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A REVIEW OF EXPORT LED GROWTH AND CONSTRAINTS ININDIA WITH SPECIAL REFERENCE TO MANUFACTURING

SECTOR

Dr. Himanshu AgarwalAssociate ProfessorFaculty of Commerce and Business Administration,D. N. (PG) College, Meerut (UP)

AbstractEconomists across the board have agreed with the opinion that the process of economicgrowth is an extremely complex phenomenon. It depends on many variables, such as, capitalaccumulation (both physical and human), international trade, price condition, politicalsituation, income distribution, and even more on geographical factors. Export-led growthpostulates that export expansion is one of the prime determinants of economic growth. Theoverall growth of countries can be generated not only by increasing the amounts of labourand capital within the economy as the classical economists postulates, but also by expandingexports to wider markets. According to the proponents of ELG, exports can perform thefunction of an ‘engine of growth’. The association between exports and economic growth isoften attributed to the positive externalities for the domestic economy arising fromparticipation in world markets, for instance, from the re-allocation of existing resources,economies of scale and various labour-specialisation effects. The Export-Led Growth is aninteresting subject of research in the field of applied economics. This paper investigates thelinks between exports and output growth in the review framework of the Indian economy.Furthermore, the findings suggest a strong and consistent causation from output growth toexport performance in the long-run.Keywords: Export Led Growth, Economic Growth, Constraints

INTRODUCTIONPhysical and human capital accumulation, international trade, price conditions,

political situation, income distribution and geographical differences are some variables ofIndian Economy that gave a complex attitude to the process of economic growth in India.These variables could be suppressed effectively if the prime determinant i.e., export’sexpansion was looked after carefully. A number of countries have achieved better percentileof GDP growth by exercising Export Led Growth model of economic development. Thisway, it can be said that the overall growth and development of the economies can begenerated not only by increasing the amounts of labour and capital within the economy, butalso by enhancing exports to wider markets. The economic growth through the exportexpansion may, also, prove to be an engine of growth for a developing nation like India.

Therefore, it is urgently required in India to establish such a system in an effectivecombination with the present traditional agriculture-oriented-economic-development modelthat can contribute to quality-production, suitable and comfortable employment to theunemployed Indian youth and generation of foreign currency for correcting present economicposition of the country. This all can only be achieved by adopting a rigorous export ledmanufacturing industrial base. Japan, China, Korea and Finland are such countries who havebased their economies on export led manufacturing industry.

Manufacturing industry is the base for an economy that helps to better achieveeconomic growth, sufficient employment generation and to innovate agriculture and servicesector. It is not so that manufacturing sector in India is not sustaining growth. Recently,

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Indian manufacturing sector has witnessed spectacular growth after a slowdown in thenineties. The manufacturing industry has taken quick steps in India mainly because thecountry meets the key requirements of skills in resources, raw materials and processes. Thecheap technical and non-technical manpower available in abundance in India has attracted ahost of foreign collaboration in every conceivable sector.

This way, with more diversification and better availability of skilled & unskilledmanpower, effective raw materials usage and modern machinery, Indian manufacturingindustry can compete in global markets and provide better GDP results becausemanufacturing is inextricably linked with other sectors of economy. It acts as a barometer ofthe overall health of the economy, the progress or downturn of manufacturing has a cascadingeffect on all other sectors of the economy.

Although, the overall factors show good potential within India but it is nowhere nearChina and its other contemporaries in becoming a global manufacturing hub. No other nationproduces as many engineering graduates every year as India does. The huge domestic marketalong with the globalised economy created the right investment climate. India is now gettingrecognized for high value goods requiring engineering precision and quality. Be it mobilephone industry or automobiles, consumer durables or engineering products, luxury brands oraircraft industry, major global players are all eyeing India. Nokia, Samsung and LG havealready set up manufacturing plants in India. Some other firms are expected follow suit. The

cases of Ford India, Hyundai and Suzuki are no different.India is slowly emerging as a significant player in the aerospace industry. This has

thrown up excellent opportunities for aerospace goods and services. There are avenues forcollaboration and creation of joint ventures for establishing Maintenance Repair Overhaul(MRO) facilities for aircraft, aero engines and production of avionics, components andaccessories. Tapping this new opportunity in a big way can yield substantial benefits forIndian economy.

This way, the present paper reviews export-led-growth opportunities and presentconstraints in manufacturing sector in India.

Figure 1: India’s Growth Statistics

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OBJECTIVES OF THE STUDYThe study has the following objectives:

1. To review the manufacturing industry in India as a conceptual framework.2. To analyze the effect of exports on the overall economic development of the country.3. To review the export led growth potential of India and to identify future possibilities.

METHODOLOGY OF THE STUDYThe secondary source is used to gather data in the present study. Secondary data

gathered through reliable and authentic government offices, agencies, organizations, surveyreports, private studies, websites, journals, news papers & annual reports. Research design isdescriptive by nature. The study was conducted following the methodology as under: Collecting, sorting and analyzing secondary information relating to manufacturing

industry and its exports; Collecting, analyzing, reviewing and assessing secondary information relating to recent

economic growth of some selected countries like china, Korea, Mexico, Japan andThailand;

Output on the basis of the findings and evidences and Incorporation of comments andimprovement proposals made for further research.

