Challenges Facing the Indian Manufacturing Sector Dr.

Rajen Mehrotra*

Introduction
Every sector of the Indian economy presently is exposed to Global Competition and the Manufacturing sector is no exception. The ambitious National Manufacturing Policy of India announced by the Government on ! November " ## aims to ma$e India a manufacturing hub% and improve the share of the manufacturing sector to "& per cent of the G'P in the next decade from the present level of #& to #( per cent% so that # million better )obs can be created. The Government of India for achieving this target has set up a National Manufacturing Competitive Council *NMCC+% as a forum for policy dialogue to energise and sustain the gro,th of the manufacturing sector. The NMCC has suggested a five year National Manufacturing Competitive Programme *NMCP+% particularly for the small - medium enterprises *.MEs+. /ccordingly they have identified and recommended several schemes% including the programme on IP0 to sustain the gro,th of .ME sector. /ccording to the National 1no,ledge Commission% Indian micro% small -medium enterprises *M.MEs+ are not as successful in pushing for,ard at the innovation frontier. 2o,ever% much more needs to be done if the policy is to achieve the desired ob)ective. In India% almost half the ,or$ force% still earns a living from the agricultural sector. /t the same time% around )ust ## percent of the Indian ,or$ force are located in the manufacturing sector. In India ,e still have to ,itness a significant transition of ,or$ers from agriculture 3 urban informal service sector to the manufacturing sector. 4ormer Chief Economist of the 5orld 6an$% 7ustin 8im estimated that 9& million )obs ,ill be shed in manufacturing )obs in China in the coming years after " ##% as China moves up the value chain *more details read http:33bogs.,orldban$.org3developmenttal$3ho,;to;sei<e;the;9&;million;)obs; bonan<a+. The challenge for India is that ,hether it is in a position to ta$e advantage of this% once in a generation structural change.

In India M.MEs are a vibrant part of the manufacturing sector and contribute 9 percent of the G'P and have a !& percent share of the industrial output% reality is that ,ith some exceptions% most of the M.ME units are characteri<ed by lo, technology levels% shortage of funds % ,hich becomes a handicap in the emerging global mar$et. Present reality is that the bigger organi<ations are using M.MEs as an important lin$ in the supply chain% based on the outsourcing model that has developed in the country after the economic reforms of #==#. Thus many of them are suppliers of components 3 toll manufacturers> to large companies and hence operate on limited margins and in many cases have a single buyer. In the present industriali<ed environment in India there is availability of contractors 3sub;contractors 3manufacturing unit 3ancillary units> 3franchisee3 outsourced services that are M.MEs. In the automotive industry ,e have the ?riginal E@uipment Manufacturers *?EMs+ ,ho speciali<e in ma$ing certain parts 3components ,hich are also sold as spares for the t,o% three and four ,heeler industry% but this type of specialists are not there in other sectors. There has been a ma)or shift in the ,ay large manufacturing enterprises operate. Presently a lot of companies have outsourced not only their non;core activity% but also the one time core activity through third;party manufacturing 3 outsourcing 3 subcontracting. There ,as a time ,hen large si<e companies purchased ra, material% then moved to buying ,or$;in; progress and no, @uite a fe, of them buy the finished products. Examples of these can be clearly seen in India ,ith reference to the follo,ing fast moving consumer products i.e. toothpaste% tooth brush% shaving cream% shampoo% soap% detergent% personal care products% ice cream% ,heat flo,er% processed food% bread% aerated drin$s% pharmaceutical products% etc. ,hich are being made by @uite many .ME units for ,ell branded large si<e companies of both Multinationals and Indian Companies operating in India.

