Business Government and Society

Enhancing India’s
Manufacturing
Competitiveness

Project Report

Indian Institute of Management Bangalore

Submitted by:
Group – 2, Section E (PGP 2009-11)
BGS Group Project Enhancing India’s Manufacturing Competitiveness

Ajay Bhatia(0911289), Shikha Rawat(0911344), Sunidhi Gupta(0911347),

Tarun Kumar(0911349), Umang Rustagi(0911351), Vandit Bhurat(0911352)

Acknowledgement

We take this opportunity to thank Prof. Supriya Roy Chowdhuri, for guiding us and providing
an opportunity to work on this project, learn about various aspects of Business Government and
Society and apply the theoretical concepts learnt in the classroom to practical Issues relevant in
today’s situation.

We would also like to express our gratitude towards We would also like to express our gratitude
towards Mr. Mrutuyanjoy Sahu for his timely inputs and suggestions along with the time he
gave for reviewing the draft.

The discussions with our colleagues at IIMB were an indispensable source of information and
have spawned a lot of insight for this project. But what is even more important, our joint work
was always a pleasure, and we had a lot of fun together.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Table of Contents
Acknowledgement.......................................................................................................................................1
INTRODUCTION...........................................................................................................................................4
MANUFACTURING INDUSTRY IN INDIA...................................................................................................4
Current Scenario......................................................................................................................................5
Performance & Problems........................................................................................................................6
Future of Indian manufacturing...............................................................................................................6
Part- I GREEN TECHNOLOGY.......................................................................................................................7
GREEN TECHNOLOGY- Sustainable Development.......................................................................................8
Current Scenario:.....................................................................................................................................9
Challenges:..............................................................................................................................................9
Relevance:...............................................................................................................................................9
Recommendations:................................................................................................................................10
Part- II Improving Factors of Production..................................................................................................11
DEVELOPMENT OF HUMAN CAPITAL.........................................................................................................12
Forecasting employment needs:...........................................................................................................12
National Skill Development Mission:.....................................................................................................12
Development of Labor Intensive industries:..........................................................................................13
Creating Skill base:.................................................................................................................................13
INFRASTRUCTURE......................................................................................................................................14
Relevance..............................................................................................................................................14
Present situations..................................................................................................................................14
•G-Generation •T-Transmission •D-Distribution Conclusion & Recommendations.............................16
CREDIT AVAILABILITY.................................................................................................................................16
Current Scenario....................................................................................................................................17
Recommendations.................................................................................................................................17

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

TECHNOLOGY............................................................................................................................................19
Current scenario....................................................................................................................................19
Challenges.............................................................................................................................................20
Recommendations.................................................................................................................................20
Part- III Role of Government.....................................................................................................................22
REFORMING INDIA’S ARCHAIC LABOUR LAWS..........................................................................................23
Need for Labour Law Reforms...............................................................................................................24
Recommendations.................................................................................................................................25
Part-IV Sector Specific Problems..............................................................................................................27
ISSUE OF SMEs...........................................................................................................................................27
Relevance..............................................................................................................................................28
Current Scenario....................................................................................................................................28
Conclusions & Recommendations.........................................................................................................29
CONCLUSION.............................................................................................................................................32

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

INTRODUCTION
Manufacturing can be defined as physical or chemical transformation of materials into products
on a large scale using machinery or capital equipment. The products may be finished
consumption good, semi-finished goods or capital goods. 1Manufacturing industry is divided into
some well recognized categories such as chemical, food and beverages, electronics, engineering,
energy, industrial design, metal-working, textiles and transportation among others.

MANUFACTURING INDUSTRY IN INDIA

India has a rich history in the field of manufacturing.

Manufacturing activities in India were present even at the
time of the Harappan civilization, 5000-6000 years back.
Weights and measures and copper smelting tools were some
of the products found from that time.2 Historically, India was
a leader in textile exports. There was a break from this
diverse history at the time of the Industrial revolution. India
was not a participant. It lagged behind.

At the time of independence, India was primarily an agrarian

economy. The second plan and the implementation of the
Nehru-Mahalanobis strategy brought with it an emphasis on
capital intensive industrialization headed by the public
sector. A drive towards setting up of heavy industries was
accompanied by export pessimism and an inward-looking strategy. These factors did not lead to
a ‘big push’ in the direction of economic growth but it helped India build a strong base for its
industry.

The economic reforms made a significant change. The manufacturing industry growth picked up.
Liberalization and increased competitiveness led to consciousness of quality and efficiency. The
mindset changed from one predominantly bureaucratic to one focused on cost effectiveness and
customer satisfaction. Certain sectors such as the automobile sector saw drastic changes.
Moreover, the IT boom of the 90s was also a major milestone. India became prominent on the

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

global map. However, growth was restricted to a few select sectors and most manufacturing
activities were at the bottom of the heap.

Growth in the manufacturing sector in India has gone through a series of ups and downs since
independence as shown in the table below.

