Need for manufacturing reset - High end products, and Exports

India's manufacturing sector and associated exports now need a reorientiation from low-end to high-end.

 Need for manufacturing reset - High end products, and Exports

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• The India story: From 1947, the Indian economy was largely dependent on the agricultural sector. It contributed more than 50% to the GDP. Over the years it shifted from an agriculture based economy to the service based economy. The manufacturing revolution never happened. Experts feel that it was the reason a large scale formal sector never was created. That led to a lower development trajectory also.
• Focus on manufacturing: Since 2000, various governments tried to push manufacturing. Realising the amount of employment it can generate, many initiatives were taken up by governments to foster its growth. It slowly seemed imperative to shift manufacturing from low to high end products in order to achieve a higher economic growth rate. The PM himself announced the launch of "Make in India" on 15th August, 2014. Sadly, it could not move the needle, and manufacturing continued to stay at near 15% of GDP, since then (goal was to push it to 25%). Make in India 2.0 was launched later.
• Types of products and share: Indian exports are of two types - X and Y.

1. Products of type X are traded in large values globally but in which India has a small share — machinery, electronics and transport products account for 37% of global goods export basket. The share of Indian exports in global exports of each of these is low (Machinery 0.9%, electronics 0.4% and transport goods 0.9%). Same is the situation with ICs (Integrated circuits) (0.03%), computers (0.04%), solar-cells (0.3%), LED TV (0.02%), and mobile phones (0.9%).
2. Products of type Y are those where India has a large share in global exports, but the value of world trade in these products is small. So India's share in global textiles exports is 5.9%, but textiles is a small category counting for just 1.3% of the global export basket. In marine products, India has a high share of 5.4%, but marine products count for just 0.6% of the global export basket. Other examples are cut and polished diamonds (28.8%), jewellery (13.5%), rice (35%), shrimps (25.4%), and sugar (12.4%).

• Export Complexity Index (ECI): It measures diversity and technological sophistication of goods exported by 130 countries. India’s rank was 42 in 2000 and 43 in 2019, mainly because of weak presence in Type X products. China’s rank improved from 39 to 16 during this period due to expansion in Type X products. So for Indian policymakers, a major thrust area is to focus on expanding presence in such products (X). The small size of the Products Y sets the limit on growth. Most such products being labour-intensive and low technology, face competition from low-cost countries. Though it must be said that they are crucial for jobs in India.
• Problems in Indian manufacturing: For the manufacturing sector to grow, what is required is an educated workforce with the necessary skills and training. Other issues are -

1. Infrastructure - Manufacturing labs, connectivity and transportation are slow and costly when compared to developed nations, and is a huge deterrence to Industries. Uninterrupted power supply is a challenge.
2. Small firms - Small enterprises, because of their size, suffer from low productivity, preventing them from achieving economies of scale.
3. Low spending on R&D - India spends about 0.7% of GDP on research and development, a considerably small amount when compared with other developed nations. This prevents the sector from evolving, innovating and growing.
4. Poor productivity - In India, labour productivity and capital productivity are both low. Manufacturing productivity in Indonesia is twice as high; in China and South Korea, it is four times higher. South Korea’s electronics manufacturing sector is 18 times more productive than India’s, and its chemicals manufacturing sector is an astonishing 30 times more productive.

• How to push high end products (Y): High duty on inputs results in expensive finished products that are out-priced by imported goods both in the domestic and export markets. So tariff reduction is a must. Low duties make domestic firms competitive. With better forward and backward linkages, jobs increase as both exporting and importing sectors grow. In Vietnam, five million workers work with direct exporters while seven million work for firms supplying products to exporters.

1. Formal finance - India needs to enable top one million small manufacturing firms to get bank finance without collateral at regular interest rates. Today, less than 4% of small firms in India have access to formal finance. The figure for the US, China, Vietnam and Sri Lanka is 21%.
2. Simplify exporting processes - Many people buy local sarees, suits, handicraft, ready-to-eat/cooked products and ask the shops to courier to friends and relatives abroad. For such small value exports, what is needed is to simplify and integrate compliances relating to Customs, GST, Directorate General of Foreign Trade (DGFT) and other concerned agencies. Schemes like making districts as export hubs would benefit from such simplification.
3. Get anchor firms - This is a tested strategy for promoting the manufacturing and export of product X type items. Government initiatives like simplified labour laws, PLI incentives, low corporate tax on new manufacturing operations and scrapping of retrospective tax have enthused many firms searching for China plus-one location to shift base to India.

• Summary: Improvements to key manufacturing processes could increase the productivity of Indian companies in the chosen value chains. By adopting Industry 4.0 and automation technologies and investing in analytics, reskilling, and upskilling, Indian manufacturers could accelerate the production of high end products.
• EXAM QUESTIONS: (1) Analyse the structure of India's GDP. What proportion is industry, and manufacturing? What are the implications? (2) What are the links between manufacturing high end products, exporting them, and generating jobs locally? Explain.

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