The Hindu : The Indian manufacture jinx

Online edition of India's National Newspaper
Monday, Jun 23, 2003

Opinion

Opinion - Leader Page Articles

The Indian manufacture jinx

By N. Vittal

If we want sustainable development, we have to focus on manufacturing.

THE WORD manufacture has been figuring frequently in seminar circuits in the recent months. Gurus like C. K. Prahlad have been talking about the manufacturing myths about India and trying to blast them. The focus on manufacturing has come late in our country. Better late than never.

Our country became independent in 1947 but we have not had much of success in manufacturing so far. Countries of Southeast Asia, especially the tiger economies of Japan, Korea, Singapore, Malaysia, etc., were not only able to grow fast but also achieved their success in the area of manufacturing and exports. Multinational companies found that relocating of their manufacturing base in developing countries made economic sense. The `hollowing of the economy' became a fear of some of the American economists.

There is a perception that as an economy develops, the service sector ultimately becomes dominant and overtakes agriculture and manufacturing. In fact, the dominance of the service sector can be taken as an index for development. In India, the service sector today may be about 40 per cent of the GNP, whereas the manufacturing sector may not exceed 22 per cent. But does it mean that we already have a developed economy? Hardly. In fact, the growth of our service sector is because of our inefficiency and corruption. So long as we had the permit licence raj, we used to have middlemen. After all, they provided the services of ensuring the smooth flow of papers in the labyrinthine channels of the Government. The lack of proper power facilities led to the growth of diesel generators. Corruption in many Government offices has given rise to the service activity of middlemen.

The realisation is now apparently dawning in some quarters that ultimately, it is the manufacturing sector that creates jobs on a sustainable basis. If we want sustainable development, we have to focus on manufacturing. The question before any thinking Indian is, can India do well in manufacturing? Why is it that when the tiger economies were able to succeed in manufacturing, we failed? Countries such as Korea, Japan and Singapore focussed on manufacturing because they had huge manpower which was cheap. And they used the cheap labour to manufacture products at competitive price. Today, a glorious example of this strategy is that of China, which is probably emerging as the manufacturing base for almost the entire global economy. Then why is it that India, comparable in size to China, is nowhere near it in manufacturing? The competitive edge for these countries was provided by low-cost labour. Then why in India can low-cost labour not be utilised to create a better manufacturing base? A little reflection will show why the successful export-led growth countries were able to build on the greater advantage of low-cost labour. By our perverse policies, we have systematically tried to remove the advantage.

We today talk about our success in the software industry. It is a fact that India is a source of low-cost engineering manpower. Our engineers get probably 30 per cent of what the American engineers earn. Could we, therefore, say that we are doing nothing but indulging in `intellectual coolyism?' There is a Tamil proverb that money earned by selling a dog does not bark. A dollar is a dollar and if one is able to earn it by honest means, there is no reason why one should be ashamed of it. I was the Secretary, Department of Electronics, in 1990, when software technology parks were contemplated. One of the factors that would have stifled the growth of software exports was the formula we had adopted for calculating added value to permit the operations of software technology parks (STPs). The formula tried to notionally enhance the rate of the salaries so that the incoming companies which wanted the benefits of STPs would have to add value assuming a heavy outgo in the wages. I was able to move the Government to change the formula. A simple formula of one-and-a-half times the wage bill was adopted as the minimum export requirement for STP operations. It was the removal of this block, which came in the way of Indian engineering skills being exploited and led, among other things, to the explosive growth of software exports. But, did we do like this in other areas? Certainly not. Our labour laws ensure that a prospective investor would like to go in for capital intensive, not labour intensive, projects.

There, however, is an exception to this line of reasoning. When Gen. MacArthur introduced in post-war Japan the labour laws of the United States, the Japanese managers adopted a different strategy. They converted the difficulties in fining employees into the concept of lifetime employment of labour and turned it to their advantage. In the whole 1970s and 1980s, we were all given lectures about Japanese management principles, particularly on how a sense of loyalty was cultivated by the lifetime employment concept. But here in India, we seem to have got the worst of both worlds.

The point I want to make is that even though our cost of labour is low, by our inflexible labour laws we find that it is easy to hire a person and very difficult to fire him. And this is what is coming in the way, especially when we talk about the second phase of economic reforms.

So, we come back to the basic point. We could not succeed in manufacturing because we designed policies which took away the basic competitive advantage of low-cost labour. All other countries of Southeast Asia seem to have somehow hit upon policy packages and practices that exploited and built on this strength.

We, on the other hand, adopted policies which neutralised, if not converted, this strength into weakness.

If we look at the areas in which we have succeeded after Independence, we find that even though there may be many factors that contribute to success, there is one key factor which brings all the factors together to ensure success.

For example, during the green revolution, it was the hybrid seed technology and the happy triumvirate of C. Subramaniam, M. S. Swaminathan and Dr. Sivaraman, which went ahead with the thousands of demonstration farms with agricultural extension leading to success. In software, it was the combination of software technology parks, which provided the basic infrastructure, the critically-required 64 kbp per second connectivity and the policy incentives that clicked. As for nuclear technology, again, it was merit and the inspired leadership of men like Homi Bhaba. In space technology, Vikram Sarabai and Satish Dhawan produced results by focussing on merit and devising flexible personnel policies.

When it comes to the area of manufacturing, can we think of one critical factor that can break the jinx? Of course, a number of reasons could be given about the factors that come in the way of success — high cost of capital being a major factor till recently. Our systems and procedures, red tape and corruption are other factors. The legacy of the permit licence raj is a third factor.

But above all, I think the single decisive factor is our set of policies and procedures, which prevents the exploitation of our low-cost labour. If we fine-tune our policies to build on this, we are bound to succeed.

What about equity? Should we allow our people to be exploited? That argument can be raised today about the comparatively low wages of Indian software engineers. But nobody complains because of the job opportunities that have been created and the success we have achieved. The same logic will have to apply so far as the manufacturing sector is concerned.

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