Average Annual Decadal Trend Trend Growth

Time Period
Growth Rates Growth Rates Rate

1952-54 5.3 7.2

1955-59 7.4

1960-64 9.3
5.7
1965-69 3.9

1970-74 2.8
4.4
1975-79 5.3

1980-84 4.8 5.7

7.6
1985-89 8.9

1990-94 5.1
7.1
1995-99 7.9

2000-01 5.3

2001-02 2.9

Profile of growth rates of Indian manufacturing sector

Current Scenario

Growth picked up in the middle of this decade, took a hit due to the economic crisis in India and
the world and is now in recovery mode. A survey by CII ASCON revealed that sectors such as
fertilizers, pig iron, steel and moped recovered showing a moderate growth of up to 10% in
production with others like ‘vanaspati’ moving from moderate to high growth ranging from 10%
to 20% in the fourth quarter of FY08. Sectors such as industrial gases, power transformers and
electric two-wheelers have shown excellent production growth of over 20%. Sectors like cement,
sponge iron, auto components, and auto industry including cars, two-wheelers and consumer
durables continue to see moderate growth of up to 10%.i

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Some of the top manufacturing companies of India include Larsen and Toubro, Hindustan Lever
Network, Bombay Dyeing, Aditya Birla Group, Haldia Petrochemicals, Ranbaxy, Apollo Tyres,
Asian Paints and Jindal Steel among others.ii

Performance & Problems

The performance of the Indian manufacturing industry has picked up in recent times. However,
much needs to be done. Manufacturing contributes approximately 16% to the country’s GDP,
less than half that of China.iii Studies indicate that productivity of the Indian manufacturing
sector is one-fifth of that in USA and half of those in South Korea and Taiwan. iv There is a lack
of multinational presence of India’s manufacturing activities to date. The share of manufacturing
in exports further fell from81 percent in 1999-2000 to 63 percent in 2008-09 according to a
survey by ASSOCHAM.v

Several problems constrain growth. The foremost are infrastructural bottlenecks such as lack of
high quality ports and roads, inadequate skilled manpower, credit availability, restrictive labor
laws, nascent research and development environment, lack of coherent quality standards among
others. These issues need to be resolved and long term strategies adopted to ensure sustainable
growth in manufacturing, creation of wealth and opening up of more employment opportunities.

Future of Indian manufacturing

The rapid growth of the Indian economy is likely to make India the fifth largest consumer market
in the world by 2025 from twelfth in 2005, according to a study by McKinsey Global Institute.
Aggregate Indian consumer spending is likewise estimated to more than quadruple to
approximately US$ 1.5 trillion by 2025, on the back of a ten-fold increase in middle class
population and a three-fold jump in household income.vi

To make sure India makes a mark in the global markets and emerges as the next manufacturing
giant certain ideas and policy measures should be considered. They have been described in the
next few sections.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Part- I GREEN TECHNOLOGY

Way to go forward

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BGS Group Project

GREEN TECHNOLOGY- Sustainable Development

TC
atrio
FIEn
M
H
G eyLsl
d
Enhancing India’s Manufacturing Competitiveness

Environmental technology or green technology is the application of the environmental science to

conserve the natural environment and resources, and to curb the negative impacts of human
involvement. Sustainable development is the core of environmental technologies. Economic
sustainability means that the solutions need to be socially equitable and economically viable
apart from being environmentally sound.

Sustainable Development

The three main facets of green technologies can be distinguished as [1]:

1. Targets, which are the basic focus areas. These are products, processes, marketing
methods, organizations, and institutions. Green technology in products and processes
tends to rely on technological development, while in marketing, organizations and
institutions it relies more on non-technological changes.
2. Mechanisms, which are how changes in the target areas are made. They can involve
modification of practices, re-design of practices, alternatives to existing practices, or the
creation of new practices.
3. Impacts, which are how this affects environmental conditions

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Current Scenario:

At present, green technology has penetrated to a great extent into the developing nations and the
market is growing at a nearly exponential rate. But the concept needs to be picked up in the
developing nations [2].
According to the survey reports by PWC [3], 60 percent of the manufacturers are developing
green products and services.

Current practices by companies include:

 Closed loop processes – Recycling
 Green buildings using more sunlight and smart lightening systems
 Environmental remediation – Removing pollutants from the effluents and products
 Renewable sources of energy

Challenges:

 Information: There is not much information available about the implementations and benefits
of green technology
 Expensive: Most of the green technologies require large investments which act as a barrier to
entry

Relevance:

Green technology helps in conserving the environment. Also, it has the following benefits:
 Reduction in cost of the production process
 Create a positive image among customers which increases sales
 Product differentiation through use of recyclable material or closed loop production
processes
 First mover advantage

Recommendations:

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

1. Creation of a framework that brings together domestic firms, venture capitalists, and
technology holders in a forum to reduce information asymmetries and transaction costs
This framework would help in easy exchange of information among the major stake holders
and reduce the entry costs to the use of green technologies.

