Industrial Strategy of India China

8/6/2019 Industrial Strategy of India China

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Term paper part 1: Analysis of Indian Manufacturing Sector

Anurag Rawat (061/46)

Amit Ambre (030/46)

ContentsIntroduction:......................................................................................2

Comparison of Reforms and growth trajectories of India and China:......2

Development of manufacturing capability in India................................8

India's relative underperformance in Manufacturing............................9

I. Role of Investment: Comparison of India and China.........................10

II. Foreign Direct Investment: Comparison of India and China............11

III. Structural and Policy Factors............................................................16

Potential for growth in Investment rate in India:................................17

Special Economic Zones: Comparison of India and China.....................18

Focus on R&D...................................................................................19

Recommendations:...........................................................................21

References:......................................................................................23


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Introduction:India and China are two major economies in South Asia that are both large with

huge population and growing fast. In this paper, we present a critical analysis of

growth of the Indian industry, specially concentrating on high tech industry in

general and medical devices in particular. The analysis primarily builds on Indias

comparison with China, which has succeeded in developing a strong industrial

base and manufacturing capability in high-tech sector in quick time. India and

China are similar in many respects which makes a case for comparison of the

growth of the two economies. Historically, though different in their extents, both

India and China had established central planning systems where the role of

government has been dominant in the production mechanisms and economic

decisions. Both the countries have vast territorial extension and large population

(together the two account for nearly a third of the world population). Both the

countries started the economic reforms process from late 1970s/ early 1980s

onwards.

This paper is structured as follows:

A brief about the economic reforms and their impact on the development

of different sectors in the two countries.

Detailed analysis on where India has lacked in developing its

manufacturing capability

Present a case for why India needs to develop manufacturing capability in

high- tech sector

Study of medical devices market and industry in India and the world. We

will present an economic and social case for development of medical

device and equipment industry in India

Finally, we will give policy recommendations for development of

manufacturing capability in India

Comparison of Reforms and growth trajectories of India and

China:


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Both India and China have witnessed rapid economic growth since the last

decade of the 20th century. While China's growth has been powered by a strong

manufacturing sector, Services has been the major source of India's GDP. After

three decades of Soviet- style planned development strategy, economic reforms

were introduced in China starting in 1978. The first part of Chinese economic

reform involved implementing the Household Responsibility System (HRS) in

agriculture, by which farmers were able to retain surplus over individual plots of

land rather than farming for the collective. By the end of 1984, approximately

98 percent of all farm households were under the HRS and the agriculture

output and the household income started to increase. This policy was followed by

incentives to rural industrialization through the establishment of the

Township and Village Enterprises (TVE's), which were industries owned by

townships and villages. The TVE's resulted in a boom in investment and

entrepreneurship and were considered to be the growth engines of the country

till the 1990s.

The second stage of reforms, started in early 1980s, aimed at creating a price

driven market system, creating market institutions and opening to foreign trade.

This stage of the reforms in the 1980s can be termed as pro-market reforms.

From an administered pricing regime in the early 1980s, most of the goods wereshifted to market prices by the early 1990s. Foreign trade was regarded as an

important source of investment funds and modern technology and restrictions on

commercial flows were relaxed and foreign investment was legalized allowing

and encouraging joint ventures with foreign firms. Special Economic Zones

(SEZs) were established that stimulated productive exchanges between foreign

firms with advanced technology and major Chinese economic networks.

Still till the 1990s, China could be called a socialist market economy. The main

sources of production were owned by the government. From 1994, another set of

reforms that can be termed broadly as "pro-business reforms", started taking

shape. In 1994, private ownership was considered for the first time a

"supplementary component of the economy which in 1997 was elevated to an

"important component of the economy". Privatization of State Owned

Enterprises (SOEs) and layoffs of state workers began to emerge on a

large scale. By early 2000s, nearly two thirds of China's GDP was in the private

sector.


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While China adopted a "pro-market" policy followed by "pro-business", India first

implemented "pro-business" followed by "pro-market" policy. Starting the early

1980s, the restriction on industrial production due to the licensing system was

reduced considerably. This was accompanied with increase in trade barriers to

protect the domestic industries from foreign competition. India was one the

closest economies during this period.

The Indian reform process switched towards the pro-market orientation

after the financial and political crisis in 1991. While, the previous initiatives

towards privatization and the removal of the system of licences were intensified,

a high priority was put to the lowering of foreign trade barriers and to the

enhancement of international integration. Tariff and non-tariff barriers were

reduced over time for most intermediate and capital goods and numerous

initiatives were also put in place to attract foreign capital, especially in

services.

