“There is a misnomer that, due to lower labor costs, Indian manufacturing is very competitive,” said the chair of the joint government-industry SCALE panel.
Industry players largely want to do what is right for India, although there may be some exceptions, says Chairman of the Steering Committee for the Promotion of Value Added and Local Exports (SCALE) , Dr Pawan Goenka. As the committee develops sector-specific policy advice, it also identified “horizontal catalysts” that India needs to address in order to become more competitive in all areas, including the cost of doing business. High logistics costs and import duties on raw materials and machinery, as well as excessive regulation are also matters of concern, he said in an interview with The Hindu.
What are the big challenges facing Indian manufacturing?
Our main focus is how to make Indian manufacturing cost competitive. There is a misnomer that due to lower labor costs Indian manufacturing is very competitive. This is a misnomer because there are many factors outweighing this advantage and making our manufacturing uncompetitive in many areas. There are a few general themes that cross almost every industry… We put it under the cost of doing business umbrella. We talk a lot about the ease of doing business, but India’s biggest problem is the lack of scale. Industry needs to come forward and invest on a large scale and government needs to facilitate that with a sustainability gap. But above all, the foot is on the side of the industry to know how to invest on a large scale as China has done. Second, there is the cost of land, which is one of the most expensive industrial land in the world, and electricity, which is the most expensive industrial power in the world, part of which is the cross-subsidy which occurs. But now, in the competitive world, India’s manufacturing industry cannot afford the burden of cross-subsidies it has. Third, the cost of capital. If you leave out the current low cost of capital due to COVID-19 and low interest rates, the cost of capital in India is 20-30% higher than the cost of capital in most other countries. exporters. These are our factor costs. The third area which is well recognized, but which we have not been able to make much progress, is that of logistics costs. India’s average logistics cost according to government data is 13% of revenue while the world average is 8%. India therefore has a 5% disadvantage due to logistics costs. Obviously, this disadvantage cannot be compensated by the industry in terms of labor costs. The fourth area is the productivity and skills of the workforce, which is primarily the responsibility of industry. The fifth axis is to strengthen the micro, small and medium-sized enterprises (MSMEs) sector because while the scale will be created by large enterprises, they cannot do everything themselves without a strong MSME sector. The government should always focus on strengthening MSMEs, in collaboration with industry. It’s not about giving some kind of financial advantage… It doesn’t make them strong, but good technology and a good skill base will. While we have improved the ease of doing business, for manufacturing we still have a lot to do.
How was your interaction with the different ministries?
The personal involvement of Minister of Trade and Industry Piyush Goyal was intense even after he set up the committee. He spent at least two hours with us at over 15 such meetings involving different sectors. I remember a meeting where six or seven ministers attended for over two hours to go through all the details of the recommendations. Mr. Goyal has also personally raised issues with other government departments in order to assert our ideas and build buy-in to the changes in policies and rules. Engaged champions from all sectors have helped immensely in diagnosing and addressing challenges. DPIIT, in fact, does much of the groundwork essential to coordinate with other ministries. The contribution of all members of the SCALE committee who devote significant personal time to this effort on a voluntary basis cannot be ignored either.
India has increased import tariffs in an attempt to deter imports in recent years. Is this the right approach to become independent?
The SCALE panel is not in the spirit of increasing tariffs. Our goal is how to make Indian manufacturing more competitive, so that the need for imports decreases and export opportunities increase, and not through artificial means of raising tariffs or putting non-tariff barriers. This may be necessary in the short term in some cases, but the increase in tariffs essentially results in an increase in consumer prices. We’ve drawn a line that we don’t want to do anything that leads to higher consumer prices. In fact, we have asked for tariff cuts in many areas to make Indian manufacturing more competitive. Moreover, while the need for more favorable Free Trade Agreements (FTAs) comes up repeatedly in the context of exports, we believe it is important that India is not at a disadvantage compared to other developing countries. terms of FTA. And today, with many countries in Europe, Southeast Asia, and Middle East Africa, India is at a disadvantage compared to others with more favorable FTAs. So our request was only to see if something can be done to create a level playing field where India is at a disadvantage, rather than saying ‘let’s get the lowest tariffs’ to export everywhere… This is clearly not practical nor feasible. Tariff reduction is still a two-way street. India cannot apply for entry of Indian exports and continues to apply high tariffs on imports.
Vietnam, one of our major manufacturing competitors, has already concluded FTAs with the UK and the EU …
Prior to the COVID pandemic, India was a $ 2.87 trillion economy with around $ 229 billion in manufacturing exports, with around 43% of its total exports coming from manufacturing. Now, in order for India to see itself as a manufacturing country and achieve a good balance between Industry and Services, it is important that manufacturing exports are higher. Vietnam, for example, is at 80%, Malaysia at 70%, Thailand at 56% in terms of manufacturing exports as a percentage of exports. The second aspect is that even what is exported from India, it is often a low value-added export. India is very poor in high tech, with export contribution coming from high tech sectors at only 10%, which is a very dismal figure. Vietnam is 40%. Malaysia is at 52%, Thailand at 23%. So my concern is not so much with overall manufacturing exports as that number will be low due to a very strong service economy. My concern is more that high tech exports are very low and often we end up exporting commodities or raw materials rather than exporting value added products. Over the past decade or so, Vietnam has focused heavily on exports and much of Chinese manufacturing has moved to Vietnam, often owned by Chinese companies, but in any case adding value to the Vietnam. Today, Vietnam’s exports of manufactures are the same as India’s in absolute terms. So even though the Vietnamese economy is 1 / 10th the size of the Indian economy, the exports are the same.
The target of reaching $ 1 trillion in manufacturing exports by around 2027 is very good and India deserves it. But that will not happen with business as usual. Some difficult calls will have to be taken, some priorities have to be given, some other compromises have to be made. Because in order to get something you have to give up something more often than not. Sometimes you can get it all.
Third, for market access through FTAs and preferential trade agreements, what we are looking for is not a disadvantage. Fourth, technology and quality. We know that India’s spending on research and development (R&D) is among the lowest, at only around 1.5% to 1.6%, compared to 3.5 to 4%, which is the global average. . And above all, the industry is not interested enough in R&D, but it must come forward and invest more. Finally, the India brand is not strong overseas for manufacturing. He is known more for his cheap products than for his great products, which is a misconception. And we have to change that.
Given the challenges of aligning factions in the industry and convincing government officials, do you have times when you feel – “What did I get myself into”?
No, I personally appreciate it. I discover a whole new world beyond the automobile and tractors. All my life, I have worked in the automotive industry for 41 years including 10 years on tractors, and what I discover is an exciting world outside of cars and tractors. I also have the impression that: yes, of course, all companies want to do well. But overall, while there will be exceptions, companies want to do good for the nation. Okay, and there is that desire – is there a way that without compromising my business requirements, I can add value to the country. AatmaNirbhar Bharat is a very motivating slogan. I really enjoy discovering all of these industries and interacting with the players… The auto industry is respected by most industries as I discovered, because of what it has been doing for the past 25 years. Fortunately, I’m pretty well known because the auto industry has a big presence on TV and in the print media, so I can get my point across a little bit and they listen to me. It helps like if someone stranger did this it would be hard to get everyone to line up.