Reasons for Large Size Manufacturing enterprises Going in for Outsourcing

There are plenty of reasons ,hy large si<e manufacturing enterprises have gone in for outsourcing and the rationale ,ill differ from enterprise to enterprise. / ma)or

reason is that outsourcing is a strategic decision of building and expanding capacity% at the same time reducing financial investment in fixed assets. This is also being underta$en to shift the ris$ element% because of shorter life span of products 3services arising from changing aspirations of consumers coupled ,ith innovation by competitors. Many of the old manufacturing enterprises have had problems at the operating level and in the post #==# scenario of economic reforms% closed 3 restructured 3 shifted existing manufacturing facility by re;engineering the resources including the ,or$force through innovative voluntary retirement schemes and started buying the product 3 subassemblies 3 components 3 service from India or abroad% as their o,n manufacturing cost became non competitive. .ome of the problems and situations that led to the emergence of outsourcing are listed belo,: a. 0estrictive ,or$ practice by the employees ,ith respect to vocational and ,or$ place mobility and the rigid attitude of the ,or$force %coupled ,ith the ,ay the Industrial 'isputes /ct got misused ,ith respect to .ection =/ on ANotice of Change A by vested interest groups in the enterpriseB b. 8o, output norm resulting in delays and a higher cost% because return on plant investment ,as lo,B c. Cnfavorable behavior and conduct of employeesB d. Inability30eluctance of existing ,or$ force to ac@uire ne, s$ill3learn ne, technology and also inability to give higher outputs and underta$e multiple )obsB e. Inability of management to find solutions to inherited3past restrictive ,or$ practices and usher in changeB f. Economics of ma$e versus buyB g. ?utsourcing leads to reduction in fixed cost% hence a lo,ering of brea$; even point on capacity utili<ation leading to higher sustainability of the enterprise in recessionary mar$et. This also leads to improved cash flo, as the investment in fixed cost on tangible fixed assets ,as reducedB h. Policy decision to outsource and not have the activity in;house% even if it costs moreB

i. 8imitation of in;house expertise% hence need to outsourceB ). 8imit the number of employees %and also in;house activities% so that the internal operations are highly focusedB $. 6enchmar$ing studies ,ith competitors on their practices of outsourcing and in;houseB l. Easy availability of subcontracting 3outsourced facilityB m. Increased flexibility as there is ample choice to outsourceB n. ?utput norms of the employees ,ith subcontractor are higher than in; houseB o. To build additional capacity. ?ne of the dra,bac$s in the outsourcing partners> model% in certain cases has been their inability to adhere to time lines% lac$ of confidentiality% failure to consistently adhere to @uality and failure to strictly adhere to systems and procedures. There is need for the manufacturing enterprises operating as sub contractors to improve and eliminate these dra,bac$s.

Challenges
5e must remember that manufacturing enterprises are location specific and operate in a particular state of the countryB hence a manufacturing sector friendly approach by the .tate Government ,ill help. Manufacturing enterprises are set up by individual entrepreneurs and entrepreneur managers of large si<e companies% hence there is need to encourage entrepreneurship and the rules framed by the various Government agencies% ban$s 3 financial institutions need to help the individual entrepreneurs and the entrepreneur managers and not become hurdles in operating manufacturing enterprises. Presently individual entrepreneurs prefer to enter into trading business rather than manufacturing% so as to reduce ris$% because business is not a straight line and it is bound to have ups and do,ns. /chievement of the target of "& percent of G'P ,ithin a decade for the Indian manufacturing sector is not easyB there are plenty of hurdles and challenges both external and internal to the enterprise ,hich need to be overcome and some of the suggestions given belo, ,ill help in meeting the target.

