For India, manufacturing has become the elephant in the room. Periodically, debates on whether India should pursue manufacturing and gain a more significant foothold or garner more share of the global services economy occupy the centre stage. While most advanced economies moved from agriculture to manufacturing to services in their economic development journey, India skipped a step and jumped from agriculture to services, with manufacturing contributing under 20% in both output and employment. It is quite natural that the manufacturing versus services debate keeps coming back time and again.
Let us get this straight. Global trade in manufactured goods is a $15-trillion opportunity, twice the global trade in services at $7 trillion. This data is enough to stop the debate of whether India should be just happy being a services economy or should make all efforts to become a manufacturing powerhouse.
Let us also not forget that at stake here is the goal of achieving a $10-trillion economy by 2030. We should not take any step that slows the march towards that target.
Recap of services journey
Riding on the back of the Y2K success in the late 1990s, we strode ahead to excel in IT services. Governments of the time took time to understand the sector and global dynamics. Soon enough, what started as a labour cost arbitrage transformed into a unique capability. Indian companies began offering more efficient solutions for various businesses that few other countries could offer at lower prices. That was a clean slate head start any country would aspire to have for economic growth.
On the other hand, India’s manufacturing, mired in several challenges such as a complex tax regime, poor infrastructure, and flawed lending norms, acquired the dubious reputation of being risky and totally inefficient to compete globally. Manufacturing, today, contributes to about 17% of the GDP and is expected to touch 21% in the next 6 years. We rank fifth in the global manufacturing table with a 3.3% contribution, and China is at 28.4%.
Where do we go from here?
India cannot afford to look away from manufacturing. It is not an either-or situation, but both. India still has lots and lots of headroom in manufacturing. We must look at India’s competitive advantage and fully harness that potential. We need to have a 6-point focus approach to this.
First, harness our manufacturing clusters. States like Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu, Telangana, and Uttar Pradesh have robust manufacturing clusters. These clusters offer many advantages, making them attractive destinations for domestic and international organisations. It has helped us build capabilities in sectors like automobiles, pharma, leather, and textiles. For instance, in a state like Uttar Pradesh, it is easier to consolidate the manufacturing expertise of the state than to try to build a knowledge economy.
Second, let us not forget that manufacturing comes before designing. The idea that manufacturing and designing can be separated is a gross oversimplification of the manufacturing process. History points to the fact that countries like Germany, Japan, Finland, Italy, and the UK, which now excel in product and engineering, started as countries that first excelled in manufacturing. Many of them, even today, remain excellent centres of manufacturing. Product innovation and design will be at its best when it works closely with manufacturing.
The automobile sector’s “smile curve,” where design and customer connect are the two high-value additions and manufacturing at the centre, was considered a low-value addition and has been disaggregated. Many auto companies had become like FMCG companies, focusing on marketing, and there was very little differentiation between car brands. Now, these companies are taking control of design and shifting focus more to “make” than “buy.”
Yes, India can certainly be the "back office" for global engineering design and services and should maximise that opportunity. However, India must have its own branded products and designs. In that case, it must start with manufacturing within India first.
Keep focus on innovation and design
Third, let us not undermine the importance of frugal innovation. India has always relied on frugal innovation. The importance of "frugality" is best understood in a country like India. From pharmaceuticals to defence, we have shown the world our capability to innovate frugally. It is only in India that specific designs for the specific needs of the Indian people can be made, and these designs can be highly effective when combined with modern manufacturing techniques. GE Healthcare’s efforts in India to build medical equipment at more affordable prices is a classic lore today. One that catapulted it into a billion-dollar business.
If India, with its size, fails to build its manufacturing muscle, it will lose its thinking and innovation capability significantly. The UK is a classic example of a country that has almost lost its once-strong manufacturing muscle and, consequently, other related capabilities. On the other hand, Finland retained its manufacturing capability and, despite being a country with just 5 million people, is home to at least a dozen well-known global product brands that keep changing with time.
Fourth, don’t lose sight of new frontiers like electronics manufacturing. Global electronics traded goods is a $5-trillion opportunity. We missed this opportunity entirely until we embarked on the road to digitisation and scripted our success story. This also coincided with the world looking for an alternative to China for manufacturing.
Electronics manufacturing includes electronics manufacturing services (EMS) and semiconductors. EMS is about precision machining and surface finishing on a humongous scale. Most often, it is mistaken for low-end manufacturing. There is nothing low-end about manufacturing metal enclosures for one lakh smartphones per day and subsequently assembling them. It would need around 70,000 operators. So, if India were to produce even 5 lakh mobile phones daily, this one product alone could generate 350,000 direct well-paying good jobs. So far, we have not seen manufacturing in electronics that involves scale, precision, and surface finish, all simultaneously. And a product that keeps changing every couple of years. This is a massive opportunity for upskilling and talent to be relevant.
Semiconductor manufacturing is the holy grail of all manufacturing. There is no doubt that setting up a fabrication plant or fab is expensive and complex. So was Chandrayan, India's moon mission. The most critical resource in setting up a fab is high engineering talent. India should focus on urgently producing such talent in large numbers.
Education more important than skilling
India completely missed the electronics manufacturing boom. We have lots to catch-up to, mainly in workforce quality and leadership. Also, India has a high capital cost and must compete with depreciated plants and machinery. Government support is necessary to overcome the initial challenges.
Sixth is education, and not skilling. We need to double down on education. It must be done at all levels — primary, secondary, or tertiary. Our youth on the shop floor should have basic numeracy skills, discipline, and an attitude to keep learning. Specific skills can be taught at the workplace quickly, and such skills will keep changing from time to time. However, to imbibe new skills, the proper foundation of basic education must be laid. A considerable part of that basic foundation is imbibing fundamental human values.
It is equally important to double down on high-end university education, produce more PhDs, do more basic research and partner closely with industry.
Undoubtedly, manufacturing capability building is a "must-do" for India. We fail to understand why many people in our country perceive working with one's own hands and producing real goods needed by the public as not valuable enough for investors or attractive enough as a profession.
Now why is manufacturing not considered an attractive option for investors is a question for the economists to answer!
Banmali Agrawala & Ravi Venkatesan
https://economictimes.indiatimes.com/small-biz/sme-sector/india-must-focus-more-on-manufacturing-and-this-is-the-way-to-do-it/articleshow/107100520.cms