REVIEW OF LITERATUREFor the last two decades, there has been massive resumption of economic growth

literature triggered by the ‘endogenous growth theory’, which has led to the propagation ofmodels that stress the importance of trade in achieving a sustainable rate of economic growth.These models have focused on different variables, such as, degree of openness, real exchangerate, tariffs, terms of trade and export performance, to verify the hypothesis that openeconomies grow more rapidly than the closed ones. Although, most models emphasized thenexus between trade and growth, they stressed that trade is only one of the variables thatenter the growth equation. However, the advocates of the ELG model have stated that trade,in fact, was the main engine of growth in Southeast Asia. They argue that, for instance, HongKong, Taiwan, Singapore and South Korea, the so-called Four Tigers, have been successfulin achieving high and sustained rates of economic growth since the early 1960s because oftheir free-market and the outward-oriented economies. The literature concerning therelationship between trade and growth is also the consequence of the many changes that havetaken place in the fields of development economics and international trade policy.

Among earlier major empirical studies, Emery (1967), Syron and Walsh (1968),Heller and Porter (1978), Bhagwati (1978) and Krueger (1978) can be mentioned. Thesestudies explained economic growth in terms of export expansion alone in a two-variableframework. That is, they used bi-variate correlation - the Spearman’s rank correlation test - incross-country format to illustrate the superior effects of the ELG hypothesis (Lussier, 1993).A second group of researchers, which includes Balassa (1978), Tyler (1981), Feder (1982),Kavoussi (1984), Ram (1985, 1987) and Moschos (1989) studied the relationship betweenexport and output performance within a neo-classical framework. In most of these studiesexports were included in an ad hoc manner in the production function, together with labourand capital. They claimed that by including exports they were taking into consideration abroad measure of externalities and productivity gains generated by this sector whichstimulated the domestic economy.

The paper has reviewed some of the representative literature in the area oftechnological structure and performance of developing countries in manufactured exportssince 1990s. In the developing countries, comparative advantage is changing from the

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traditional base of primary resources and cheap unskilled labour to manufactured productsand services incorporating higher skill and technological inputs. The export performance ofdeveloping countries are changing at different rates and in different directions; some arerapidly expanding export earnings and raising their ‘quality’ (shifting export structures fromlow-technology, low-skill, and largely labourintensive products to high-technology and high-skill products) and others are stagnating in terms of both export earnings and quality Lall(2000). This move or progression of developing countries from traditional to non-traditionalexports seems justified when one looks at the benefits conferred upon by their exportdiversification. As noted by Samen (2010), by providing a broader base of exports,diversification can lower instability in export earnings, expand export revenues, upgradevalue–added, and enhance growth through many channels. These include:

improved technological capabilities via broad scientific and technical training as wellas learning by doing, facilitation of forward and backward linkages within output of someactivities which then become input of some other activities; increased sophistication ofmarkets, scale economies and externalities, and substitution of commodities with positiveprice trends for those with declining price trends.

As for India’s manufactured exports, Kumar and Palit (2007) point out that the latestexport figures point unambiguously to a slowdown in India’s merchandise exports. Hisanalysis revealed strong deceleration in growth of manufacturing exports net of petroleumexports during the period 2004-07. In fact based on India’s share in world manufacturingexports, which showed a less than 1 percent increase during 2000-2009, Mukherjee &Mukherjee (2012) noted that India’s manufacturing sector’s exports have had a minimalimpact on global scale. Evaluating India’s export performance Mukherjee & Mukherjee(2012) finds that India is still a very small player at global level especially in knowledgeintensive and advanced technology products. According to him the main challenges for Indiafor emerging as a hub for manufacturing exports are the low level of R&D and scarcity ofskilled personnel. Other impediments to the realization of transition to mass manufacturing,essential for generating the required employment opportunities, are inadequate infrastructure,entry and exit barriers and low volumes of foreign direct investment.

Further, Lall (2000) said, “Low technology products tend to grow the slowest andtechnology intensive products the fastest.” Lall (1999) study on India’s manufactured exportsconcluded, “A comparative analysis of Indian manufactured exports suggests that theirstructure and positioning are not suited to sustained growth. The base for rapid structuralchange—through FDI or domestic capabilities—is weak. The current export slowdown inIndia reflects external conditions and may end soon; however, this does not assure rapidfuture growth.” Lall (2000) illustrates the growing role of technologically advanced productsby patterns of world trade in manufactured products. He observed the Asian share is highestin high technology products (89 per cent) and lowest in resource based products (65 per cent).In addition, at the country level, only thirteen – the four mature Asian Tigers, four new Tigers(Indonesia, Malaysia, Philippines and Thailand), China, India, and the three large LatinAmerican economies – account for over 93 per cent of manufactured exports fromdeveloping countries. He also observed the significant differences in national patterns ofspecialization such as Philippines, Singapore, Malaysia, Mexico, Korea and Taiwan havevery high (over 60 per cent) shares of advanced (high plus medium technology) products intheir manufactured exports, while India, China, Indonesia and Argentina are the technologicallaggards (with shares of below 40 per cent). With regard to developing countries’ share inmanufacturing exports and high tech exports Mani (2000) showed that developing countriesare increasingly becoming exporters of manufacturing products. The share of manufacturedproducts now account for very nearly threequarters of total exports of these countries. Theshare of developing countries in the total world exports has also been increasing. The analysis

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reveals that export structure of developing countries is increasingly moving towardstechnology-intensive products like capital goods. However, he concluded that while share ofdeveloping countries in high tech exports is very high it is highly concentrated in fivecountries or so.