Political events and main economic reforms, China [8]

YEAR POLITICAL EVENTS MAIN ECONOMIC REFORMS

1976 1966-1976 Cultural Revolution

1978

Election of Deng

Xiaoping

1979

Creation of HRS (Household Responsibility System),

peasants allowed to retain over-quota output

1980 Creation of Special Economic Zones

1981

Beginning of 1980s: creation of TVEs (Township and

Village Enterprises)

1983

The People's Bank of China was nominally

designated a central bank

1984

1982-1983 elimination of price controls on more 500

small consumer items 1980-1983 fiscal contracting

system, local governments allowed to retain over-

quota revenues Dual-track system, enterprises were

allowed to sell over-quota product at market prices

1989

Tiananmen Square

Event

1990 Two stock exchanges were set up

1992 Socialist MarketEconomy declaration

Commercialization" of SOEs (State OwnedEnterprises) Regulations on Transforming the


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Management Mechanism of State-Run Industrial

Enterprises "

Full price marketizationAbolishment of the iron rice bowl (the permanent

employment system)

1993 New accounting system

Tax reform

1994

Abolishment of dual-track exchange rate Separating

tax reform, a brand new unified tax system including

VAT, and recentralization of tax collection to central

governmentAdoption of four major state banks of the

international accounting standard1995 Privatization of small SOEs

Budget Law Central Bank Law, central bank has the

mandate for monetary policy independent from the

central government

1999

Private ownership and the rule of law incorporated

into the Constitution

2001 Ascension to WTO

2004

Constitution amended to guarantee private property

rights

Political events and main economic reforms, India [8]

YEAR

POLITICAL

EVENTS MAIN ECONOMIC REFORMS

1975 During the '70s the Green Revolution was implented

1976

Re-introduction of OGL (Open General Licensing, list of

goods with no license for import) list with 79 capital

items

1978

By the end of '70s, increasing pressures for

liberalization policy from industrial lobbies

1980

Re-election of

I. Gandhi

1981Removal of licensing requirements in 20 industries andsome relaxation of import controls


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1984

Murder of I.

GandhiElection of R.

Gandhi

1985Introduction of replenishment licenses to exporters asincentives

1985

Introduction of replenishment licenses to exporters as

incentives50% of business profits from exports made income tax

deductibleThe interest rate on export credit was reduced from

12% to 9%47 product groups free from the industrial licensing

systemPrice and distribution controls on cement and aluminium

abolished

1986

Canalization declined from 67% in 1980 to 27% of total

importsDuty-free imports of capital goods allowed in selected

thrust" export industries "

28 industry groups broad banded, no license for product

differentiationCapacity utilization allowed to expand in firms reaching

80% capacity utilizationBetween 1985/1986 relaxation of MRTP (Monopolies and

Restrictive Trade Policies)

1987

OGL reaches 1007 capital goods and 620 intermediate

goods

1988

100% of business profits from exports made income tax

deductibleOGL reaches 1170 capital goods and 949 intermediate

goods

1990

Between 1985/1990 the real exchange rate was

depreciated by 30% (nominally 45%)OGL reaches 1329 capital goods Introduction of

MODVAT (Modified Value Added Tax) covering all

manufacturing sub sectors (excl. Petroleum, textiles and

tobacco)

1991

Murder of R.

Gandhi Statement of Industrial Policy


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Election of N.

Rao

Public monopoly limited to 8 sectors, all the others

opened to private investmentsFinance

Minister M.

Singh Relaxation of controls on FDICreation of Special Economic Zones where 100% of FDI

allowed in manufacturing sectors

1992

Devaluation of the rupee by 22% against dollar

Introduction of a dual exchange rate: exporters allowed

to sell 60% of their exchange in the free market, and

40% to the government at a lower official price

1993

Foreign companies own up to 51% equity in 34 high

priority industries

1994

The highest tariff rate on import fell to 85% (it was

355% in 1990)

1996

Win of BJP,

first no-left

party

National Telecommunications Policy for private and FDI

in cellular and telephone services The highest tariff rate

on import fell to 50%

1997

Instability

BJP/Congress

1998

Election of

A.B.Vajpayee

(BJP)

1999

The Insurance Regulatory and Development Authority

permits private and FDI to operate in the insurance

market

Liberalization of banking

NTP defined FDI in internet servicesInfrastructure sectors opened to private and FDI (excl.