2. Legislation to use renewable sources of energy: If the government enforces the use of green
technologies (for example 15 kv of solar power per hectare of the company), it increases the
use as well sale of the energy efficient equipment. This is being followed in Germany [5].

3. Benchmarking and setting standards- The work done by companies in the field of
environment sustainability does not get recognized to a great extent because it cannot be
quantified. If benchmarking of efficiency and emissions is done, it gives more visibility to
companies as well as helps to set standards for other companies in the industry.

4. Capital support to companies for using green technologies: Generally, in the beginning, the
cost of investment is very high which deters the companies from reforming their production
processes. Thus, capital support through encouraging venture capitalists or giving incentives
can encourage more organizations to rework their production processes and improve
efficiency.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Part- II Improving Factors of Production

Human Capital Development

Infrastructure
Credit Availability
Technology

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

DEVELOPMENT OF HUMAN CAPITAL

Skilled and cost-effective manpower is an essential
component of success in the manufacturing industry.
Shortage of the same can prevent India from gaining a
competitive edge in global markets. Measures to build a
strong pool of workers equipped to meet the diverse
needs of the upcoming sectors and new technologies in
manufacturing must be taken. Development of human
capital is a dynamic process and can have a gestation
period of up to a generation.

Forecasting employment needs:

The first step must be to forecast the road that manufacturing will take. Which sectors would it
expand into and which technologies would be important in the future. The question to ask would
be how India can leverage its strengths and resources to achieve a competitive edge in these
areas. Moreover, what weaknesses need to be dealt with and what kind of skills will be required.
An estimate of the number of jobs to be created and the skill requirement for each job profile can
help direct the course of a human development strategy.

Some indicators of the future of manufacturing needs are available. The manufacturing sector is
estimated to have a US$ 180-billion investment opportunity over the next five years, according
to the Investment Commission of India.1 Meanwhile, the Indian manufacturing sector is
estimated to command a market capitalization of $520 billion by 2014-15, as against $272 billion
as of Sept. 30, 2007, said a study on the sector by the Confederation of Indian Industry and the
Boston Consulting Group.3 Outsourcing of manufacturing jobs to India would result in the
creation of 30 million jobs by 2015. 4 Sectors that will experience tremendous growth include
machine tools, automobile components, pharmaceuticals and the textile sector, which alone is
expected to create between nine and 10 million new jobs over the next four years.5

National Skill Development Mission:

The Planning Commission set up a National

Skill Development Mission (NSDM) in
2007 headed by the Prime Minister Dr.
Manmohan Singh. The NSDM proposes to
consist of four sub-missions —industrial
training, polytechnics, vocationalisation of
secondary education, and another for the

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

unorganized sector— each catering to different streams of workforce entrants to train more than
10 million people every year.3 The government has projected that 70 million jobs will be created
during the 11th Plan (2007-12) and proposes to spend Rs31, 000 crore during that period.6

To effectively channelize resources, the future of the manufacturing industry must be looked
into. The right kind of training must be imparted to match employment needs of the industry and
the availability of skilled workforce. This would require extensive market research, study of
trends in the manufacturing sector and consultation with industry experts.

Development of Labor Intensive industries:

Manufacturing industry in India currently employs only 11% of the workforce. 7 The world over,
manufacturing forms a major employer in most economies. In India however, it has lagged
behind. In fact the share of manufacturing in India has been more or less stagnant or has even
decreased in the last few decades.

India being a labor rich economy must look to the manufacturing sector for its employment
needs especially in light of the jobless growth in the growth driver ‘services sector’. Moreover,
as the displaced workers from agriculture and related activities move to urban areas, the need for
creating employment would only increase.

Creating Skill base:

Industrial training programs, introduction of vocational training and other courses at

Polytechnics and development of a large number of educational and training institutions should
be prioritized. Moreover, to further develop a competitive edge in manufacture of cheap
consumer goods such as alarm clocks, decorative items, etc – currently the niche of Chinese
manufacturing – would require the availability of a large amount of cheap labor with basic
school education and some level of skills. A push towards expanding literacy at all levels along
with basic vocational training would be of immense help. Public-private initiatives in this
direction would help speed up the process.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

INFRASTRUCTURE
Infrastructure is most prominent area of concern to promote rapid economic development. Proper
infrastructure will be needed to provide the platform for faster, consistent growth and for India to
become a major world economic power. Development of world class infrastructure is must to
enhance the competitiveness of the manufacturing sector in India. Most important sectors of
infrastructure which need to be concentrated to improve manufacturing competitiveness are
ports, roadways, railways and power.