Desai (2011) focuses on India’s changing structure of technology intensive exportswhich has witnessed a rapid growth an increase in their share compared to low-tech ormedium tech exports in international trade since liberalization. The structural change inexports as well as technology intensive exports is quite striking suggesting the fact thattechnology intensive products are drivers of export dynamism. He added, “India is noexception to this and has demonstrated a sharp increase in the technology intensive productsas percentage of manufactured exports in the recent period.” He observed that low incomecountries concentrated on low-tech exports while concentration of high-tech exports occursalong high-income countries. This phenomenon has some exceptions in countries likePhilippines, Singapore, Malaysia, Indonesia and China where the share of high-tech exportsas percentage of manufactured exports is equivalent or much higher than many of the high-income countries. He mentioned that India largely pursued import substitution policies andhence largely biased against exports till early 1990s. He added, “In the 1950s exports wereneglected and while there were conscious attempts to promote exports in the 1960s, anoverwhelming portion of traditional exports were neglected and a narrow range ofmanufactured exports was subsidized that

Lall (2000) prevented development of any new, dynamic and technology intensiveproduct exports.” Liberalization provided opportunities for technology capacity building inhigh-tech sectors like automobile, pharmaceuticals, computer hardware and resource basedtechnologies like leather (Desai 2011). During the years 2008-10, an upswing has beenobserved in India’s exports of high-tech manufactured goods. The share of high-tech thathovered around five percent between 1990s and till recently has suddenly jumped to ninepercent of the total manufactured export (World Bank, 2011).14 Desai (2011) estimated thetrend of technological intensive exports which shows that between the years 2002-03 and2007-08, the proportion of low-tech export declined from 66 to 56 percent. As against this,the share of medium and high-tech rose to 30 from 22 and from 7 to 14 percent respectively.He concluded that “India might require greater level of coordination and policy interventionsto translate the technological capabilities into higher level of high-tech exports by takingadvantage of expanding markets in this sector.” Aggarwal (2001) using ‘Tobit Model’analyzed that India’s competitive advantages still lie in low-tech sectors. The results alsosuggest that in technology based sectors own technological capabilities of firms are crucialdeterminants of export performance of firms. It was also found that the export performance offirms was linked strongly with firm size and imports of raw materials and components inalmost all technology groups.

Kumar and Pradhan (2007) observed that Indian manufacturing has not changedsignificantly with three-fifths of manufacturing value added still contributed by low- andmedium-low technology intensive industries. According to Meyer (2007), India’s prominentposition as an offshore hub for IT and IT based business services does not translate into ageneral specialization in sophisticated products.

In fact, India’s share of high-technology manufacturing exports is markedly belowthan that of other countries. Only 2.8 per cent of India’s total exports are classified as hightechnology against China’s over 19 per cent. Desai 2011, “Export Innovation System:Changing Structure of India’s Technology Intensive Exports,”

The study very well recognizes that share of high tech products in exports is notnecessarily associated with indigenous technological capabilities as pointed out by Srholec(2005). This issue was also highlighted by Lall (2000) who suggests that a significant part of

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the high-tech industry outbreak in developing countries might be "something of a statisticalillusion", as they specialize in labour-intensive processes within high-tech-intensiveindustries. Similarly, Mayer et al. (2002) also noted that the rise in high-tech exports fromdeveloping countries is largely because of their increased participation in labour-intensivesegments of high-tech electronics in the context of international production sharing. Despitethese reservations, however, this study focuses on the structure of exports without furtherconcerns.

OVERVIEW OF INDIA’S MANUFACTURING SECTORExport oriented Manufacturing industry has contributed the rapid growth to many

emerging economies like China, Korea, Japan, Thailand, Finland and Mexico. The historicaldata of Indian economy show that there has been a variation in the performance ofmanufacturing industry in India. Since, the last slow down of Indian economy, themanufacturing industry has showed a good achievements. However, it cannot contribute thethought-over results to India’s growth chart. Even, it can also not shift idle agricultural labourto industrial sector. Currently, India’s manufacturing sector contributes about 16 per cent tothe GDP, and India’s share in world manufacturing is only 1.8 per cent (Figure 4). This is instark contrast to China; where manufacturing contributes 34 per cent to the GDP and is 13.7per cent of world manufacturing; up from 2.9 per cent in 1991.

In fact, contribution of manufacturing to GDP for 2010 is higher for countries likeThailand (36 per cent), Malaysia (25 per cent) and Indonesia (25 per cent) than India (15 percent).

The service sector has proved to be a dynamic fundamental contributor to India’s

growth. But, manufacturing sector has been weak in performance. In fact, the biggest changein the share of manufacturing in GDP in India between 1980 and 2000 has been 2.5percentage points (pps) lower than that of the average country at the same stage ofdevelopment, while the change in service share was 10 pps higher than average. Figure 2shows the current position of India’s Industrial production. November, 2012 has been catalystin production achieving 8.3 per cent points than a very low in July, 2013 i.e., 2.2 per centpoints.

Manufacturing has never been the engine of growth for the Indian economy. But,considering coming external competition, opening up of the economies, contribution of

Figure 2: India’s Industrial Production

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manufacturing sector in exports as well as in overall development of the countries havecreated a need to grow manufacturing sector at a much faster speed to sustain economic

excellence of India.Further, the importance of manufacturing sector to the domestic and global economy

is set to increase even further as a combination of supply-side advantages, policy initiatives,and private sector efforts set India on the path to a global manufacturing hub. Manufacturingis likely to contribute 25 percent to the GDP by 2025 as per the target set by the NationalManufacturing Competitiveness Council (NMCC) report. However, in order to attain a 25 percent share of the GDP by 2025, manufacturing would need to grow at a rate of 2-4 per centhigher than the GDP. Figure 4 shows the total market size of manufacturing sector in Indiaand the percentage share of the sector in the GDP of the economy. Manufacturing industriesare expanding year by year from Rs. 1263 billion in 1990 to Rs. 28100 billion in 2011 andRs. 28156 billion in 2012 (in absolute terms). In contrast, the contribution of manufacturingsector to the GDP of the economy is decreasing in percentage terms (Figure 4).

