Jan-Mar 2012

The New National Manufacturing Policy: A Flow Perspective

The New National Manufacturing Policy:  A Flow Perspective

Professor ManMohan S Sodhi discusses the implications of the new National Manufacturing Policy (NMP) on various aspects of India’s development.

The new National Manufacturing Policy (NMP) with its National Investment and Manufacturing Zones (NIMZ) has been finally approved and comes at a crucial time with the country facing a lower gross national product (GNP) growth compared to the recent past, smaller net inflow of foreign investment, domestic politics creating paralysis, and a sharply devalued currency. Improving manufacturing makes sense: manufacturing is not only connected to other sectors but is also the jewel of a multi-strand necklace where the strands are flows of different kinds to and from other sectors.

This article considers such flows in analysing the NMP and other proposals. My conclusion is that the government is taking a holistic approach to manufacturing, considering the different flows needed to make India a major economy. However, the government must further consider such initiatives as creating an Internet superhighway, virtual manufacturing zones to support IT solutions for industry clusters, finding supply-chain finance solutions to help tier-2 suppliers, usually [SMEs] and finding creative solutions for land use. In addition, the government must further skills development for the manufacturing sector for the long term.

While considering different flows – that of materials, information, cash, skills, land use and even prosperity – I refer to three companion articles in this special issue on manufacturing, written by Arun Maira, Member Planning Commission, who is involved with the creation of the policy, with consultative feedback from B Muthuraman, President of the industry body, Confederation of Indian Industries (CII), and Sunil Kant Munjal, Joint Managing Director of Hero Motocorp as well as a Past Pesident of the CII.

Flow of Materials
Materials need to flow in and out of manufacturing plants, and in and out of the manufacturing sector. These flows need infrastructure – roads, the cold supply chain, an information infrastructure, etc, – to aid the supply chain. While gains have been made to the road infrastructure to aid truck movement, it is to be noted that this is the most expensive mode of transportation – see Munjal– that also adds congestion and pollution. In any case, India has a reprieve only till 2020 for increasing carbon pollution on grounds of economic growth so the window for developing badly-needed rail and water-based infrastructure is not large.

The current tax system in India distorts and constricts supply chain flows. To this extent, the government hopes to implement the two-layer Goods and Services Tax (GST) to further simplify the current value-added-tax (VAT) while at the same time, creating more uniformity and scope of products. From a manufacturer’s viewpoint, “this consolidated tax reform will help spur capital investment by eliminating cascading of taxes. It will also remove trade biases against Indian manufactured goods. Most important, it will ensure free flow of goods through a common market.”

To take the flow from finished end product from factory or distribution centre to end consumer, the retail sector needs to put in large investments in the supply chain. Such investment (and expertise) will have to come primarily from foreign direct investment (FDI). While the government’s recently retracted retail policy was touted to help the agriculture sector, it would have also helped the manufacturing sector to get end products sold, without which the sector cannot make intermediate goods either. Still, the government must be commended on its vision and continuing efforts on this front.

Flow of Information
Along with material flows, manufacturing also needs the flow of information for orders, order status, and deliveries. Although the rest of the world depends on India for many IT needs, there is very little evidence of IT use within the country. True, many Indians now have Google Mail or Facebook accounts, but these are not enough for manufacturing. I have seen presentations on Cloud Computing as the silver bullet for Indian manufacturing but these presentations appear to have been hastily recycled from the slides I saw in the late 1990s and use the same acronyms and technology. At this stage, I am skeptical that the vendors have anything real to offer today but eventually, I hope they will.

But before we get Cloud Computing for manufacturers, we will need access to the Internet, a cheap and now ubiquitous way to exchange information – compared to the expensive and awkward electronic data interchange (EDI). Although Indian telecom majors have provided mobile phones at much lower cost to Indian consumers relative to the West, the quality of Internet access is poor and cost is high relative to the West. It may well be that, as in the US or Korea, the government or the public sector will have to step in by providing Internet “superhighways” and cheap access.