#. Need to ensure uninterrupted ade@uate po,er and ,ater in industrial estates being earmar$ed for the manufacturing sector by each of the .tate Governments ,ith scope for expansion at an existing site. ". Enterprises operating in industrial estates need proper infrastructure support% ,hich has to be provided by the .tate Government% such as availability of fire brigade% effluent treatment facility% incineration of ,aste facility% rail ;port; air connectivity% good and accessible road connectivity to national high,ays% public transport facility% hospitals% effective la, and order enforcement. D. Political stability is essential% to avoid policy shifts at the Central and .tate Government level. !. Investor friendly approach. Certain states li$e 2imachal Pradesh and Cttaranchal have been able to get fiscal benefits of excise duty exemption for specified time period ,hich has helped in attracting capital in manufacturing sector. &. ?perational transparency at Government and enterprise level in the Public Private Partnership model ,here Infrastructure developed pro)ects on 6uild ?perate Transfer *6?T+ principle has come under clout due to lac$ of transparency% though the basis is sound. (. 0eduction in time delays in clearances from various Government departments including the Cnion Ministry of Environment - 4orests *CME4+ especially for pro)ects in the core sectors dealing ,ith mining. E. / buoyant stoc$ exchange% ,here the citi<ens are $een to invest in the e@uity of ne, and existing companies% ,hich are setting up ne, manufacturing sites or 3 and expanding existing manufacturing sites. 9. .pecial Economic Fones *.EF+ do helps in attracting investments in manufacturing% but the 6udget of " ## taxed .EF both at M/T level and distribution tax level and this need to be revie,ed. =. 0etroactive tax amendment of " #" sends out a signal to investors in the ,orld that they ,ill not get a fair deal. Need for a revie, of this decision. # . .tate Governments have been setting up industrial <ones% but there is a ma)or problem on limitations of s$ills% amongst the locals ,ho have to be provided employment in the enterprises% hence they by and large ,or$ at the uns$illed level.

##. Need to revie, the existing labour la,s for unviable enterprises% as they cannot continue to live in comatose% because presently the 8abour 'epartment of the appropriate Governments rarely agrees to grant permission to manufacturing enterprises for layoff% retrenchment and closure. #". /t the state Government level% if the same person is the Minister for Industries and Minister for 8abour% it does help in sorting out the operating problems faced by manufacturing enterprises. #D. There ,as an amendment in the Model .tanding ?rders on 4ixed Term Contract% but the same is not applicable in the rules of most state Governments. 14. Contract labour in manufacturing industry has come to stay% because of absence of any changes in the labour la,s% ,hile the business environment post #==# has changed. Need for the Government to revie, The Contract Labour (Regulation & Abolition) Act, 1970 and Rules, so that they bene it the contract labour as !ell as the enter"rises. Also there are hurdles and challenges ,hich are internal to the enterprise and this need to be tac$led by each of the manufacturing enterprises:;; #. Guality: The manufacturing enterprises need to ta$e a hard loo$ at ensuring @uality systems% so that there are no re)ections% re,or$ and the product consistently meets the buyers> specification. ?utsourcing certainly creates @uality issues and unless the suppliers> are treated as partners and supported in maintaining systems and in turn @uality% outsourcing at times does become a nightmare of @uality. In the t,o ,heeler industry for example subassemblies li$e ,heel assembly% handle assembly become pretty complicated as the flo, of parts becomes complicated% for example in ,heel assembly% the rim is manufactured by a supplier% comes to the main plant gets painted and goes bac$ to the supplier. The bearings come from another supplier and goes to the assembly supplier. The tyre comes from a tyre manufacturer. The @uality of overall assembly depends on variation of all parts and processes and any issue ,ith respect to vibrations becomes a blame game. Complications in supply chain and multiple handling do create further problems. To add fuel in the fire% suppliers also outsource some activities to level t,o suppliers and this

goes even to four levels in some cases. 2ence for ?riginal E@uipment Manufacturer *?EM+ it becomes essential to $eep trac$ of @uality adherence up to the last level of supplier. /ll these issues if not handled properly create direct impact on @uality of the final product and revenue generation is impacted. ". .horter 8ife .pan of Products: Presently there are products ,here technological changes are very high and the mar$et situation is such that the life span of the product has become short. The production phase has thus become: Ahigh variety lo, volumesH. This in turn creates constraints for mar$et predictions. There are many examples ,here outsourcing is underta$en ,ith an assumption of a certain level of volume and a supplier invests money to set up manufacturing facility to cater to the demand of the ?riginal E@uipment Manufacturer *?EM+. If the product does not do ,ell in the mar$et and the actual demand reduces drastically% this creates a negative financial impact on the supplier as their returns on capital employed calculations go drastically ,rong. If the supplier is not strong enough% to ta$e such a hit% it becomes a permanent sour point in the relationship and the supplier demands compensation. There is an approach of many suppliers to multiply the demand of the ?riginal E@uipment Manufacturer *?EM+ by .E to build capacity. 6y chance if the demand is true% the shortage $ills the product as the ?riginal E@uipment Manufacturer *?EM+ fails to supply the product on time to the mar$et. /s the lifespan is small% it becomes difficult to revive. A5hat is selling today has to sell todayH and hence the opportunity loss becomes permanent. This again becomes a sour point for relationship bet,een the ?riginal E@uipment Manufacturer *?EM+ and the supplier 3 vendor. D. Product 'esign - Technology Cp gradation: There is need for continuous innovation to $eep improving on the product design% as that is one ,ay of improving the life span of the product. This approach is being adopted by the global leading companies manufacturing mobile phones and lap tops. /pple>s approach of innovation in product design of i;phone and i;pad is ,ell $no,n. There is also technological obsolescence that occurs ,ith passage of time and there is need for enterprises to invest in technology up gradation% ,hich