Figure 3: Gross Domestic Product of India

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The reasons behind the weak performance of manufacturing sector are lack of technologicalupgradation, costly raw materials, non-availability of proficient workforce and lack ofinnovation in Indian manufacturing sector. But, of all, the lack of technological upgradationis the main culprit in the slow pace of manufacturing sector in India. Most Indianmanufacturing firms are still using obsolete technology and producing at average level oftechnological capabilities. In India, manufacturing sector is losing its recognition and there isa need to invest more in R&D to make it competitive globally. India’s R&D expenditure is0.77 per cent of GDP, whereas China, South Korea and Brazil spent about 1.3 per cent, 2.5per cent and 1.03 per cent respectively (Table 1). The relatively low spending on R&D is

hampering India’s potential to set-up new innovative manufacturing industry. And, it is ahigh fact that without modernization of Indian manufacturing sector, export performance orexport based GDP expansion can not be accomplished as per the standards set.

It is a hard fact to understand that greater attention to R&D and more openness to FDImay both be crucial for achieving the transition to mass manufacturing. Creating conduciveenvironments to increase business expenditure on R&D complemented by institutional

Table 1: Cross-country Comparison of Research and Development

Country Spending on R&D as percentage of GDP

Argentina 0.42Brazil 1.03China 1.30India 0.77Indonesia 0.2South Korea 2.5Malaysia 0.7Source: Kumar and Gupta (2008) (Research and development is defined as current and capital expenditures (includingoverhead) on creative, systematic activity intended to increase the stock of knowledge. Included are fundamental andapplied research and experimental development work leading to new devices, products or processes)

Figure 4: Size and Share of the Manufacturing Sector in India

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measures around skill development, regulation and standardization need to be key areas ofemphasis.

OVERVIEW OF INDIA’S MANUFACTURING EXPORTSManufacturing exports contributes maximum share of merchandise exports of the

economies globally. Similarly, the manufacturing exports are, too, a good contributor inIndia’s total merchandise exports. However, as depicted in figure 5, it declined substantiallyover the period 2000-01 to 2007-08 from above 76 per cent to 59 per cent. Then, it went upmarginally, thereafter, and was about to 61.5 per cent in 2010-11. This decline islargely attributable to the emergence of petroleum products (not covered undermanufacturing) as one of the major items of merchandise exports for India in recent years.Whereas, on the contrary, the share of manufacturing in total merchandise exports is 93 percent in India.

India’s manufacturing sector exports could not make a major impact on the global scale.India’s share in world manufacturing exports increased from 0.6 percent to 1.4 percentbetween 2000 and 2009, whereas China’s share in world manufacturing exports tripled from3.2 percent to over 10 percent in the same period. India’s share in global merchandiseexports, in general, and manufacturing exports, in particular, though rising, has been notreflective of her true economic strength and potential. The reasons for this difference arediscussed previously also. It may be the relatively slower rate of growth of manufacturingproduction, lack of technological upgradation, cheap raw materials, poor transportinfrastructure and insufficient information with manufacturing about procedures andregulations of various countries affecting Indian exporters.

The comparison of Indian economic growth with that of China is worth some. TheGDP growth includes the overall growth of the country. Not even China alone, Brazil,

Finland, Korea, Japan and Thailand have also witnessed a high rise of GDP growth. Thesecountries have based their GDP on the shoulders of manufacturing industry. They havesettled up modernize industrial set up with in the country and concentrated upon its exportorientation. This way, the export-led-manufacturing industrial set up in these countries notonly invited foreign technological know-how via FDI but, generated a handsome amount ofnational income, employment and growth, also.

Figure 5: Share (%) of Manufacturing in total merchandise exports of India

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RECENT TRENDS IN SECTORAL COMPOSITION OF INDIA’SMANUFACTURING EXPORTS

Manufacturing exports grew by a compound annual growth rate (CAGR) of 16.2 percent during the first four years of XI five year plan (2007-08 to 2010-11). Engineeringproducts emerged as the most dynamic sector with its share in total manufacturing exportsincreasing from 35 per cent in 2007-08 to 39.8 per cent in 2010-11. The sector has alsoregistered accelerated growth during the first quarter of 2011-12. The second majorcontributor to India's manufacturing export performance is Gems and Jewellery, with a shareof 22.2 per cent. Textiles are at the 3rd place accounting for around 13.9 per cent in the totalmanufacturing exports, a fall from over 17.8 per cent in 2006-07. The top four items inIndia’s manufactured exports are engineering goods, gems and jewellery, chemicals andrelated products, and textiles. Since 2007-08, electronic goods have displaced leather andmanufactures from fifth place with the share of the former increasing and the latterdecreasing. There has been a gradual shift in India’s manufacturing exports from labourintensive sectors like textiles, leather and manufactures, handicrafts, and carpets to capital-and skill intensive sectors. Engineering goods exports has seen an almost steady rise inshares from 1999-2000 to the first half of 2011-12 and high growth rates of 84 per cent and43.6 per cent in 2010-11 and the first half of 2011-12 respectively mainly due to the highgrowth rates of two major items machinery & instruments and transport equipments besidesresidual engineering items with very high growth rates. The major markets for Indianengineering exports in 2010-11 were China, the USA, the UAE, Singapore, Saudi Arabia,South Africa, Germany, Sri Lanka, and the UK. All these markets showed tremendous exportgrowth with China tops at 409 per cent.