Railways)

2003

Electricity Bill privatized generation, transmission and

distribution of electricity

2004

Election of

M.Singh

(Congress) The highest tariff rate on import fell to 25%


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Development of manufacturing capability in IndiaAfter the economic reforms introduced in 1991, India has witnessed rapid

economic growth. A major feature of this development is the role of services

sector in driving growth. While the share of agriculture has reduced, almost the

entire share of agriculture has moved to services sector, which have come to

acquire nearly 55% of the GDP, and the share of manufacturing has remained

constant at 15-17%.

Statistics: i. GDP growth rates over last 20 years; manufacturing and services

growth ii. sector share in GDP. Iii. Per capita figures

Sourced from:Annual Report 2009-10, DIPP [1]


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Source: World Development Indicators 2006

While the emphasis on services rather than manufacturing has been widely

noted, within manufacturing India has emphasized skill-intensive rather than

labour-intensive manufacturing, and industries with typically higher average

scale. Indias relative under-performance in manufacturing is matter of concern

especially with regard to the high technology manufacturing. Indias CurrentAccount Deficit has been inflating with imports of electronic and other high tech

goods forming an increasing part of it.

What is required is a restructuring of the economy such that industry acquires a

much higher share. Why does it matter? As Panagariya (2005, pp. 193195)

quoted: Because typically, under liberal trade policies, developing countries are

much more likely to be able to expand exports and imports if a large portion of

their output originates in industry.

India's relative underperformance in Manufacturing

While India has experienced high rates of growth since the early 1990s onwards,

the share of manufacturing in the GDP has remained stagnant at around 15-17%.

A major portion of the growth is driven by services sector which now has more

than 55% share in the GDP. Almost the entire reduction the agriculture share of


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GDP has gone to the Services sector. In it trajectory of economic development,

India is said to have missed the manufacturing growth phase. Industry in China,

on the other hand, has nearly 55% share in the GDP. So why has manufacturing

sector in India lagged behind compared to China?

A lot of research has been done in this area and we will directly state the reasons

asserted for the same. In a general sense, it can be said that the investment

climate in India is not good compared to China.

I. Role of Investment: Comparison of India and China

The main difference between China and India lies in the relative importance

of investment. [5] Investment has played a much more important role inpropelling economic growth in China. Gross fixed capital formation in China as

a share of GDP stood at a staggering 42.5% in 2003, while the comparable

figure for India was substantially lower at 27.7%. During 19802003,

investment grew at an annual average rate of 11.7% in China, compared to

6.8% in India. Due to the higher growth rate, as well as to the higher

proportion of investment in total output, the contribution of investment to

overall growth in China far exceeds that in India (this is calculated as the

product of the share of investment in GDP times the growth rate of

investment, divided by the growth rate of GDP). During 19802003,

investment contributed on average about 40% of total growth in China, while

its contribution in India was 25.5%. [6] Figure below shows the investment

shares of the two economies.

The importance of investment in China seems to mirror the experience of

some of the East Asian newly industrialized economies. Young (1995, pp.

644645), for example, noted that investment shares in these economies rose

substantially during the years of rapid growth. Singapores investment to GDP

ratio (measured at constant local currency prices), stood at 10% in

1960, before going on to reach 39% in 1980 and 47% in 1984, after which it

declined to below

30% by 1988, only to begin another rise in the late 1980s and reached almost

40% in 1997. In Korea, investment shares were around 5% in the early 1950s,

but climbed to 20% in the late 1960s and to 30% by the late 1970s. They

were approaching 40% by 1991. In Taiwan, the share was around 10% in the


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early 1950s, from which it grew steadily to 27% in 1975, after which it has

fluctuated at around 22%. [7] We conclude that the major factor explaining

the difference in growth rates between the two economies lies in the

differentials in the share of investment and in the rate of capital

accumulation.

Gross fixed capital formation as a share of GDP (%)

Source: World Bank, World Development Indicators

II. Foreign Direct Investment: Comparison of India and China

In this section, we will outline the reasons why India has not been able to

attract FDI flows as China has. Besides that, the issue of quality of FDI is will

be discussed. Finally, suggestions to attract greater more and better quality

FDI will be presented.