Relevance

India is planning to achieve a growth rate of 8-9 % over next few years. Such a high growth rate
is only possible if enough investment in infrastructure is undertaken. Growth in last few years
has already made visible the lack of infrastructure in India. The effects of undeveloped
infrastructure are evident in India's congested highways, airports and ports. In times of recession
improvement in infrastructural framework gains all the more importance. Proper infrastructural
facilities are also important in today’s world of increasing globalization as the foreign investment
in directly linked to such facilities existing in a country. Importance of development of
infrastructure is evident from emphasis that Mr. P. Chidambaram gave when he said "To sustain
9 per cent GDP growth, investment in infrastructure should be increased from 4.6 per cent to
around 8 percent of GDP over the Eleventh Plan period (2007/12)"

Present situations

The government has realized importance of infrastructure in development of economy and

several steps have been undertaken in the direction. A brief overview of present conditions and
governmental initiatives in various infrastructural sectors important for the manufacturing units
in India has been given below:

Ports: India has 12 major ports and 187 minor ports along 7,517 km
long Indian coastline Indian ports handle cargo of more than 519
million tonnes Cargo handled by Major Ports has increased by 9.5%
p.a. over last 3 years. Government of India dominated maritime activity
in the past. The National Maritime Development Programme is
expected to bring a total investment of over Rs.50, 000 crore in the port
infrastructure.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Highways: For a country of India's size, an efficient road network is necessary both for national
integration as well as for socio-economic development. The National
Highways (NH), with a total length of 66,590 km, serves as the arterial
network across the country. India has an extensive road network of 3.3
million Kms - the second largest in the world. Roads carry about 61% of the
freight and 85% of the passenger traffic. According to the Planning
Commission, investment in the roads sector during the Eleventh Plan is
projected at US$ 93.11 billion.

Railways: The Indian Railways took up the most ambitious ever annual plan
for fiscal 2008-09, entailing an enormous investment of US$ 7.91 billion,
registering a 21 per cent increase over the previous year. The rapid rise in
international trade and domestic cargo has placed a great strain on some rail
routes. Government has, therefore, decided to build dedicated freight
corridors in high-density routes.

Power: Majority of Generation, Transmission and Distribution capacities are with either public
sector companies or with State Electricity Boards (SEBs). Private sector participation is
increasing especially in Generation and Distribution.

Major players and presence in value chain Capacity •G •T •D

Public Sector
NTPC 23,749    
National Hydro Electric Power Corporation 3,615    
Nuclear Power Corporation 2,770    
Domestic Private Sector
Tata Power 2,203
RPG Group – CESC 1,005
Reliance Energy 885
International Private Sector
China Light and Power (CLP) 655    
Marubeni Corporation 330    

•G-Generation •T-Transmission •D-Distribution

Conclusion & Recommendations

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Although a lot of steps have been undertaken by the government still their proper and timely
implementation needs to be ensured. At the moment, differentiation amongst different elements
of infrastructure and prioritizing of those projects that have the most far reaching fall out for the
economy need to be done. A proper connectivity of ports to various industrial regions needs to
be developed. This is possible by development of proper rail and road infrastructure. The rate of
road development in recent years has to be maintained. Implementation of railway projects
especially in areas involving large amount of goods movement should be taken up. Power costs
need to be reduced from the current high of 8-10 cents/unit by a combination of lower AT & C
losses, increased generation efficiencies and added low cost generating capacity. The SEB units
are highly inefficient and hence they need to be streamlined in their operations trough a national
monitoring agency. All these areas would require further liberalization under a strong,
dependable, but enlightened regulatory regime. Private capital is the key here together with
world-class standards of governance. Public private partnerships should be encouraged as a
policy for infrastructure development. Moreover government should consider developing
industrial hubs by providing all the necessary infrastructural support based on availability of
resources. Development of SEZs is a step in right direction and such hubs need to be encouraged.
However, if building a world-class infrastructure in India is truly to be a priority of the first
order, there are two obvious conditions that must be met. One is overriding clarity of purpose.
The other is courageous political leadership dedicated to accomplishing the mission. These two
preconditions with efficient implementation is the key to development of world class
infrastructure that would support the manufacturing sector in India.

CREDIT AVAILABILITY
The unavailability of credit facilities forces the small and medium scale industries to finance
investment with internal finance, which is very difficult in case of SMEs. And hence they are
forced to delay the investment till they have built up the required capital. As a result of poor
credit availability, thousands of small and medium scale enterprises have shut down. The credit
to SMEs declined from 26 per cent to 17 per cent from March 1997 to March 2007.

For sustained economic growth and development of manufacturing competencies government

policies are required which allow more participation and attract more and more foreign direct
investments in India.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Current Scenario

Today, India provides highest returns on FDI than any other country
in the world. India is ready for further growth in manufacturing,
infrastructure, automobiles, auto components, food processing
sectors, real estate development etc.

High interest rate is one of the main reasons which has restricted the
growth of manufacturing sectors and has not only led to increase in
the cost of production for manufacturers but also a decline in the
demands for their products. The higher interest rates have made the
manufacturing firms to reduce their profit margins. A large number
of manufacturing sectors, including both capital and labour intensive, have been adversely
affected because of the increase in interest rates.