With the highest growth rate among manufactures at 58.4 per cent in the first half of2011-12, gems and jewellery, the second major export item, has retained its share of around16- 17 per cent since 2000-1. In 2010-11, this sector accounted for 14.7 per cent of India’stotal merchandise exports. India is the largest cutting and polishing centre for diamonds in theworld. Of the global polished diamond market, India’s share is estimated to be 70 per cent interms of value, 85 per cent in terms of volume, and 92 per cent in terms of pieces. As per theGem and Jewellery Export Promotion Council (GJEPC), this sector as a whole supports about34 lakh jobs. The gems and jewellery manufacturing sector consists of large number of smalland medium enterprise (SME) units, employing skilled and semi-skilled labour, almostentirely in the unorganized sector.

The share of chemicals and related products has fallen marginally over the yearsmainly because of the fall in shares of basic chemicals, pharmaceuticals, and cosmetics. Thegrowth in 2010-11 and the first half of 2011-12, however, have been higher by 26.5 per centand 34.2 per cent respectively. The steady fall in share of the textiles sector to single digitssince 2000-01 is mainly due to a fall in shares of ready-made garments and cotton, yarn,fabrics, made-ups, etc. Clearly, India has not been able to utilize the opportunity provided bythe phasing out of the Multi Fibre Agreement (MFA) in 2005. The rise of the electronicssector, though long overdue, is a welcome sign. This is due to the recent policies of thegovernment to help this sector like including many electronic items in the Focus ProductScheme and customs duty exemption to many electronic components. The Tsunami in Japanwhich led to disruption of supply chains in Japan could also have benefitted India at a timewhen support measures were taken by India for this sector.

CONSTRAINTS IN EXPORT LED GROWTH VIA MANUFACTURINGSECTOR

No doubts, Export led growth based manufacturing sector model is far better thantraditional manufacturing sector model. In an economy like India, there are a number of

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diversities which hurdles in the path of such dynamic and innovative ideology. Theseconstraints, if removed of, can speed up the overall process of economic development inIndia. These are as given below:(i) Entry Barriers: A major impediment faced by new entrants relates to proceduresassociated with starting a business in India. There are 11 procedures involved in starting abusiness, beginning from presenting the name of the company for approval to the registrar ofcompanies (ROC) to registering for employees’ provident fund and medical insurance. Asshown in Table 2, while these procedures are necessary and must be put in place, the timerequired to cover these procedures can be reduced. While in India, it takes 35 days to start abusiness, it only takes 5 days in the United States and 6 days in Singapore. Moreover, WoldBank’s “Doing Business in South Asia” also lists high start-up costs as a major impedimentto starting business inIndia.(ii) Labour Market Rigidities: Compared to other developed as well as some developingcountries like China, South Korea, Malaysia, etc., companies find it relatively difficult to hireworkers. India is even more rigid when it comes to de-employ workers. Table 2 shows thatamong the major developed and developing countries, India scores extremely high ondifficulty of firing index. Only Egypt, Venezuela and Peru score higher on this index. Thesingle most important labour law is arguably the Industrial Disputes Act of 1947. This lawalmost makes it impossible for firms to de-employ workers. An amendment to this act in mid-1980s requires that any firm employing more than 100 workers needs to get permission fromthe state government before Retrenching workers. Such laws leave absolutely no room forfree contracting and hiring contract workers that may be required seasonally to meetadditional demand. The net effect of the prevailing labour market regime is to convert labourinto a fixed cost and one that also results in significant transaction costs and source ofuncertainty. This results from the prevailing statutory provisions that give almost completeand unquestioned authority to the government in matters relating to labours’ working andemployment conditions. The net result is deterrence to labour intensive and large scaleinvestment and a binding constraint on SMEs trying to achieve greater scale. There is a needfor a law that allows employers greater flexibility in hiring labour in line with the specificrequirements. Some workers may sign a contract for a high wage but one that requires themto quit at short notice; others may seek the opposite. This would allow firms to employdifferent kinds of labour depending on the volatility of the market they operate in. Hiring andfiring of workers is not the only or even the most important issue in the current circumstancesof skill scarcity and high attrition rates but there is an urgent need to improve the existinglabour dispute resolution system. As of October 2005 there were as many as 1,61,117 casespending in the various labour courts in India.(iii) Procedural Constraints: Entrepreneurs also face a significant delay in registeringproperty in India. According to Table 2, in India it takes 62 days to register a propertycompared to 32 days in China, 11 days in South Korea and 6 days in the United States.Moreover, entrepreneurs have to go through significantly more procedures to enforcecontracts in India, which leads to substantial delays. Apart from having to go through moreprocedures in India, entrepreneurs also find that the average time on each procedure in Indiais far higher than other countries. For example, in India it takes an average of 25.36 days tocomplete one procedure to enforce a contract compared to 9.42 days in China and 7.93 daysin South Korea. Again, this is primarily due to the stifling culture of red tape and needs to becurbed.(iv) Exit Barriers: Apart from stringent entry barriers, entrepreneurs also have to deal withvery complex and dysfunctional exit barriers. It normally takes 10 years for a firm to close itsbusiness in India, compared to 2.4 in China and 1.5 in South Korea (Table 2). This has

