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Thursday, May 26, 2016

For 'Make In India' To Work, India First Needs To Become Globally Competitive

By LIKHAVEER | INNLIVE

A survey of industrial clusters in four states shows Prime Minister Narendra Modi's big idea isn't exactly working.

Bhoday Sales Corporation is tucked inside the industrial zone of Ludhiana. A small machine tooling factory with a net worth of not more than Rs 10 lakh, it makes manufacturing equipment for other plants in the city.

Of late, it has fallen on bad times. Sales are down. At one time, says its founder, 68- year-old Maan Singh, the company used to make four power presses a month. It now makes one a month.

Bhoday is far from being the only company that is struggling in Punjab. A story published last December in INNLIVE reported industrial units across the state – steel plants in Mandi Gobindgarh, sporting goods manufacturers in Jalandhar, textile units in Amritsar, bicycle-makers in Ludhiana – were shutting down or relocating to other states.
A similar narrative is visible in industrial hubs in three other states that Scrollsurveyed.
About 80 kilometres from Delhi, in Rajasthan’s Bhiwadi Industrial Area, hardly any new units have come up since 2014. “Instead, a hundred units have shut down in these two years,” said Brij Bihari Kaushik, the president of the Bhiwadi Manufacturing Association.
In Kalunga Industrial Area on the outskirts of Rourkela, one of the central steel-making towns of Odisha, Subrata Patnaik, the secretary of the Rourkela Chamber of Commerce and Industry said, “Out of 50 induction furnaces, 40 are closed.”
Further south in Coimbatore, one of the prime industrial towns of Tamil Nadu, the manufacturers of groundwater pumps said the volume of business has fallen by 20%-30 %in the last 3 years.
These are puzzling trends. Between them, these industrial clusters in Punjab, Rajasthan, Odisha and Tamil Nadu house a range of manufacturing industries. Some of them export what they make. Others live off domestic demand. And yet, each of them has the same story to tell – of slowing business and shuttering units.
Try and understand why and you arrive at the fundamental limitation of the "Make In India" programme.
The proposition:
"Make In India" is one of the cornerstones of Prime Minister Narendra Modi's blueprint for the country.
You know the backstory. Manufacturing growth has been slowing down in India. Between 2007 and 2012, it grew by just 7.7%, far below the targeted growth rate of 10%-11%.
This is a concern because India needs a robust manufacturing sector not just to boost economic growth but also to provide employment to the country's burgeoning population.
In the next 15 years, an estimated 250 million people will join the labour force. With agriculture in decline, India needs the manufacturing sector to step in and create a lot of jobs.
Accordingly, after coming to power, the Modi government launched its "Make In India" programme. Similar to the National Manufacturing Policy proposed by the previous Congress-led United Progressive Alliance government, it seeks to make India grow like China by producing goods for external markets. Among other things, the government has eased the process of regulatory approvals for setting up manufacturing units in India. This export-driven push, claims the government, will create 100 million jobs and boost the manufacturing sector's contribution to India's GDP to 25% – up from the current 17% – by 2022.
Two years down the line, the programme is snared in conflicting claims. The government claims it is doing well. In a speech in February, Modi said: “When we started the Make in India campaign, manufacturing growth in the country was 1.7%. This year it has improved substantially. In the current quarter, manufacturing growth is expected be around 12.6%.”
But a visit to industrial clusters across the country shows de-growth – not growth.
What explains this?
The immediate factors vary from state to state, cluster to cluster. But taken together, they raise a large question about the competitiveness of manufacturing in the country, and whether companies will Make in India if these issues are not addressed.
Punjab:
Businesses in the state are struggling to compete with cheaper competition from units in other Indian states or in China.
Jalandhar was once the global hub of sports goods manufacture, specialising in inflatables, the industry term for volleyballs, basketballs, footballs, beachballs and the like. That has changed with the entry of China. Said Vipan Mahajan, the head of the local sporting goods manufacturers' association, “We produce at $2 and they, at $1.50. How do we compete? Today, 90% of the market is theirs.”
Why is Punjab costlier? Partly, because of its location. Both raw materials (like iron ore for its steel plants) and ports (for exports) are more than 1,000 kilometres away.
At the same time, the cost of doing business from Punjab is rising. The state government is cash-strapped. In a bid to mop up additional revenues, it has tacked additional charges like a cow cess, infrastructure cess, electricity duty and octroi on to power bills. The cost per unit of power in Punjab has risen to Rs 8 – much higher than in neighbouring states. The state also imposes higher taxes on industry. A letter by the Mohali Industries Association says LED manufacturers in Punjab pay a value-added tax of 13.5%. In contrast, their rivals in neighbouring states pay 5.5%.
The final straw, say manufacturers, is the predatory extraction of the ruling Akali Dal. A businessman, who wanted to set up an atta (flour) factory, alleged that the party asked him for a 3%-4% chunk of his turnover. “My margins will be 10%-15%,” he said. “Three per cent-4% was too high.”
All these factors are making it harder for units in the state to compete with their peers elsewhere. Larger companies are relocating. Smaller ones, like Bhoday, are struggling to stay afloat.
Tamil Nadu:
Coimbatore has a different story to tell. The city’s industrial cluster of micro, small and medium industries (collectively called MSME) is yet to recover from the crippling power shortages that the state faced seven years ago.
In nearby Tirupur, the cotton yarn producers are facing a raw material crunch. Over the years, cotton production in Tamil Nadu has severely fallen. Facing labour shortages, cotton farmers have moved to plantation crops like coconut, or converted their farmlands into residential plots. The fallout? The industry now gets barely any cotton from the fields around it.
Said S Sakthivel, executive secretary, Tirupur Exporters Association, “Our demand for cotton bales is 110 lakh tons but what is locally available is just 5 lakh tons. Most cotton is now produced in Gujarat, Madhya Pradesh and Maharashtra, which means we have to import as much as 100 lakh tons.”