Recommendations

1. Reduction in Interest Rates – A large number of manufacturing sectors have been badly hit
by the increase in interest rates. As a result it affected not only the demand for
manufacturing items but also the expansion plans of many manufacturers. Sectors like
automobiles have been badly hit, as two-wheeler sales has witnessed continuous declining
trend in the last few months.
2. Maintain custom duty – Custom duty on manufactured items should not be reduced so as
to limit the imports of manufactured items especially from China which constituted approx.
10 % of our industrial goods GDP.

Sector-wise FDI Inflows ( From April 2000 to January 2009)

AMOUNT OF FDI INFLOWS
PERCENT OF
SECTOR TOTAL FDI
INFLOWS (In
In Rs Million In US$ Million terms of Rs)
 
 

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Services Sector 787420.81 18118.40 22.39

Computer Software & hardware 391109.74 8876.43 11.12

Telecommunications 275441.38 6215.55 7.83

Construction Activities 213595.12 5029.01 6.07

Automobile 146799.41 3310.23 4.17

Housing & Real estate 217936.02 5118.85 6.20

Power 137089.37 3129.66 3.90

Chemicals (Other than Fertilizers) 87008.07 1964.06 2.47

Metallurgical industries 109563.20 2612.85 3.11

Electrical Equipments 57379.63 1324.92 1.63

Cement & Gypsum Products 70781.19 1621.03 2.01

Petroleum & Natural Gas 94417.17 2244.17 2.68

SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India

3. Focus on selected manufacturing technologies & products – Promote technology -based

FDI partnerships between foreign and local enterprises especially in medium scale SMEs.

TECHNOLOGY
Sustained increase in the competitiveness is a representative of the
economic strength and stability of the economy. Technology has a
great impact on the economic growth and development of the
country, which is a result of interaction between national and
international bodies including governments, businesses, and
academia. There is a need for generation, application, transfer and
diffusion of technology to the developing countries for improving

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

competitiveness of their manufacturing sectors. Technology also results in value addition in

manufacturing.

In 1990, India and China had almost the same GDP per capita. Since then China has experienced
higher growth rates due to its growing manufacturing sector and as a result, today China’s GDP
per capita is more than 95% of India’s GDP per capita. Hence manufacturing sector plays an
important role in economic growth and India needs to strengthen it in order to achieve higher
growth rates.

India’s manufacturing sector’s growth depends on the investment policies and the economic
reforms. However for the long term competitiveness of
Indian manufacturing sector, improvement in
production efficiency is required which in turn depends
on the ability to develop, import and adapt new
technologies apart from other factors. India through its
continuous efforts has made significant developments in
technology over the years and now has strong trained
manpower and an innovative knowledge base.

Current scenario

A measure of competitiveness is the ability of manufacturers to respond quickly and effectively

to the changing demands of the market.

Technological capabilities of Indian manufacturing sector can be classified as:

1. Basic Level - ability to operate and maintain a new production plant based on imported
technology
Sector Technology
2. Intermediate Level - ability to duplicate and adapt the
Capability
design for an imported plant and technique elsewhere in
the country
Food Processing Basic
3. Advanced Level - capability to undertake new designs Metal Forming Basic
and to develop new production systems and Steel Intermediate
components. Machine Tools Basic
Pharmaceuticals Intermediate
Chemical Basic
Electronics Basic
Automotive Intermediate
19 IT Advanced
Telecommunication Advanced
s
Petrochemicals Intermediate
BGS Group Project Enhancing India’s Manufacturing Competitiveness

Challenges

The main reason for Indian manufacturing sector not being competitive enough are:

a) Significant presence of small-scale unregistered manufacturing units even in capital-

intensive segments.
b) Poor logistics & transport infrastructure across all sectors
c) High cost of Power – 50% more expensive than in China
d) High cost of capital - 10-12 % against international average of 6-8 %

Recommendations

1) Research Agencies
India has a network of scientific and academic institutions engaged in wide spectrum of research
with 250 research laboratories and institutions; 1500 private industries with R&D centres and
264 universities.

Favourable investment environment in terms of better infrastructure support, institutional

finance, fiscal policies concentrating on growth of manufacturing sector. Manufacturing firms
should concentrate on internal changes aimed at improving efficiency and reducing costs
through:

 Upgrading manufacturing technology levels

 Enhanced emphasis on attracting and retaining talent
 Enhancing quality focus and customer orientation

2) Developing R&D
There is a need to develop our domestic R&D expertise and for that
government support is required. The Government of India allocates
a budget for scientific and technological (S&T) activity under an
R&D fund. The 2008-09 budget supports a 20.5% increase in
funding for the Ministry of Science and Technology, Rs 3630.00
crores

Private sector has failed to make significant contribution to India’s R&D activities which are
primarily driven by government. There is a poor industry-academia interaction which resulted in
low orientation of India research and lack of technology inputs to industry.