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significantly impeded the entry of new players into Indian manufacturing. Again, a carefulreview of the existing procedures is needed and redundant procedures weeded out.(v) Emerging Skill Constraints: The competitiveness of the Indian manufacturing is heavilydependent on the availability of a low-cost skilled workforce. In recent years severalindustries are experiencing an increasing shortage of skilled workers. To meet this demand,there is a need to undertake significant reforms in the education sector. The policy focus sofar has been on raising literacy levels and improving access to primary education throughschemes like Sarva Shiksha Abhiyan on the one hand and establishing some top world classinstitutes like IITs, IIMs, etc. There is a case of the ‘missing middle’ in the education sectoralso, which refers to the relatively weak vocational and technical education sector. Thenumber of vocational schools and courses are only a tenth of that in China and a massiveresource infusion is needed to address this issue.(vi) Infrastructure: It is now widely recognized and commented upon that themanufacturing sector suffers from a severe infrastructure deficit. A range of estimates forresources required to address the deficit is available with some studies suggesting arequirement of $350 billion over the next five years. Given the constrained fiscal space, theseresources cannot come only from public investment. Hence the strong emphasis given inrecent years to promoting public-private partnership and for creating necessary regulatoryframework for facilitating private investments needs to be encouraged further.

The target for India should be to raise the investment in infrastructure from its currentlevel of about 3 per cent to 9 per cent of GDP as has been achieved by China. Some progresshas been made, notably in the telecom sector where reforms were initiated in the mid-1990s.The supply response has been tremendous with teledensity increasing from 0.8 per cent in1994 to nearly 13 per cent at the end of 2006. The telecom sector has attracted around $16.61billion in foreign investment since 1991.

The Electricity Act of 2003 has provided the statutory basis for reforming the sector.Some states have implemented the provisions of the Act but others have not. Some majorissues like transmission and distribution losses, continued loss making by State ElectricityBoards and extensive subsidy to some consumer groups like the farmers are yet to beaddressed. There has been an unfortunate regression in the sector from 1994 when all thestates had agreed to charge a minimum tariff even for electricity supplied to farmers. TheElectricity Commissions, created under the 2003 Act in every state and in the Centre, havebeen asked to rationalize tariff to progressively reflect cost of supply and institute anti-theftprovisions. To ensure a competitive manufacturing sector it should not be burdened withsubsidizing power to other sectors and should also be allowed “open access” to power supply.This would imply that the units can directly source their electricity from any generatorlocated anywhere in the country. These would introduce competition and propel states toperform better. The development of the Golden Quadrilateral (GQ) and East-West (EW) andNorth-South (NS) corridor projects are steps in the right direction and must be given highestpriority. Special attention must be paid to development of high speed roads and railway linksconnecting hinterland to ports. The 1995 Amendment to the National Highways Act of 1956allows private investment in road development, maintenance and operation and this isbeginning to show results with significant private sector participation in the nationalhighways sector.

Two other areas, however, need special and urgent attention. First, the urbaninfrastructure, especially in Tier I and Tier II cities and towns has deteriorated under thepresence of rural to urban migration and sheer lack of investment by municipal authorities.Secondly, the project design and implementation capacity in both the Central and Stategovernments has to be augmented. This would include means to remove inter-ministerial

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bottlenecks that presently create great uncertainties and risks in the execution ofinfrastructure projects.(vii) Foreign Direct Investment: The Chinese experience shows that FDI can play a majorrole in transition to mass manufacturing. FDI not only brings capital into the country but alsoadvanced technology, know-how, managerial expertise, global marketing networks and best-practice systems of corporate governance. Thus there are considerable spillover effects thatwork through supply chains and spin-offs, which will facilitate the transition to massmanufacturing.

In India, there has been considerable liberalization of the FDI-related policies since1991. However, the flow of FDI has not been very encouraging. From August 1991 to March2000, cumulative FDI in India was only $16.48 billion at an average of $1.83 billion per year.Though FDI flows have picked up in recent past, even for the period 2000-06, FDI inflowsaveraged a mere $5.5 billion per year. It is only in 2006-07 that FDI inflows have picked upsubstantially. In the first 10 months of the fiscal year around $16.44 billion of FDI had comeinto India.

As per the extant policy, FDI up to 100 per cent is allowed, under the automatic route,in most sectors/activities. FDI under the automatic route does not require prior approvaleither by the Government of India or the Reserve Bank of India (RBI). However, someirritants do remain, which have impeded the flow of FDI into country to an extent. Forexample, Press Note No. 18 (1998 series) points out that automatic route for FDI would notbe available to those who have or had previous joint ventures in the same or allied field inIndia. Investors belonging to this category will have to go through the FIPB/PAB approvalroute and they have to provide requisite justification and proof that the new venture will notjeopardize the current interests of their existing or former joint venture partners.

These issues related to FDI need to be addressed urgently for India to undertake asuccessful transition to mass manufacturing. Thus while it is important that Indian indigenousmanufacturers themselves upscale to mass production levels, FDI can also play a veryimportant role in the transition.(viii) Job conditions: The majority of India's working population is ill-educated and is in noposition to exploit the job opportunities thrown up by the booming manufacturing sectorincluding information and communication technology. The economic growth solelydependent on the services sector has its limitations. The labour intensive manufacturingsector alone has the capability to generate employment on a large scale to absorb the ill-equipped labour pool. A big increase in the manufacturing work force will boost the incomelevels and make a dent in poverty level. According to FICCI, even though agriculturesupports 60 per cent of the working population, it contributes only 22 per cent of thecountry's gross domestic product. The manufacturing sector employs around 30 per cent ofnon-agricultural work force in India now. With sluggish growth of agriculture and poorincome generation more and more of the agriculture labour will have to turn to themanufacturing sector for sustenance.

