India's Silent Manufacturing Boom

Though the current developments—credit crunch, commodity crisis and economic downturn—are challenging India’s strong growth performance of recent years, a manufacturing revolution has been well underway.

The silent manufacturing boom is spurred on by the increasing presence of multinationals, the scaling up of operations by domestic companies, and expanding domestic market. The sector has been averaging 9 percent annual growth in the last four years (2004-08), with a record 12.3 percent in 2006-07.

Indians are discovering now that India cannot sit on the laurels of its service industry, and has to ramp up its manufacturing sector to keep its position in the global economy. The Indian government’s pro-business policies and its own increasing use of information technology (IT) and automation will continue to build confidence among local companies seeking to invest in manufacturing, say industry analysts.

Make to eat

“The manufacturing sector is what will provide food on the table for 1.2 billion Indians,” said Kumar Bhattacharyya, founder-director of the Warwick Manufacturing Group (WMG), under the University of Warwick, in the United Kingdom. “With labor costs sure to rise in the near future, the services sector will not be able to maintain the edge it enjoys now,” he said.

India is taking advantage of its own prodigious IT talent. It might be best known as an IT outsourcing destination, but the U.S. credit crunch, a rapid rise in the Indian rupee and a drive for internal business efficiency is leading to a boom in India’s own IT spending. Industry research firm Gartner Inc. forecasts IT spending in India will reach $110 billion by 2012, at a growth rate of nearly 15 percent a year.

Another area of focus for the country is the contract manufacturing market—for instance, in the pharmaceutical industry. The Indian contract manufacturing market is expected to touch $2.46 billion by 2010 with an annual growth of 41.7 percent from $869 million in 2007.  “Indian companies, through their high quality-low cost production models, have bagged some impressive deals in the contract manufacturing space. These deals validate India’s potential to achieve a larger share of the global manufacturing outsourcing market,” consulting firm KPMG said in its latest pharma report.

The concrete efforts from various quarters reflect that India has the potential to become a major manufacturing power with its stable democracy, skilled manpower and inexpensive labor. All the top five telecom manufacturers have established manufacturing in India. Cummins is making India its manufacturing hub for a newly developed line of generator sets; Ford is making India its hub for engine manufacturing; Suzuki and Hyundai are making India the manufacturing and exports hub for small cars.

“Every major company has India on its radar screen,” says Saikat Chaudhuri, professor of management at the Wharton School at the University of Pennsylvania. And the number of companies, spanning diverse industries, that are planning to make India their global hub for host of operations has only been increasing by the day.

Chinese comparison

Yet, the manufacturing growth rate in the country is about half of that of its neighbor China. In the year to May 2008, China had recorded 16 percent growth in industrial production over the previous year. By comparison, India’s industrial output had grown by 7 percent in the year to April 2008 over the previous year.

A study titled “Indian manufacturing ...aiming to achieve 15 percent sustainable growth,” by the Associated Chambers of Commerce and Industry of India (Assocham), says the high cost of borrowing is another impediment to manufacturing sector growth. It says that while the average lending rates internationally range between 0.5 percent and 4 percent, they are as high as 12 percent in India.

But Subir Gokarn, chief economist (Asia Pacific), at financial research firm Standard and Poor’s, says that access to finance is a bigger problem than interest rates. What is required, he says, is “to create a channel of financing which allows entrepreneurs who have a viable project in the manufacturing sector to actually raise money.” Gokarn adds that if infrastructure and flexible labor laws are in place, financing will cease to be a bottleneck.

In order to boost manufacturing growth, S&P has forwarded a 20-point agenda to the government. The measures suggested include lowering interest rates and corporate tax, and provision of better infrastructure.

Uday Lal Pai, udaylalpai@gmail.com, is a freelance journalist based in India.
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