Although the spending on R&D has improved (2-3% of GNP), there is still a long way to go to
catch up with the developed nations.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

3) Manufacturing Infrastructure
For ensuring consistent growth and sustained competencies, heavy
investments are required in Indian manufacturing sector. This can be
achieved through encouraging Public Private Partnership in establishing
technology parks and developing R&D centres where manufacturing
clusters are active.

4) Develop & restructure technology infrastructure to support firms striving to improve

their technological capabilities and competitiveness:
 Provide technology infrastructure to support industries that are striving to improve their
technological capabilities and competitiveness.
 Create “Centres of Excellence” by consolidating institutions that are working in similar
areas. Promote joint public-private sector R&D activities for better monitoring.
 Emphasis on international cooperation between R&D institutes and build linkages for
technology development and transfer.

Part- III Role of Government

Reforming India’s Labor Laws

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

REFORMING INDIA’S ARCHAIC LABOUR LAWS

Labour law is the body of laws that covers the relationship between groups of employees,
organized as unions, and employers. In India, the labour laws have been criticized to being pro-
employee (by employers) in the organized sector and very rigid, thus adversely affecting
operation of labour markets and performance of industry in general. However, this viewpoint is
vehemently opposed by trade unions who believe that it is a strategy of firms to maximize their
profits at the cost of their employees. Thus, any action to be taken must consider all
stakeholders- employers, workers, trade unions and MNC’s.

Current Scenario
There are a number of laws that are a source of contention between employers and trade unions.
Some of them are:

 Factories Act, 1948

This act limits the weekly working hours to 48 and daily working hours to only 8. Thus, it is
inflexible to needs of industries with seasonal demand e.g. textiles industry.

 Industrial Disputes Act, 1947

According to Chapter V-B, if the firms employing more than 100 employees have to retrench
some workers, then they have to take permission from the Labour Commission. Also, according
to Section 9 A of the act, employees have to be given a notice of 21 days before modifying
wages, hours of work-rest intervals, leaves etc. This act is a constraint in efficient deployment of
employees at short notice and hampers restructuring and technological upgradation.

Multiplicity of Labour Laws- The labour laws are highly fragmented and inconsistent. There
are separate schedules for different workers and different definitions of the same. Thus, they
create confusion and there is scope for misinterpretation etc.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Role of Trade Unions- Though the role of trade unions is to protect labour rights and be the face
of the worker to the management, often it has misused its position to black mail owners and
hinder the smooth functioning of business. The most potent weapon it uses it is strikes and
lockouts. Though this trend has decreased over the years, still, the annual loss of worker days is
second highest in the world.

Social Security Concerns- The present situation of social security is dismal in India. Currently,
social security covers on 6% of work force (belonging to organized sector) and it ignores the
remaining 94% in the unorganized sector. Hence, a small percentage in organized sector is in
a privileged position having access to various privileges. Moreover, the workers in unorganized
sector are not given any such benefits e.g. in apparel Exports Park in Gundlapochampally,
women workers are exempt from labour laws. They work for three shifts at less than minimum
wages. Such exploitation should not be encouraged.

Need for Labour Law Reforms

1. Missing Middle-The skewed labour laws towards workers in organized sector have
created a peculiar situation in the country. Either the workers are organized in small scale
unorganized sector or large scale sector.

2. High Labour Cost- As compared to other countries, anti- market labour laws have
significantly increased the cost of production, making indigenous businesses
uncompetitive in global context.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Figure: Manpower Average Cost for Textiles and Garment Industry, 2007

3. Difficulty in Entry/ Exiting a business- The rigid labour laws make entry/exiting a
business difficult. To fire employees, you need approval of labour commission. Also, in
order to change job profile there are many regulatory hurdles to pass.

Figure: Manpower Index of Competing Countries in 2008

Clearly, all these discourage FDI investments in India.

Recommendations

Extension of Working Hours: The government needs to amend the Factory Act, 1948 by
extending the working hours limit from 48 to 60 hours per week and the daily working hours
limit from 8 to 10 hours, subject to adequate compensation. This will allow industries to fulfill
peak season demand and increase production in the short run.

Allow Adjustments in Workforce: The government should relax the provisions of Chapter V of
Industrial Disputes Act by allowing up to 100 people outside its purview from present number of
100. The government can also employer to adjust workforce in case of restructuring (in line with

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

ILO convention on Termination of Employment). Also, the government can modify Industrial
Employment Act to ease job transfers and fixed term employment.

Permit Contract Labour: The government should consider amending the Contract Labour Act,
example excluding certain industries e.g. textiles industry, provided they give employment for a
fixed tenure of 150 days as well as other benefits like health, safety etc.

Formation of Uniform Labour Code- The government should unify all definitions that are
present in court literature to form a uniform labour code. This will eliminate the possibility of
confusion and incorrect interpretation.