Indian software vendors and system integrators have an important role to play for Indian manufacturers but they will have to change their business model. They cannot get the same consulting or licensing fees from Small and Medium Enterprises (SMEs) in India as they can from large manufacturers in the west, but they can support Indian manufacturers at a much lower price point with standardised software given the massive scale in India. Customisation can be minimised. Cloud Computing would become tangible as a delivery mechanism of cheap standardised solutions for information storage and exchange. Moreover, large IT vendors/system integrators can create virtual information exchange zones around the supply chains of major original equipment manufacturers (OEMs) or, in cooperation with state or central governments, around clusters of SMEs.

Flow of Cash and Finance
Inadequate credit holds back many SMEs. This applies to investment as well as to working capital. There are different ways credit can be made available: First, in the past, the State Bank of India sought to creatively improve the lot of many small manufacturers through a mix of consulting and credit. Other public and private sectors should take note.

Second, the government can create conditions where supply-chain finance becomes a reality, whereby the small suppliers to big OEMs or their suppliers can get short-term credit against the supplies while they await payment. The government can also encourage credit rating or facilitate foreign banks to step in as competition to domestic banks.

Third, enterprising banks such as the SBI can seek to emulate the Grameen Bank model of giving a loan to only one out of four-or-five micro-entrepreneurs in a cluster, and funding the others when the first one has repaid the loan. Over time, perhaps, private sector entrepreneurs may join in with other operational models.

Finally, the new manufacturing policy envisages creating of Technology Acquisition and Development Fund (TADF), targeting micro and small enterprises in particular, to facilitate technology acquisition, creation of patent tools and development of manufacturing equipment.2 Such a fund could therefore, provide finance for investment, and suitably implemented, would further not only manufacturing but more importantly, the capability thereof.

Flow of Skills
India will need to create 200-250 million additional (net) jobs over the next 15 years if it is to employ the children currently in school. The demographic dividend, if any, will come from the flow of these children into the workforce. This requires an education policy consistent with the country’s changing needs over these 15 years. Indeed, the new NMP takes this into account with its emphasis on vocational education with “farm-to-work” and “school-to-work” programmes, and on seeking to add 100 million manufacturing-related jobs by 2022.

Muthuraman points out the unavailability of skilled labour as a constraint on Indian manufacturing. The reasons are deeply intertwined: Salaries for many workers even in the OEMs are the government-mandated minimum wage; rigid labour policies ensure most workers are hired only on contract (and at minimum wage); there is little incentive for manufacturers to train contract workers; and union unrest at major OEMs seems always close at hand. Any proposed solution can quickly get into the chicken-and-egg problem.

But there are encouraging win-win areas that can create virtuous cycles. As Munjal points out, union membership is falling and one way to rejuvenate unions would be to have fresh talent coming into employment. Flexible laws on entry and exit of workers would encourage companies to step up hiring, provide training, and enable unions to increase their base and have a more productive say.

Regarding skills development for the manufacturing sector, the Industrial Training Institutes (ITIs) have done a tremendous job thus far, but there must be more such institutes. Curriculum requirements “too” have changed and will continue to do so. And not only the workers, but also the owner-managers of SMEs need to be “upskilled.” Part of the solution lies with the private sector: OEMs can help by working with engineering and business schools.

In the long term, the flow of students from primary school to higher secondary and beyond, with many going into the manufacturing sector must be considered. Consideration must be given to the trainers and faculty for these students. For instance, India should have high quality DBA or D Eng Programmes (Doctorate in Business Administration or in Engineering) to supplement the meager PhD programmes – DBA/DEng programmes will turn experienced professionals into faculty for the rapidly growing “universities” and “schools.” One prominent management institute even has its own recent graduates teach the students, highlighting the problem of not being able to find faculty.