FDI is defined as: An investor based in one country acquires an asset in

another country with the intent to manage that asset (OECD, 2000). FDI has

become very important in global trade and economic development. The

global stock of FDI at the end of 2006 stood at $10 trillion. A large part of this

FDI stock (more than two-thirds) is between the TNCs (Trans National

Corporations). FDI in developing countries increased by 40% in 2004. This

was mainly due to M&A activity and Greenfield FDI rising. The success of


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Asian Tigers- South Korea, Hong Kong, Taiwan, and Singapore in last two

decades has been largely attributed to FDI (Zhang, 2001 [10]; Lall, 1993

[11]). Trying to mimic this success story many countries are trying to attract

FDI in a variety of ways. China has seen the largest volume of net FDI inflows

than any other country in the past few years.

FDI Statistics: The stock of foreign direct investment (FDI) in India soared

from less than US$2 billion in 1991, when India undertook major reforms to

open up the economy, to almost US$ 39 billion in 2004 [12].Annual Report

2009-10, Department of Industrial Policy and Promotion For the period

April, 09 to December, 09 of Financial year 2009-10, the FDI equity inflow was

Rs. 100,539 crore (US$ 20.9 billion). The cumulative FDI inflow from August

1991 to December, 2009 is Rs. 5,54,270 crore (US$ 127.5 billion). . Mauritius

is the main source, followed by Singapore, the US, the UK, the Netherlands

and Japan.

FDI overview, selected years

(Millions of Dollars)


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Sector-wise Distribution of FDI: Total FDI inflows are estimated at US$90

billion during April 2000 to March 2009. Services sector; computer hardware

& software; telecommunications; real estate; construction; automobiles;

power; metallurgical industries; petroleum and natural gas; and chemicals

received the highest FDI. The sector-wise distribution of FDI in India hasundergone a significant change over the past recent past. We have divided

the period after 1991 into 2 parts for comparison. Emergence of service

sector is clear from the figures below.


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How does FDI help? Emerging markets do not have sufficient internal capital.

The government is devoid of resources and the private sector lacks

resources. Internal savings are insufficient to support rapid growth that the

economies need. Besides, they lack the technological expertise and know-

how to invest in large projects.

Basic factors affecting FDI:Market growth rates, political stability,

corruption, exchange rate, labor productivity, economic freedom,

infrastructure, openness, human capital, and taxes affect FDI flows to global

markets (Sinha, Kent and Shomali, 2007 [12]). Overall, this means creating a

better investment climate and ease of doing business increases FDI flow.

Factors restricting FDI flows in India: Lack of Infrastructure is a major issue

restricting foreign capital investment. The power supply is in-sufficient and

unreliable. Industries have to employ their own generators that add cost to

manufacturing. The ports and internal transportation networks are under-

developed. The growth has been restricted to certain areas and sectors with

few major states (Maharashtra, Gujarat, Hyderabad, Andhra Pradesh, Tamil

Nadu, and Delhi) taking a disproportionate share of FDI and services sector

contributing to more than 50% of GDP. Several political parties have stood

against entry of foreign competition resulting in policies that restricted FDI.

Tariffs and taxes on the TNCs have been high. Many sectors have not been

opened up for foreign investment and there have been caps on most others.


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Fiscal deficits and corruption, combined with lack of privatization have

affected capital formulation. Archaic labour laws and missing diaspora

involvement have prevented creation of a conducive business climate (Sinha,

Kent and Shomali, 2007 [12]).

FDI Quality: There is skepticism about the growth effects of FDI in India. This

skepticism is justified for several reasons. Setting aside the recent boom, FDI

inflows may still be too low to make a big difference. It forms too small a

portion of the gross fixed capital formation to be considered an important

driver of economic growth. Secondly, there is skepticism about the change in

the quality of FDI from the economic reforms. It is widely believed that the

quality of FDI and its structural combination matter at least as much as the

volume of the inward flows. FDI that promotes exports, transfers technologies

to host country, and/or has economic spillover effects promoting local

enterprises and benefitting local workers is considered to be of higher quality.

While this skepticism prevailed in early years of the decade, there have been

indications that FDI in manufacturing sector falls somewhat in line with the

definition of quality FDI.

FDI in Manufacturing: Analysis by Chakraborty and Nunnenkamp [13] and

many others, finds that favourable growth effects of FDI are largely restrictedto the manufacturing sector. There is no evidence of any causal relationship

of FDI in the primary sector. The causality in services sector is the reverse,

greater output leads to greater FDI. However, there is an indication of

spillover effect of FDI from the services to manufacturing sector.

