Manufacturing Adds Punch to India's Growth

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 index of industrial production (IIP) 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.

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“The trends are encouraging, but it is too early to draw any conclusion,” said Union Finance Minister P Chidambaram, commenting on the IIP figures. The 15.1 percent manufacturing growth in April  was 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 they also predict a continued growth in the manufacturing sector. The chief economist of Reliance Industries Ltd said that 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.

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. 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.

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

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 on the other hand, Knowledge@Wharton  believes 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.

 

Uday Lal Pai,

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