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However, the latest indicators on the Indian manufacturing sector in the context ofglobal economic slowdown are not very encouraging. RBI Governor has said Indianeeds to focus more on manufacturing in order to achieve GDP growth of more than6.5 per cent. The manufacturing sector has the scope for creating jobs for millions ofpeople who leave other sectors such as agriculture, he said in his keynote address atHyderabad at Centre for Economic and Social Studies, according to a PTI reportAugust 5. India's economic growth rate slipped to 5.3 per cent in the fourth quarter of2011-12, the lowest in nearly nine years, following poor performance of themanufacturing and farm sectors. During the quarter ending March 31, growth in themanufacturing sector contracted to 0.3 per cent, from 7.3 per cent in thecorresponding period of 2010-11."Every unit of manufacturing needs more credit thanfor every unit of services output to GDP. And we need to be focusing onmanufacturing because you cannot accelerate growth from the current level of 6.5 percent...without focus on manufacturing."(ix) Low productivity: Indian manufacturing earlier suffered from high costs ofproduction, poor quality of products and lack of competitiveness of its exports. Thishas been changing over the years. How to increase the productivity in themanufacturing industry should be the prime concern. Studies have revealed that theproductivity of the manufacturing industry in India is about 20 per cent of theproductivity in the US. It is almost half of the productivity in South Korea.

Use of outdated technology, poor infrastructure, costly financing and bureaucraticinterference have dogged the sector in India. FICCI points out that the higher inputcosts for the Indian manufacturing sector due to impact of indirect taxes, high cost ofpower, water, higher cost of finance and high transactions costs puts the sector at asevere disadvantage. While laying down guidelines to the government to accelerategrowth and improve competitiveness of the manufacturing sector, it has sought moreprivate sector participation in infrastructure sectors like electricity distribution,aviation, roads, railways and ports. ICT (Information and CommunicationTechnology) revolution could play a key role in increasing the productivity on theshop floor and supply chain management. In an environment of intense globalcompetition with customers becoming more demanding, manufacturers must findways to achieve greater efficiency and speed up in the product development process.

The Union Government is striving to give a new push to the manufacturing sector.The government hopes to ensure that 25 per cent share of gross domestic product(GDP) growth comes from manufacturing by 2022 and eventually create 100 millionjob opportunities to make the growth inclusive. The Government is also evolving aspecial incentive package to promote local manufacturing of electronic goods andtelecom network equipment. The new manufacturing policy aims to encouragedomestic manufacturers in public procurement, provide them a level playing field, cutred tape and redefine the role of PSUs rises to restrict them to areas that are vital butnot attractive for the private sector.(x) Slower Pace of Economic Growth: Economic growth is likely to touchdecade low of 5-5.5 per cent this fiscal year. Rupee has depreciated more than 20 percent over the last few years, inflation has been high and consumer demand is alsoslowing down. In short, after a decade of rapid growth, Indian growth engine hasslowed down considerably. Some of it is because of uncontrolled governmentspending, but there are also other deeper structural issues.

Over the last decade, starting from a low base, IT exports grew at an annualrate of 20 per cent+. IT Services jobs are high income jobs in the Indian context andconsumption demand of IT employees drove growth of many sectors in India

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(consumer durable, auto, real estate, media etc). Also, over the last decade, mobilepenetration and media penetration increased dramatically and this led to productivityimprovements throughout the economy cutting across sectors. However, these sectorsare now slowing down. IT Service exports are likely to grow at less than 15 per centper year over the next decade due to the high base effect. Mobile penetration hasreached a figure of 70 per cent plus and as expected subscriber growth has sloweddown over the last few quarters. Given that the big success stories of the last decadeare not going to be the big growth stories over the next 10 years, India needs to findnew high growth sectors which can propel job growth, productivity improvements andoverall economic growth.

Let us look at which sectors have a potential to be the high growth sectorsover the next decade. Insurance penetration in India is fairly low and reforms in thatsector are likely to lead to significant employment growth. Banking sector reformswill also lead to more competition, productivity growth and increase in bankingpenetration in India. Retail and logistics sectors are likely to show productivityimprovements as the sectors become more organized. However, it is important to keepin mind that retail sector growth and to some extent banking/insurance growth aredependent on the underlying consumer income growth which in turn depends ongrowth in other sectors of the economy. It is hard to identify too many other servicesindustries which can contribute meaningfully to net job creation and rapid incomegrowth over the next decade. This brings us to the manufacturing sector. It is a fairlywell known fact that rapid growth in manufacturing exports was the principal reasonfor many Asian countries becoming middle income/rich economies. In India,performance of manufacturing exports has been disappointing. Manufacturing sectorin India mostly caters to domestic demand. Recently, Government has taken a fewsteps to boost growth of the manufacturing sector. Government has come up with aNational Manufacturing policy and the government is hoping that globallycompetitive National Manufacturing zones will come up next to the Delhi-MumbaiIndustrial corridor (DMIC) – similar to Coastal Chinese manufacturing SEZs.