Quoting the results from a study by NCAER [2] gives the following striking

features of FDI in manufacturing sector:

A significant proportion (54 %) of manufacturing plants is located in

Class-3 cities compared to the 35% services facilities.

44% of FDI received in manufacturing sector has moved to tier-3 cities

compared to only 8% in services

About half the total output of FDI-enabled manufacturing firms

originates in Class-3 cities; 48% of value-added originates in Class-3

cities; 45% of the payments to employees originates in small cities

FDI-enabled firms in manufacturing sectors provide employment to

about 15.6 lakh persons, accounting for about 4 to 5% of the total


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employment in the organised sector. Sectors providing a relatively high

share of employment in Class-3 cities include transport equipment;

growing and processing of crops; construction parts; textiles; and non-

metallic mineral products.

FDI-enabled manufacturing firms pay higher wage per rupee of net

fixed capital than domestically invested manufacturing firms. Output-

capital ratio is also higher in FDI firms than in similar domestic firms.

FDI Promotion: The current euphoria about FDI may be over-optimism on

about its merits. Nonetheless, FDI needs to be promoted in a strategic way

that promotes growth and technological advancement. Only opening FDI to

new industries is not sufficient. The policy challenge is to improve local

conditions to make FDI more effective.

Development of strategic infrastructure: Availability of road transport,

electricity, water, telecommunications and other resources promotes

efficiency and ease in doing business. The infrastructure should be

strategic in the sense of location, reflecting the demographic realities

and supporting the strategic intent of promoting a specific economic

activity. Economic clusters should be developed that are self

contained, with connectivity and proximity with the markets or ports,

and equipped with the necessary infrastructure and talent generation

facilities.

Openness to trade is important for strengthening linkages between

foreign and local companies, especially in the manufacturing sector.

Development of financial sector, promotion of entrepreneurship and

human capital development will both attract FDI and create linkages

across sectors.

Spreading the growth geographically areas with relatively low

economic development will create spillover effects that will be more

favourable.

The availability of sufficiently skilled labour as well as adequate

infrastructure, particularly telecommunications, would support the

process of off-shoring higher value-added services to India and the


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dissemination of the benefits of IT-related services throughout the

Indian economy (UNCTAD, 2004, pp. 207208; World Bank, 2005, p.

76).

I. Structural and Policy Factors

1) Long time to start up and exit a business: The World Bank's

"Doing Business" database shows that In China the average time taken

to secure necessary clearances to start up, or to complete a

bankruptcy procedure is much shorter than India.

2) Rigid labour laws: Indian labour laws give firms far less flexibility with

their employees than in China, Brazil, Mexico or Russia. Retrenchment,

closure and layoffs are governed by the Industrial Disputes Act, which

requires prior government permission to lay-off workers or close

businesses employing 100 or more workers. Permission is not easily

obtained. Private firms have successfully downsized using voluntary

retirement schemes. Foreign banks are also required to get the RBI's

approval for closing branches.

Lack of Infrastructure: The situation of power supply is alarming in

India, with frequent power outages and high costs. Because of this,

power generators have become standard industrial equipments in

India. Almost 61% of Indian manufacturing firms own generators, the

figure is 27% for China and 17 % for Brazil. The combined real cost of

power in India is 74% higher than Malaysia's and 39% higher than

China's. The situation of transport also needs to be improvedsignificantly.

Capital Constraints and inefficient land markets: Evidence from

the World Bank report suggests that India might be losing productivity

because of capital constraints and inefficient urban land markets.

Inefficient land markets have driven cost of doing business in India

more than anywhere in East Asia.


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Corruption: U.S. firms have identified corruption as one obstacle to

foreign direct investment. Indian businessmen agree that red tape and

wide-ranging administrative discretion serve as a pretext to extort

money. According to some foreign business representatives in India,

corruption lies in the lack of transparency in the rules of governance,

extremely cumbersome official procedures, and excessive and

unregulated discretionary power in the hands of politicians and

bureaucrats.

Potential for growth in Investment rate in India:

As noted above, the most important factor underlying differences in growthbetween China and India is capital accumulation. This is mostly the result of a

much higher investment-to-output ratio in China.Indias investmentoutput ratio

is only about 55% that of China, and grows much more slowly. With the slow

growth, gap between the investmentoutput ratios of the two countries has

widened more. Between 1981 and 1999, Chinas investment share was above

Indias by 12.9 percentage points on average. In 1999, the gap was 17.9

percentage points. Thus, the rising investment share has played a major role in

explaining Chinas rapid capital accumulation and, therefore, the difference in

capital accumulation between the two economies. Although the capital

productivity is higher in India compared to China, the differential in the

investment share between the two countries is so large that Indias increasing

capital productivity cannot compensate its much lower investment share,

resulting in a much smaller growth rate of the capital stock. A high investment

share has an effect of increasing the speed of capital accumulation in China.

