Manufacturing Adds Punch to India's Growth

Giving a fillip to India's dream of becoming a manufacturing hub with high degree of automation, industrial production in the country rose by 13.6 percent in the first month of the current fiscal year thanks to a surge in manufacturing.

India's industrial output was up 13.6 percent in April over the same month last year, thanks to a robust 15.1 percent growth in the Industrial Production of the Central Statistical Organization (CSO). "The revised annual growth for the period April-March 2006-07 now stands at 11.5 percent over the corresponding period of the previous year," the organization said in a statement. 

The Confederation of Indian Industry (CII) applauded the industrial growth achieved during the year 2006-07 as revealed by CSO's quick estimates. The cumulative growth of 11.5 percent during the year 2006-07 driven by 12.5 percent growth in Manufacturing and 11.5 percent growth in electricity has been one of the major contributors to the 9.4 percent GDP growth, which is beyond expectations. 

"The trends are encouraging, but it is too early to draw any conclusion," said Union Finance Minister P Chidambaram, commenting on the index of industrial production (IIP) figures. The manufacturing sector grew at 15.1 percent during the month, one of the fastest growth rates in a decade. This sector had grown by 11 percent in the same month last year, indicating a high base. 

Cautious optimism 

Analysts are cautious in their reaction, stating that the IIP figures depend on the base effect. But then they predict a continued growth in the manufacturing sector. Chief economist of Reliance Industries Ltd TK Bhaumik said manufacturing accounted for 85 percent of the country's total exports. "Exports are growing at above 20 percent in recent times and this will ensure manufacturing growth at over 12 percent," he added. 

The top five growth industries in the manufacturing sector are cement, steel, pharma, gems and jewelry, and engineering, according to a study by Hyderabad-based Cygnus Business Consulting and Research. 

India's trade minister Kamal Nath said last month the government expects foreign direct investments to double to $30 billion this year. "What better example to cite the growing clout of emerging economies than India, which has recorded the fastest GDP growth in 18 years, with the economy growing 9.4 percent in 2006-07. While India continues to alter the coordinates of global trade, the country itself has seen robust growth in manufacturing with the sector growing 12.3 percent in 2006-07 as compared to 9.1 percent in the previous year. Very few countries in the world match these growth rates", he said. 

According to McKinsey Research, India has all the required skills needed by manufacturers in process, product and capital engineering, thanks to its long manufacturing history and higher-education system. India's vast domestic market and relatively low-cost workers with advanced technical skills are expected to make it a manufacturing powerhouse within five to 10 years. 

Already, more multinationals are setting up operations in India: ABB, Honeywell and Siemens in electrical and electronic products; Cummins, DaimlerChrysler, and Toyota in auto components and engineering; and Degussa, as well as Rohm and Haas, in specialty chemicals. All these operate in skill-intensive industries requiring advanced technical expertise—areas in which India is likely to become a primary sourcing and manufacturing base. 

High-end manufacturing 

The country is surely waking up to a manufacturing boom, with investments worth $18 billion committed by major global players in the electronics, information technology (IT) and telecom sector since mid 2005. "Every major company has India on its radar screen," says Wharton Professor of Management, Saikat Chaudhuri. "It's just a matter of timing." Clearly, India's competitiveness lies in relatively high-end manufacturing.
 

India could become a manufacturing powerhouse within five to 10 years, according to a study conducted by The Boston Consulting Group and the online journal of Wharton, Knowledge@Wharton. India's success is due mainly to its competitiveness in relatively high-end manufacturing and the huge engineering and scientific talent its universities churn out every year. It is only a matter of time that India converts its engineering prowess into manufacturing capabilities.

However, on the flip side, some government policies may take things to a reverse gear. The CII said the slowdown in some sectors could have been the result of recent monetary tightening measures of the Reserve Bank of India (RBI).

"While Industrial Production in April 2007 has generally shown an upward trend and has registered a growth higher than the corresponding period last year, the decline in growth of consumer durables, basic goods and capital goods is a slight cause for concern," the chamber said.
In a similar vein, the Associated Chambers of Commerce and Industry of India said the interest rate hike and double excise tax on some items had also restricted the growth to six key sectors of Indian industry.

Infrastructure issues

Some industry observers believe that India is still lagging behind in the global manufacturing race, due to erratic electricity supplies, poor roads, and grid-locked seaports and airports, in addition to government policies that discourage hiring and hold back domestic demand for goods in many sectors.

No one denies that infrastructure remains the biggest single obstacle to "Made in India" emerging as a world force. With the exception of telecommunications, the cost of most infrastructure services is 50 percent to 100 percent higher than in China, with Indian manufacturers paying twice as much for electricity and three times as much for rail freight.

But Knowledge@Wharton has an answer for this. India's success will be due mainly to its competitiveness in relatively high-end manufacturing and the huge engineering and scientific talent its universities churn out every year. It is only a matter of time before India converts its engineering prowess into manufacturing capabilities. The potential is huge considering that India is in the midst of the most ambitious infrastructure upgrade in its history—better roads, ports, power and airports, which alone could sustain an 8 percent annual GDP growth in the country. In India, skilled labor forms a major portion of the working age population. The country will have 25 percent of its population in the 25-30 age group by 2020.

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