These measures are unlikely to be sufficient for any meaningful pickup inmanufacturing growth and exports. Unless government puts a concerted effort to cutred tape, reform labor laws , improve infrastructure and impart skills to the labor force(in partnership with the private sector), and don’t think the manufacturing sector andin turn the overall economy is likely to go back to 8-9 per cent growth rate on asustainable basis.(xi) Cost Competitiveness- The decision to relocate a manufacturing operation isprimarily based upon a substantial and sustainable cost differential. Producing a shirtin China today costs 20 per cent less than what it does in India. Labour costs accountfor half of this differential, with infrastructure costs and taxes making up the rest.Labour productivity in India is low. World Development Indicators show that India’slabour productivity in manufacturing is 70 per cent lower than China, and over 80 percent lower than the US. Interestingly, this differential is seen only in manufacturingwith India’s labour productivity in both the agriculture and services sectors beinghigher than that of China. However, it is heartening that there are pockets ofexcellence with world-class productivity in Indian industry, showing that this can beachieved.

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MAJOR ECONOMIC CHALLENGES IN THE COMING DAYSThe first two major challenges before any government – current and

forthcoming – are (a) chasm or disjuncture between the state and exercise of itsauthority, on the one hand, and bulk of the common people, on the other; and (b) lossof credibility of most of the political, economic and social institutions of the countrybecause of lack of good governance and lack of accountability. The second in factreinforces the first. It seems that state devotes only to the cause of a few rich andinfluential people at the cost of the vast majority.

The third challenge is how to finance additional investment requirement of thecountry to sustain the growth process. Aid flow is shrinking and whatever is comingis employed in poverty reduction measures. Private FDI flow is lean because of poorgovernance, law and order and policy uncertainties. The domestic money market isunder tremendous strains in order to finance major public expenditures. Unless thegovernment draws a limit to its borrowing from commercial banks, the latter wouldface severe liquidity crisis affecting trading and industrial production. Recently, therupee devaluation has further, curbed the FDI process. Ongoing uncertain fluctuationsin the value of Indian rupee and economic turmoil have left a bad strain on the marketvalue of the Indian economy. The situation is again like that was in 1991. IndianGovernment is planning again to mortgage a part of pure Gold fund to support theshattering economy.

The fourth challenge is management efficiency in both public and privatesectors. One efficiency index in the public sector is utilization of ADP. Most of thetime, development outlays remain unutilized because of lack of capacity andmismanagement.. Although, private sectors can claim relatively better capacity andefficiency, much remains to be desired in terms of good governance andaccountability. For economic mismanagement, industrialization is stagnating.Electricity and fuel crisis is being compounded by lack of financial discipline becauseof over-borrowing by the government. As a result, private investment flow is affected.Import of capital items has reduced drastically because of dollar crisis, higher interestrates, poor infrastructure and mismanaged utilities. As to high interest rate, theParliamentary standing Committee on Finance considers 12.47 per cent lending rateas one of the highest in South Asia.Next challenge will be subsidy for SOEs and other important sectors and sub-sectors.Subsidy does not reach the target group. This applies in the case of agriculture,energy(BPC), transport (Rail and Biman), food, even poverty reduction activities. Thejustification of subsidizing many of the government agencies and activities needrethinking. On the other hand, infrastructure like electricity, telecommunicationremains severely underdeveloped, agriculture is stagnating reducing its capacity toretain the growing labour force.

CONCLUSIONThis paper tried to undertake a broad evaluation of the Indian manufacturing

sector. During the last few years the manufacturing sector has witnessed impressivegrowth, which has helped the GDP to post historically high growth rates. Currently,manufacturing sector is witnessing its longest period of upswing since the 1980s butthere is a clear divergence between the performances of sectors that are primarilyprivately owned, namely, manufacturing, steel and cement and sectors that areprimarily in the public sector like coal, electricity and crude petroleum. A state-wise

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analysis reveals wide differentials in the performance across states with Tamil Naduand Gujarat having significantly increased their share in manufacturing output whileWest Bengal and ‘BIMARU’ states have been the biggest losers. Better quality ofinfrastructure and skill availability expectedly emerges as two key determinants of thegrowth of manufacturing sector across states.

The paper finds that the unorganized sector is overwhelmingly dominant interms of number of enterprise and its share in total manufacturing sector workforce.However, the sector is only a marginal contributor to value added. Thus, theunorganized sector is characterized by extremely low value added per worker. Thepaper argues that this problem of the dualistic structure of Indian manufacturingsector and the ‘missing middle’ is a direct consequence of public policy. This needs tobe rectified. The manufacturing sector, especially the organized manufacturing, hasfailed to generate adequate employment. The primary reason for this is modernizationof plants, technological upgradation and lack of skilled workforce, principally inresponse to the prevailing policy regime, in both organized and unorganized sectors.Evaluating the export performance, the paper finds that although there have beensignificant changes in the composition of exports in the last 20 years; India is still avery small player at the global level, especially in knowledge intensive and advancedtechnology products. The surprising and the disappointing feature has been thedecline in the share of manufactured exports in total exports in recent years.

Finally, the paper explores India’s prospects for successfully making thetransition to mass manufacturing and emerging as a hub for export led manufacturing.The main challenges in doing so are the low level of R&D and scarcity of skilledpersonnel in India. Other impediments to the realization of this transition, essential forgenerating the required employment opportunities, are inadequate infrastructure, entryand exit barriers and low volumes of foreign direct investment.

Export led growth model in India can only be established achieving throughsustaining a rapid growth of manufacturing and achieving the transition to massmanufacturing requires another major push to the reform agenda. In the absence ofthese reforms, the manufacturing sector will continue to retain its dualistic structureand be unable to address the apparent trade-off between growth and equity that can bebest addressed by massive expansion in manufacturing sector employment.

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