the then prime minister Narasimha Rao. I told him that India should remember that 40 years earlier, the US was the world’s largest creditor nation but was by then (in the early 1990s) increasingly becoming one of the biggest debtor nations just because it had shifted manufacturing to the Far East. I told the PM that real wealth was being created in South Korea, Taiwan, Hong Kong and China. My words made no impact on him, but today, huge debt is a reality both in the US and in India.
It took a change in the government at the centre for India to realise that manufacturing can be its foundation of economic growth and for creating livelihood opportunities for its working lower middle class and the poor citizens. ‘Make in India’ is the result of this recognition, giving a fresh chance for the rebirth of manufacturing again, after it was completely sidelined in 1991. For many reasons, this vital focus for building a strong economy was indeed long overdue.
The current prime minister has begun with the big fish, attracting and encouraging foreign multinationals to manufacture their wares in India. This remarkable ‘India’ salesman has relentlessly travelled across the world leaving no country of consequence uncovered. In terms of making a political and economic impact, this focused effort was an essential prerequisite to attract the attention of multinationals to the opportunities in India, aided by the promise of encouraging policies.
Within a year, India has had several foreign companies announcing manufacturing plants in India. Mobile phone manufacture, due to its huge home market, has been the most popular, with the Spice Group, Xiaomi, Motorola, Flextronics, Lenovo, Winstron, Blackberry, HTC, Vivo Mobile, etc, announcing their local production plans. Micromax is investing to set up three more manufacturing units. Foxconn is investing US$ 5 billion to set up an R&D centre and semiconductor fab near Pune. Hitachi will manufacture large auto parts, while Boeing will come here to make fighter planes and helicopters. GE Alstom plans to make locomotives worth Rs 400 billion. Japan is creating a US$ 12 billion fund for ‘Make in India’ projects. In the defence sector, HAL will make parts for fighter aircraft and build Kamov Ka-226 multi-role helicopters, according to a Russian government announcement. Indeed, this is a very promising start in terms of attracting foreign multinationals. I hope it works.
However, I am concerned that not enough attention is being given to our existing Indian manufacturing industry, especially the SME sector. It is time to take the next step soon. Amid the above announcements of big brother entries, most of the existing Indian manufacturers and entrepreneurs are feeling left out. For them, the ease of doing business is nowhere in sight, though there is optimism that soon they will also see some sharp changes. GST is indeed the most important one in order to improve manufacturing efficiency. All Indians hope that the political opposition, led by the Congress, sees the light and lets GST happen.
Indian industry, though weakened, is large even today and can be rather quickly turned into a fast-growing sector that will attract investments. Two-thirds of the 45 million SMEs are in manufacturing, making products that range from traditional to high-tech. Eight million others are ancillaries, providing outsourced processing services. Today, this sector employs over 100 million people, and that number will grow very rapidly creating employment opportunities for people with skills, the unskilled and even those who missed their education. Even today, 46.5 per cent of the country’s manufacturing output is from the SME sector, contributing about 9 per cent to our GDP and accounting for over 40 per cent of exports.
SMEs are looking forward to their turn. Multinational entry is glamorous and politically useful for the state politicians in power. But sadly, the SME sector lacks such political backing. Even the ministry of MSME gets overshadowed by the industry, commerce and finance ministries.
A change for the better should start by carefully understanding from successful SMEs where the problems are, or where the shoe pinches. Entrepreneurs managing successful SMEs, especially those exporting, need to be consulted instead of state bureaucrats manning industry portfolios. A study has proven that many schemes designed by these bureaucrats have not helped most SMEs. The best solutions will evolve out of the feedback from successful SMEs managed by entrepreneurs. I hope politicians in power change policies on the advice of such leaders from the SME sector. For instance, charging excise duty on industries that process, do outsourced fabrication or assembly work for big industry and then allowing large ones to get a set off, makes no sense whatsoever. New policies should be based on trust and the annual audit reports of industrial units. Most important, the inspector raj, which is the main reason for corruption and operational hassles, should end. SMEs need quick access to raw materials, finance at affordable interest rates and income tax incentives based on full time employment created per crore of their turnover. Such income tax concessions will essentially benefit only those who make profits. SMEs are a crucial cog in the manufacturing sector and they need very careful attention.
Many renowned economists these days recognise that product design and manufacturing are the real way to creating wealth. In the US, economists have realised that the US focus on increasing consumption has just increased consumer debt. It did not create wealth. In short, it has led to consumption of wealth, without replacing it.
Gainful use of raw materials, labour and knowledge in manufacturing is indeed the only way to create wealth. It is further helped by the productive use of innovation and enterprise. No country knows more about the power of manufacturing than the US with its history of growth in manufacturing in the 1950s to 1970s.
India, like the US, has now realised that service industries and government jobs do not increase wealth —they just circulate money. Manufacturing creates wealth because it uses knowledge and labour to add value to low cost materials to create innovative products of much higher value. Mining and manufacturing, too, create wealth for the same reasons.
On the other hand, the use of technology in the services sector will continue to eliminate jobs. Watch what the online market will do to retail employment over the next few years. After all, labour is a vital component of wealth creation in manufacturing. Its value will increase with education and training. Knowledge and innovation are also the key ingredients for productivity and wealth generation.
This is the Knowledge Age. One can see how knowledge is replacing materials in the continuously shrinking sizes and weight of products while improving their utility. Educated Indians are already beneficiaries of knowledge-based IT work that has been coming to India since 1998. However, regrettably, it is limited to providing pricy labour hours. Enterprise and innovation, which are essential to make software products like Windows, SAP, etc, are missing. Developing software products is like manufacturing, but far more profitable since the sale of software packages is then a product sale with zero raw material costs! What India should strive for is innovation in providing the highest-quality, lowest-cost labour. Our advantages over China are just two—knowledge of the English language and low wages. Eventually, our manufactured goods should dominate foreign trade.
Worldwide, 75 per cent of all research and development is done by the manufacturing industries. That is where we will need well trained hands-on engineers to create modern products and production methods. Manufacturing needs not only skilled workers, but also others without college degrees or even with no education. Bright brains and education are not related.
Designing innovative products and manufacturing them in India is the only way to create new wealth since it transforms raw materials into useful products people need. Goods manufacturing and agriculture create new wealth. The quantum of wealth generated depends on the design, innovation and uniqueness of technology. Since the 1980s, white collared business school educated experts and the moneyed class have felt otherwise and made the world consumption-centric. A number of European countries ignored manufacturing and followed that advice, and are today second- and third-rate powers in the world. England, France, Italy and others were strong and prosperous until they abandoned wealth creation and became societies consuming imported goods.