Formation of a Social Security Net to cover Unorganized Sector- The government should
work towards the formation of a social benefit schemes for both organized and unorganized
sector. This will eliminate the possibility of exploitation in the unorganized sector. Moreover, the
benefits available in the organized sector should be managed properly to benefit larger employee
base.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

Part-IV Sector Specific Problems

Improving SME’s Productivity

Making Public Sector more competitive

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

ISSUE OF SMEs
In any developing economy, development of industries / industrial sectors is driven by the
availability of natural resources and the socio-economic priorities of the nation. For a country
like India, small and medium enterprises form a very important part of manufacturing sector. The
spread of SMEs in India is over a number of industrial sectors such as Chemical, Pharmaceutical,
Engineering, Food Processing, Foundry, Textiles and Electrical. From the start of era of
economic planning in 1951, and subsequent policy changes small-scale industries and medium
scale industries have been earmarked special role in Indian economy. Due protection was
accorded to both sectors, and particularly for small-scale industries from 1951 to 1991, till the
nation adopted a policy of liberalization and globalization.

Relevance

There has been gradual change in face of the sectoral differentiation done by the government.
The emphasis on small-scale industries (SSIs) for a long time was replaced by the small and
medium enterprises (SMEs) and right now, micro, small and medium enterprises (MSMEs) have
emerged prominently in the policy documents and pronouncements. India’s huge potential lies in
the SMEs to expand employment opportunities further develop the industry and boost the
exports. But, there is no broad-based market information network to coordinate and develop the
SME sector. There is an urgent need to develop more industrial clusters to facilitate better
information network among the SMEs. Unavailability of information on the reliability of
potential buyers and sellers tends to increase transaction costs. There is significant scope for
improving productivity levels in different manufacturing industries through cluster approach.

Current Scenario

SMEs in India have always represented the model of socio-economic policies of the government.
Judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode
of production; employment generation; no concentration of diffusion of economic power in the
hands of few (as in the case of big houses); discouraging monopolistic practices of production
and marketing; and finally effective contribution to foreign exchange earning of the nation with
low import-intensive operations has been long emphasized. Policy of de-concentration of
industrial activities in few geographical centers has been coupled with development of SMEs.
At present, about 114 commodities are reserved for exclusive manufacturing by the SSI sector.
Production of some of these items requires modernization and technology upgradation to achieve
economies of scale and de-reservation alone would help enhance competitiveness of these
products. With the end of the era of protection and import substitution by government of India

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

after forty years (1951 to 1991), when encouraged SMEs to develop indigenous technologies,
ended these units found themselves amidst high competition. It is important to study the growth
of the small and medium scale sector since the dawn of liberalization and globalization.
Following table collates come of the important variables related to this sector for 17 years
starting 1990-091.
Total
Production
SMEs
% Employmen %Chang (Rs. At %chang
Year Units
change t (million) e 93-94 e
(Millions
price)
)
1990–91 Units   15.83 -- 0.68 --
1991–92 (Million)   16.6 4.86 0.79 16.18
1992–93 7.35 4.07 17.48 5.3 0.94 18.99
1993–94 7.65 4.07 18.26 4.46 0.99 5.32
1994–95 7.96 4.07 19.14 4.82 1.09 10.1
1995–96 8.28 4.07 19.79 3.4 1.22 11.93
1996–97 8.62 4.07 20.59 4.04 1.35 10.66
1997–98 8.97 4.07 21.32 3.55 1.48 9.63
1998–99 9.34 4.07 22.06 3.47 1.59 7.43
1999–2000 9.72 4.07 22.91 3.85 1.71 7.55
2000–01 10.11 4.07 23.91 4.36 1.84 7.6
2001–02 10.52 4.07 24.93 4.27 1.96 6.52
2002–03 10.95 4.07 26.02 4.37 2.11 7.65
2003–04 11.34 4.07 27.14 4.3 2.31 9.48
2004–05 11.86 4.07 28.26 4.13 2.56 10.82
2005–06 12.34 4.07 29.49 4.35 2.88 12.5
2006–07 12.84 4.07 31.25 5.97 3.24 12.5

As part of enhancing the competitiveness of Indian small firms, the strategy has essentially been
to raise the capital intensity of production. However, given the preponderance of smaller or tiny
units in this sector, it is likely that a few relatively larger units have emerged competitive by
being able to invest in expensive plant and machinery. And this is the reason that although the
sector has increased gradually there has been no increase in employment figures. Credit is one of
the most important constraint for small scale firms. Lack of transparency in operations and
financial statements is one of the major reasons for this.

Conclusions & Recommendations

Although the common belief that the small scale sector would gradually give way to capital
intensive large scale sector, — a labour-surplus and vast domestic-market based economy — the

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

MSEs continue to dominate the industrial sector. Recognition of their capability in generating
large employment and smoothening regional disparities is spreading gradually.
However government needs to bring about changes in the perspective of policymaking related to
this sector. Many of the traditional small firms are in clusters, and a cluster oriented approach
would be important for their success. Prioritization of credit availability should be an immediate
concern. Removal of all restrictions on investment in labour-intensive small-scale industries
needs to be done. Attempts should be made to bring in transparency in financial condition of
firms in these sectors. Financial institutions could usefully develop strong venture capital arms to
finance innovative small firms that have a good potential to emerge in the near future in many
industries. Arrangements of power and water to small and medium scale industries should be
ensured. There is a need for improving appropriate linkages with education, infrastructure,
human and natural resources and environment for long-term sustainable development and
facilitating value-addition and self-reliance approach towards manufacturing.

