Making India Inc angry
R Gopalakrishnan, exectutive director, Tata Sons, dissects the challenge of making India the manufacturer to the world from the managerial viewpoint
India cannot accelerate GDP growth through dominant reliance on services. India definitely needs to leverage its opportunities as a manufacturing powerhouse with a wide employment, skill and income base emerging out of it. Economists and consultants speak about manufacturing with complex charts and statistics! I would like to bring a managerial perspective to the subject.
The societal dimension
Eric Hobsbawn points out that it is rightly assumed that an economy of private enterprise has a bias towards profit rather than innovation. It will revolutionise manufacturing only if greater profits are to be made in this way than otherwise. Even in pre-industrial Europe, the available and prospective customers for manufactures consisted of the rich who required goods in small quantities. This required the manufacturer to have high profit margins. Thus the middling sort of customers were kept out of the market through a self-fulfilling logic of small volume, high prices, narrow customer base. A millionaire in mid-19th century France, which at that time was not very industrial, expressed this sentiment. "There are three ways of losing your money - women, gambling and engineers. The first two are pleasanter, the last is much more certain." Industrialisation changed all that because private enterprise could not act in a manner that advanced its markets and consequent profit opportunities.
When Henry Ford produced his Model T in 1906, he also produced what had not existed before, namely a vast number of customers for a cheap, standardised and simple automobile. When Karsanbhai Patel produced Nirma in 1971, he created middling customers for a more convenient and cheaper clothes wash than the then available laundry bar soap. When the Tatas produced the diesel Indica in 1999, a segment of car owners was created who could take the family out on four wheels for a fuel cost per kilometre that was only two-thirds of the most inexpensive car in the market. Put another way, you could drive your diesel Indica for a fuel cost per kilometre of taking out two-and-a-half motorcycles. That is five wheels in all, whichever way you view it!
In my experience, there is a positive tension between manufacturing and marketing. Notwithstanding that, my somewhat contrarian view is that India can accelerate manufacturing growth only through a focus on markets and marketing. Generically, domestic and export markets grow due to four reasons:
All these four conditions are available to Indian manufacturers. What is lacking is the social milieu and the mindset - among government, industry, economic planners. We need a market expansion mindset. This mindset issue is reflected in the statistic that the contribution of manufacturing within GDP is lower in India than other developing countries.
Over the last 20 years, from 1979 to 1999, manufacturing contributed just 16-17 per cent to national GDP. The corresponding figure is higher for Mexico, Philippines, Malaysia, China and so on. In several cases like Thailand, Malaysia, Korea and China, the percentage is increasing over each decade.
The productivity issue
In the post-war period, growth rates of industrial output in developing countries exceeded those achieved by developed countries at their corresponding stage of development which was the turn of the last century. Thus, there has been compression in the timeframe for industrialisation among the developing countries. This has been attributed to government intervention, particularly during the 50s and 60s, through policy measures such as import substitution, public investment, development of heavy industry, etc. India's experience has been both similar and dissimilar. India too saw significant government intervention. But India's industrial growth rate was lower than peer developing countries. More importantly, whether it was the NICs of East Asia or the developed countries at their corresponding stage of development, their industrial growth was accompanied by productivity growth, thus shifting both output and employment towards the industrial sector. This has not been the case with India. Manufacturing can have a positive role in our economic growth only if it can achieve a simultaneous growth in productivity. If this has not happened in our case, one reason could be our mindset that is obsessed with production more than with productivity.
Post liberalisation, India faces a tough challenge - there is no doubt about that. Today, a decade after the first flush of economic liberalisation there is a healthy debate going on about increasing levels of productivity in Indian manufacturing; about achieving international levels in cost and quality. Issues that are being scrutinised range from improving efficiencies, cutting costs and putting assets to better use to take on foreign competition and very importantly offer better products and services to domestic consumers.
If we just look at productivity, you will find that no clear pattern emerges from all the studies that have been conducted so far. One study based on ASI data covering a period of 26 years (1973-74 to 1997-98) for the manufacturing sector points to an improvement in TFP, which increased at an annual rate of 3.7 per cent in the period under review. An IMF study points out that labour and TFP growth during the 1980s were higher vis-à-vis the preceding two decades and productivity growth for manufacturing and many of its segments accelerated during the 1990s. Yet another study taking a contrarian view indicates a barely positive or even negative TFP growth rate for Indian manufacturing over a period of 16 years (1980-81 to 1996-97). This may not be surprising. If all of a sudden we had managed to improve the productivity of the aggregate Indian economy in the last 10 years when we have not been able to achieve it in the last 50 years, we would be geniuses!
Whenever we speak of manufacturing growth and enhancing productivity, our tendency is to harangue the government. The belief is that productivity will improve only after policy makers undertake reforms in the areas of transport, infrastructure, power and so on. However, we need to get on with our actions without waiting for government, we need to look inwards at the firm level. Two thoughts:
It is also necessary that in the manufacturing industry clearly articulated criteria must exist to pre-select the potentially competitive industries for the country. As the Indian manufacturing sector restructures and imbibes newer technology, it is becoming less of an employment generator. Hence, certain propeller industries which have natural advantages, multiplier linkages and ancillary employment, can be identified and strategically promoted - like the automobile industry, food processing, pharma, textiles, leather, etc. Promotion of such sectors would fulfill the twin aim of enhancing India's share in manufacturing export and promote employment. For these pre-selected industries, it is obvious that a planned and calibrated development strategy will be required as already indicated.