Flow of Land Use
Land ownership seems to block any reform or initiative in India, whether it is Tata Motors’ experience in Bengal, or it is the Special Economic Zone (SEZ), or the government attempting to widen roads in Uttar Pradesh. The huge increases in price of land in the past years are a huge detriment to sale of land and only encourage non-use or even crime.

Even industrialists sometimes buy land, ostensibly for industrial development, but then hold on to it with the expectation that the returns by selling the land in the future will be higher than they could make with manufacturing. I recently heard the term “land mafia” for the first time. And, tenants can be a nightmare – the going rate to get the tenant to vacate is supposedly half the value of the property!

The government – central and state – has to work on the tighter implementation of existing laws. Moreover, creative use must be made of ownership by way of legally valid (and enforceable) medium-term, say 10-15 year leases that offer both owners and tenants some security. This way, land use can “flow” and help manufacturing not only in the NIMZs but also in the rest of the country.

Flow of Prosperity Across Social Tiers
Manufacturing can provide “inclusive growth” and the new NMP is consistent with that. For a country with over 90% of the employed working in the so-called informal sector, many with little formal education, manufacturing sector’s role in upgrading the skills of the masses needs to be emphasised. IT-related services or banks require a higher threshold of education than manufacturing so the sector can greatly improve the earning potential and skills of people from the so-called bottom of the pyramid, especially the poorest of the people. For instance, ITC’s incense stick business has its main ingredients processed by women in rural India and Hindustan Unilever Ltd sells its products through Shakti Ammas in parts of rural India.

The government’s “inclusive growth” aim is important because the belief that prosperity can “trickle down” has not worked in the past. Indeed, high ranking countries in GNP terms like Argentina, at the turn of the previous century, fell behind other countries owing to the extreme concentration of wealth.

Still, from a manufacturing perspective, the telling metric is the Global Hunger Index 2011 by the International Food Policy Research Institute (IFPRI). This metric is composed of the proportion of undernourished as a percentage of the population; the prevalence of underweight in children under the age of five; and the under-five mortality rate. Notwithstanding the tremendous progress and globalisation in India, the country is ranked close to the bottom on this index, below many sub-Saharan African countries. The situation is much better than that in 1990 but the index barely budged in the go-go decade 2000-2010.
Of particular concern is the situation with children: 43.5% of Indian children below the age of five are undernourished (IFPRI, 2004-2009 data). These are the very children for which the manufacturing policy aims to create the 200-250 million jobs by 2025! These children are in danger of being underdeveloped, not only physically but also mentally. Without intervention, the demographic dividend will turn into a demographic burden in the coming decades.

For this reason, the government must be commended and supported for tabling the National Food Security Bill 2011, that seeks to provide cheaper food grain to over half of India’s 1.2 billion population and ensure that people “live a life with dignity” as Food Minister KV Thomas puts it. Whatever the skeptics might say, the proposed bill makes perfect sense for Indian manufacturing in terms of investing in future workers.

From a flow perspective, the Indian government has taken an admirable and holistic view encompassing land, infrastructure, taxes, and skills. To the extent the pre-election politics may force the government to retract some steps is unfortunate but one can only hope some of these policy steps will remain and retain holistic form.

From a flow perspective, more can be done. Opening up the retail space to foreign investment must be welcomed to build up badly needed supply chain infrastructure and skills. Availability of credit to SMEs by way of supply chain finance for working capital and for investment is also needed. Development of rail and water-based transport needs to be looked into. Land reform by way of creating legally enforceable land leases letting the farmers or whosoever else retain ownership is needed to remove a huge block in the growth of manufacturing. Skilling in the long term is a huge gap although the NMP has spelled out initiatives in the medium term.

India and Indian manufacturing stand at a cusp today. The efforts the government is making by way of the new NMP and its related initiatives on food security and on retail can indeed turn Indian manufacturing into the jewel it should be.

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