Investment rate v/s profit rate: The ratio of the actual growth rate of capital

accumulation to the profit rate can be interpreted as an indicator of the degree

to which the growth potential of the economy is being utilized (Shaikh, 1999).

[15] A ratio below 1 indicates that the countrys capacity for investment is not

fully utilized. The more this ratio approaches 1, the higher the probability that

excess demand will end up accelerating inflation rather than boosting growth. In

some sense it is an indicator of the tightness of the economy.

Ratio growth rate of the actual capital stock to the profit rate


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In China, the rate of capital accumulation has been close to, or exceeded, the

profit rate. The average ratio from 1979 to 2003 was 1.1. The rate has been

especially high since 1995 with the ratio averaging 1.4 during 19952003. In

China virtually all profits are reinvested. [16] India exhibits a very different

picture. The ratio between the growth rate of capital stock and profit rate

averaged 0.3 from 1980 to 1999, with very small fluctuations.

The low ratio of the rate of capital accumulation and the profit rate in India

suggests that India possesses a large untapped investment potential that can lift

growth to the rates that China has achieved. As such, it is imperative to

understand and address the impediments to its full utilization. Existing studies

suggest that, despite economic reforms, hurdles to investment are still high as

the investment climate is far less favourable than that of China. Moreover, much

of this new investment needs to be directed into infrastructure. However, withthe high level of fiscal deficit, the government is in no position to pursue an

expansionary fiscal policy to stimulate public investment. The conclusion is that

it appears that India will not be able to emulate China and achieve (and in

particular sustain) growth rates in excess of 10% within the next few years

without addressing the need for fiscal consolidation.

Special Economic Zones: Comparison of India and China


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Like China, India is offering many benefits like tax breaks, duty-free imports,

freedom from customs procedures, flexible labour laws, etc. One of the major

comparisons between SEZs in China and India is the size. Each SEZ in China is

well over 1000 hectares. In India, while the SEZs are smaller, the minimum size

of SEZs has been increased after the implementation of SEZ Act, 2005.

Another differentiating aspect is the availability of power. In China, the power

supply in SEZs is at cheaper rates and there are no power cuts.

In China, the decision-making for SEZs has been decentralized. This is considered

as one of the major reasons for success of SEZs in China. Local authorities have

been made partners and given authority to approve foreign investment. In India,

the powers for foreign investment approval are vested with Development

Commissioners, who are the representatives of the central government.

The flexible labour laws with the hire-and-fire policy in SEZs have been one of

the biggest attractions for foreign investors in China. All jobs are on a contract

basis which stands terminated on the expiry of the term; the terms are flexible

for a specific job. In contrast, in India, labour laws are very problematic for

employers, with the Industrial Dispute act of 1947 not allowing companies that

have 100 or more employees to retrench labour without prior permission from

the concerned state government.

Study by NCAER [2] - A few policy measures to enhance the performance of the

SEZs include a vision in the design, establishment and operations of the SEZ; it is

necessary to develop zones as industrial clusters of specific products. The

backward linkages would also benefit the growth of accessories units. They,

perhaps, could also encourage downstream industries; zones in the long run

need to give way to industrial clusters of horizontally and vertically integrated

industries, in general, and high-tech industries, in particular. This would not only

help jump-start manufacturing processes, but would also improve exportcompetitiveness with greater returns. At present, there is no autonomous

authority responsible for the development of zones and for providing single-

window clearances in India; the zone administration functions as a government

department office. It is recommended that the SEZs should be managed by

autonomous authorities, which should be constituted under specific Acts and

should be assigned the responsibility of promoting the zones.

Focus on R&D


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Successful manufacturing locations around the world tend to invest heavily

in R&D. The US spending on R&D was around USD 340 billion[6] in 2007

with around 80 percent of this being spent by business. In contrast,

Indias R&D expenditure was estimated at around USD 6 billion in 2006[7],

with around 20 percent being business related R&D.