Trucking in the bales all the way from Gujarat adds as much as Rs 8 per kilo to the costs of yarn-makers. It is harder for them (and their buyers) to compete with spinning mills coming up in Gujarat and Maharashtra, not to mention the ones in China, Bangladesh and Vietnam.
Odisha:
Steel plants in the state have been are struggling for a long time. Their troubles started when India began exporting raw iron ore to China in the run up to the Olympics last decade.
“It was a mistake to allow the export of ore,” said the head of a steel plant in Rourkela, who argued that India should have used the ore to raise its domestic steel production. “Instead of making Rs 4,000 per ton exporting ore, we could have made Rs 45,000 per ton exporting steel,” he said. That would have made domestic manufacturers more competitive and created a more robust industrial economy in the state. But instead, he said, the state saw a “silent accommodation of mining interests”.
More recently, as the price of steel in China fell, Indian steel companies prevailed upon the government to impose import tariffs. This meant the small and medium enterprises that require steel were unable to capitalise on the low import prices. “If I am a furniture shop making almirahs, the product gets costlier,” said a businessman who runs a company that cuts and shapes sheet metal for other industries in Coimbatore.
Diminishing competitiveness:
What is common to these industrial clusters is the loss of competitiveness. This is where the failing of the "Make In India" campaign lies. While it eases the regulatory process of setting up businesses in India, it doesn't do much to make manufacturing in India globally competitive.
The impediments go beyond issues like poor infrastructure. Political risk is an especially large factor. As mentioned earlier, in Punjab, the ruling Akali Dal, which has the Bharatiya Janata Party as an alliance partner, is extracting rent from industry and overcharging for power.
In Tamil Nadu, despite a looming power shortage, businessmen complain the ruling All India Anna Dravida Munnetra Kazhagam went slow on tapping alternative sources of energy. They say the state has dragged its feet on connecting already-installed windmills to the state powergrid. Said a Coimbatore-based businessman, who did not want to be identified, “The centre has a good idea [Make In India] but unless the state cooperates, they cannot do a thing.”
Other factors – seemingly unrelated to manufacturing – also impact the "Make In India" programme. Take Coimbatore's groundwater pumpset industry and Tirupur's textile units. For both to revive, agriculture has to be saved first. This is possible only when governments start taking climate change, water availability and agricultural prices more seriously.
To make Odisha’s steel makers globally competitive, state and central governments have to stop valuing the profitability of some companies over others.
Such factors go far beyond the limited imagination of the "Make In India" programme.
Shrinking industry:
In the absence of meaningful steps to boost India's manufacturing competitiveness, we are seeing two trends. First, industrial production is shrinking in the country. Second, large manufacturing units in distressed industrial enclaves are setting up their expansion units in other states.
For instance, an official at Nahar Industrial Enterprises, which used to manufacture cotton yarn, garments and woollens in Punjab, reported that the company now makes 40% of its yarn and denim in Madhya Pradesh. Similarly, steel plants in the state are shifting to the country's mineral belt, and cycle makers and other companies are gradually shifting production to states offering them tax sops.
This is a weak solution to the problem of India's diminishing competitiveness. While relocating production in India will improve a unit's competitiveness within India, it probably isn't enough to make a firm globally competitive.
A garment manufacturer in Tirupur said his competitors in Vietnam are twice as efficient. “The only reason we continue to get business," he explained, "is because our clients don't want to be too dependent on any one country for their production.” He is planning to relocate some of his units from Tamil Nadu to the industrial cluster of Sri City in Andhra Pradesh, just to make sure he is not the costliest supplier from India to his buyers.
At the same time, while larger units can relocate, smaller ones cannot. Take Bhoday's Maan Singh. When Scroll met him last year, we asked if he too was planning to relocate. “Companies with money can relocate,” he said. “They can buy land elsewhere and start up again. But we cannot do that."
"Why will our customers follow us to the new place?” he added. "All of them come to Ludhiana. Most machine tooling factories are here."
This is creating an outcome where – even if the larger units survive – the smaller ones are shutting down.
What it means for labour:
Diminishing competitiveness is also changing India's labour markets. There is rising migration, outsourcing and dependence on casual labour. Said Sikandar Saini, an instructor at an Industrial Training Institute in Bhiwadi, “60% workforce in even the biggest factories like Maruti, Honda, Hero is now in thekedaari [contract] system." If the large units use contract workers, the smaller ones will follow suit, he said. "Workers want to write to Modi, that if you cannot ensure job security like before, at last improve wages and work conditions for contract workers,” he said.
In Tirupur, in recent years, local workers have been replaced by cheaper migrant workers from Bihar and Odisha. Simulatenously, factories have outsourced production to contractors who farm out the work (like stitching, embroidery, washing) to families who work from their homes and get paid on a piece-rate basis.
Both measures come with their own complications. Not only does outsourcing create more uncertain economic lives for workers, it can also work out more expensive for companies in the long run. As Brij Mohan Mittal, a businessman in his sixties who owns a forging unit in Bhiwadi, said: “Illiterate workers damage machines.” As for outsourcing, that brings in concerns about quality control.
In the small industrial units, workers are hit even harder. Unable to relocate, the units try and stay afloat by doing away with labour. In Ludhiana, Maan Singh's Bhoday has let go its staff. “We don’t have labour. We are not able to pay more than Rs 6,000. Khud kaam kartey hain to nikalta hai." We can make ends meet only if we do the work ourselves.
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