ENABLING COMPETITIVE PUBLIC SECTOR ENTERPRISES

The public Sector Enterprises (PSE) were set up in Independent India for the purpose of self
reliance and fast growth of Indian economy. The major objectives of PSE, when they were set up
were:

 Develop core sectors of economy

 Cater to strategically important sectors like Power, Steel, Coal, Defence,
Telecommunications and Railways etc.
 Provide self sufficiency to the country in critical areas and help spring board the economy

The sector has been largely able to meet these objectives and was responsible for initiating the
manufacturing movement in the country. However, since the 1991 policy reforms, there have
been a dramatic shifts in the country’s economic policies and this also had a bearing on the
policy towards public sector enterprises. Still, the public sector contributes to about 25% of

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

India’s GDP greater than 10% (in 1960’s). Hence, increasing its competitiveness has to be a
major focus area of the government.

Current Scenario
There are a number of important issues that have emerged in the current scenario:

 Dismal Operating Efficiencies- With economic liberalization, the public sector has
faced intense competition from private sector in terms of quality manpower, market and
resources. All this is supported by the fact that public sector is not able to compete with
private sector due to low operating efficiencies. The reasons for this are notably, over
manning, multi- regulatory authorities, low productivity of manpower etc.

 Setting up Navratna PSE’s- In order to encourage profit making PSE’s and also give
them more autonomy, the government has recently setup Navratnas and Mini Ratnas
which are given power to take their own decisions and promise by the government of
minimum interference. They are also free to form alliances, enter into joint ventures and
form subsidiaries in India and abroad. Originally 9 in number, currently, it stands at 18.
 National Manufacturing Competitiveness Council- The government has setup various
agencies to delve into the problems of PSE’s such as National Manufacturing
Competitiveness Council etc. This agency will streamline various guidelines and
procedures with respect to procurement, marketing and sales, pricing decisions,
manpower, compensation, technology transfer, outsourcing of support functions etc.

Recommendations
The following recommendations can make Public Sector Enterprises more competitive:

 Autonomy- For a competitive Public Sector, devolution of autonomy and power to take
its own decisions is a pre requisite. The company boards should be given more
autonomy; however, it needs to be coupled with proper governance and accountability.
 Review Mechanisms- Currently, there are multiple regulations and regulatory authorities
governing public sector enterprises. This creates a lot of regulatory hurdles and slows
down decision making. Thus, rationalization and optimization of multiple regulations
needs to be done on priority basis.

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BGS Group Project Enhancing India’s Manufacturing Competitiveness

 Delegation of Power- The PSU boards in order to be competitive should be given power
to form joint ventures, international alliances and incubate subsidiaries. This is very
important in today’s dynamic environment.
 Optimizing Labour cost and productivity-A major problem with public sector
currently is dismal productivity of labour. In order to optimize both cost and productivity,
a percentage of their income should be performance based and regular performance
evaluation and appraisals should be done to improve employee morale.

CONCLUSION
The resurgence of India's manufacturing sector has been quite magical. Not only are profits
soaring, the sector is fast spreading its tentacles abroad as many Indian manufacturing firms inch
close to becoming true blue multinationals. The future is potentially exciting for Indian
manufacturing. While there has been progress on some reforms, much remains to be done. India
is fast developing into a manufacturing hub for world corporations wanting to leverage the
sector's proven skills in product design, re-configuration and customization with creativity,
assured quality and value addition.
The key points mentioned in the report revolve around the basic goal and that is to create the
climate for India Inc to achieve global competitiveness and evolve into an international hub for
manufactured products. We have talked about the priorities of Indian manufacturing firms, the
programmes that they undertake to reach their objectives, and the outcome or the performance of
these firms. The recommendations would help in formation of a robust manufacturing strategy in
developing world class operations in the country.
Emphasis would be required on the efficient implementation of the recommendations. This
includes proper laws, guidelines and creating more awareness among the masses. This awareness
is in terms of the knowledge about the new technologies and methods adopted by the
organizations outside as well as within the country. Also, the awareness in terms of the
responsibility towards the growth and development of the nation needs more impetus in future
times. Human beings are the greatest asset of the nation and India being a nation with almost
50% of the youth population, much needs to be done in this field. The recommendations need to
be adapted to the variations in the culture, work as well as the conditions of the regions so that
they can be as effective as they appear as solutions. Moreover, we need to keep updating these
solutions according to the market scenario and the response of the industries so that India
becomes a leader one day in this field of work as well. The vicious circle of slow work ,
ineffective implementation and slow progress needs to be broken. Only then can we citizens see
our nation as the most progressive nation in the future.

31
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