[6] Science and Engineering Indicators 2008, National Science Foundation

[7] KPMG Analysis. UNESCO ISE, UN Statistics, Policy Brief (Jul2008) OECD

India has the essential ingredients to transform itself as the research and design

hub for manufacturing. Firstly, going by the population growth rate projections of

the World Health Organization, India will have the largest pool of working agepopulation in the world with a large number of technically qualified people

proficient in English. Secondly, Indian businesses have shown skills at managing

to the world through the outsourcing business. Thirdly, India has well established

and fast growing manufacturing sector which needs to innovate and invest to

sustain and increase the growth. For this, India needs to position itself

proactively attract a greater share of global R&D spending. Besides investment

in technical education and increasing expenditure on R&D activities, importing

technology and marketing are two key ways in which the country can attain

greater technological sophistication and create an environment that fosters

innovation.

Technology Import:The importance of FDI and technology transfer has never

been under-estimated but has been under-utilized by Indian manufacturing

sector. FDI and acquisitions are the routes that should be actively pursued to

acquire technological expertise and intellectual property, that can create a

culture of innovation and generation of new knowledge and business practices.


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Regulations governing overseas acquisitions need to be eased and promoted by

the government [study the global acquisitions regulations by GOI].

Marketing: We should be able to market our capabilities as a good destination

for R&D and engineering services. Human capital development and manpower

marketing are critical tools for this. Broadening the skill base is a critical

requirement. Prof. C.K. Prahalad suggests that we aim to have 200 million

college graduates and 500 million certified and skilled technicians by 2022. [17]

Recommendations:

1) Infrastructure Development:

According to a world bank analysis [4], most important and robust determinant

of productivity and factor accumulation in the last two decades has been state

development spending (spending on infrastructure, health, education etc). Public

sector has an important role to play here. This is so since in this area, especially

in infrastructure provision, private returns are much below social returns. This

role gets more enhanced as India is a developing country where private capital is

limited in supply.

Development of Inland transport : The inland transport network needs to

be expanded. Indian Railways is highly in-efficient and needs to be

expanded. The Chinese experience in railways can come in handy with the

success they achieved by privatization and India can follow the same

course. Statistics on road and rail connectivity in India

Rapid Expansion of power generation capability and reforms in

distribution: Reform in power and electricity sector is necessary. The

power distribution companies and State Electricity Boards should be

privatized and the subsidy on power removed. Rather than free rural

power, cheap power should be provided to reduce wastage. The

government can generate funds from disinvestment of public sector

enterprises. This will create dual benefits it will provide funds to the

government and promote efficiency in those industries as the private

sector has shown to be more efficient and greater management expertise.

The government should then focus on promoting health care and

education.


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Development of large new ports : The existing Indian ports are congested

with poor management. Large new ports should be built in states like

Bihar and Orissa from scratch with world class facilities that can handle

large ships. Public private partnership with build-operate-transfer should

be welcomed. The existing ports should be privatized and made more

efficient using the modern operations management methods including

just-in-time and supply chain management concepts.

1) Focus on skill neutral manufacturing: The manufacturing sector in the

GDP needs to be given more focus. The services sector cannot provide jobs to

the burgeoning Indian population. Sam Pitroda commented that IT and BPO

create only 3, 00,000 jobs against 10 million required Statistics on the

number of jobs in Services sector. A boom in manufacturing is required to

employ the idling population from agriculture. In last 2 decades, Indian

manufacturing growth has seen a jobless growth. There is a large uneducated

population in India that needs to be employed. Skill neutral mass

manufacturing focus is required to generate employment. Large scale export

oriented manufacturing industries should be promoted. Coastal areas in

Bihar such as Gopalpur might be an ideal place for setting up large

manufacturing units that can be export-oriented to feed large US west coast

market (Sinha, Kent and Shomali [12]).

2) Relaxation of company laws:The labour laws need to be relaxed providing

the companies flexibility in their operations. The limit of the number of

employees above which the companies come under the purview of labour

laws is 100. Changes are under consideration that will make the figure to 300.

Sinha, Kent and Shomali [12] recommend the size to be 1000 employees to

provide the smaller size companies greater flexibility in changing their

operations. According to a World Bank study [4], labour market flexibility, by

itself, can improve productivity to a large extent and has a positive effect on

employment and investment as well. Deregulation can only be useful in the

presence of better labour laws.

The bankruptcy laws have to be simplified to make it easy of the companies

especially TNCs to enter and exit the market. Employee lay-off needs to be


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allowed in the public sector to make them lean and more efficient. Overall,

the legislation has to be made more congenial for business activity.

3) SEZ development: Already discussed in the Section on SEZs

4) Encouraging investment from NRIs:

5) Human Capital Development:


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References:

[1] Annual Report 2009-10, Department of Industrial Policy and Promotion,

Ministry of Commerce & Industry, Government of India

[2] FDI in India and its Growth Linkages, August 2009, Study by National

Council of Applied Economic Research; sponsored Department of Industrial Policy

and Promotion, Ministry of Commerce & Industry, Government of India

[3] ManufacturingIndia@75, KPMG-

CIIConferenceonManufacturingCompetitiveness:

Technology,OutsourcingandInnovation, October 17, 2008

[4] Devashish Mitra, Beyza P. Ural, Indian Manufacturin: A slow growing sector

in rapidly growing economy, World Bank Policy Research Working Paper 4233,

May 2007.

[5] Kalpana Kochhar, Utsav Kumar, Raghuram Rajan, Arvind Subramanian,

Ioannis Tokatlidis. Indias pattern of Devwlopment: What Happened, What

Follows; National Bureau of Economic Research Working Paper 12023

[6] Science and Engineering Indicators 2008, National Science Foundation

[7] KPMG Analysis. UNESCO ISE, UN Statistics, Policy Brief (Jul2008) OECD

[8] Michele Alessandrini and Tullio Buccellato, CHINA, INDIA AND RUSSIA:

ECONOMIC REFORMS, STRUCTURAL CHANGE AND REGIONAL DISPARITIES,

Economics Working Paper No.97, December 2008; Centre for the Study of

Economic and Social Change in Europe

[9] http://www.siliconindia.com/guestcontributor/guestarticle/44/Hitech

manufacturing an opportunity in waiting.html

[10] Zhang, K.H., What Attracts Foreign Multinationals to China, Contemporary

Economic

Policy, 19:3, 2001, 336-361

[11] Lall, Sanjaya, Foreign Direct Investment in South Asia, Asian Development

Review,

11:1, 103-119, 1993
http://www.siliconindia.com/guestcontributor/guestarticle/44/Hitech_manufacturing__an_opportunity_in_waiting.htmlhttp://www.siliconindia.com/guestcontributor/guestarticle/44/Hitech_manufacturing__an_opportunity_in_waiting.htmlhttp://www.siliconindia.com/guestcontributor/guestarticle/44/Hitech_manufacturing__an_opportunity_in_waiting.htmlhttp://www.siliconindia.com/guestcontributor/guestarticle/44/Hitech_manufacturing__an_opportunity_in_waiting.html


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[12] Swapna S. Sinha, David H. Kent, Hamid Shomali, COMPARATIVE ANALYSIS

OF FDI IN CHINA AND INDIA, Journal of Asia Entrepreneurship and Sustainability,

Volume 3, Issue 2, September 2007.

[13] Chandana Chakraborty and Peter Nunnenkamp, Economic Reforms,

Foreign Direct Investment and its Economic Effects in India, Kiel Working Paper

No. 1272, The Kiel Institute for the World Economy, Duesternbrooker (Germany)

[14] JESUS FELIPE, EDITHA LAVINA and EMMA XIAOQIN FAN, "The Diverging

Patterns of Profitability, Investment and Growth of China and India During 1980

2003", World Development Vol. 36, No. 5, pp. 741774, 2008

[15] Shaikh, A. (1999). Explaining inflation and unemployment: An alternative to

neoliberal economic policy. In A. Vachlou (Ed.), Contemporary economic theory.

London: Macmillan.

[16] Singh, K., & Bery, S. (2005). Growth experience. In W.Tseng, & D. Cowen

(Eds.), Indias and Chinas recent experience with growth and reform (pp. 2358).

New York: Palgrave Macmillan

[17] India@75by CK Prahalad. Lecture Delivered during the India@60

celebrations in New York, September 23, 2007

[18] Kalim Siddiqui, The political economy of growth in China and India. Journal of

Asian Public Policy, Vol. 2, No. 1, March 2009, 1735

[19] National Bureau of Economic Research. (Feb 2009). Robert C. Feenstra,

Shang-Jin Wei, Introduction to Growing Role of China in World Trade, Working

Paper 14716.

[20] Wang, Miao(2009) 'Manufacturing FDI and economic growth: evidence from

Asian economies',

Applied Economics, 41: 8, 991 1002

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