finally results in improved product design at the same time ensuring safe and easy usage of the product. !. Process: The manufacturing process needs to be economical in cost% at the same time ensuring that the process is safe for the employees. /lso the process must meet global as ,ell as national environmental standards on air emissions% effluent discharge and ,aste *toxic and non toxic+ disposal. &. Training 3 .$ill 'evelopment: The Government of India for promoting the efforts of Industry on s$ill development in " = set up the National .$ill 'evelopment Corporation *N.'C+. The National Chambers of Commerce Industry 3 National Employer ?rgani<ations have been associated ,ith N.'C. In addition the Government of India in 7une " #D too$ a decision to set up the National .$ill 'evelopment /gency *N.'/+ to anchor and develop the National .$ill Gualification 4rame,or$ *N.G4+% ,hich can play a vital role in transforming the @uality of training in India for the benefit of the Government and enterprises. 2o,ever% the present reality is that the vocational institutes li$e Industrial Training Institutes or Technical 'iploma institutions products ,hich are the young ,or$forceB have to be once again retrained ,ith hands; on s$ills needed by each industry. 2ence% certain enterprises have been imparting this training of developing the young ,or$force% by engaging them as apprentices for periods varying from one to three years. /lso the existing ,or$ force in manufacturing needs to go through a cultural change by ensuring that initiatives li$e Total Productive Maintenance *TPM+% 8ean Manufacturing Process% Maynard ?peration .e@uence Techni@ue *M?.T+% Total Guality Management *TGM+ drives ,ith tools li$e Guality Circles% Cross 4unctional Teams *C4Ts+% employee involvement initiatives along ,ith education and training are implemented% as these are necessary for achieving excellence in manufacturing. (. /ttracting Talented Technical Personnel: ?ne of the challenges faced by manufacturing sector is that bright young technical people prefer to )oin IT and service sector% rather than manufacturing sector. This is mainly due to the lo,er remuneration structure and tougher ,or$ing conditions in manufacturing. There is need for enterprises to revie, both the remuneration structure and the ,or$ing conditions% if talented technical personnel are to be attracted to manufacturing% other,ise manufacturing ,ill suffer in the long run.

E. Ensuring goods produced have a viable mar$et: Manufacturing enterprises need to ensure that the goods produced not only have a viable mar$et ,ith reasonable return plus there is a continuing demand by interested buyers% as non availability of a buyer can ma$e the manufacturing enterprise sic$. 9. Not over leveraging borro,ings: There are certain manufacturing enterprises ,ho have built manufacturing capacity by having high debt to e@uity ,ith a belief that they can service the debt easily. 5hen the pro)ect phase of a manufacturing site gets delayed and the demand for the product produced is sluggish% these enterprises get into a debt trap and at times become sic$. The .,iss multinational enterprises operating in India have a negligible debt to e@uity ratioB hence they never get into a debt trap.

Conclusion
The depreciation of the Indian rupee by nearly & I in the period " #" - " #D has resulted in imported goods becoming costlier. Certain Multi National Corporations *MNCs+% ,ho ,ere importing and selling the products are trying to either produce the products in India themselves or through a third party. The depreciation of the Indian rupee needs to be used as a boon to help the manufacturing sector in India to gro,% and expand% because imports are becoming expensive. 2o,ever there is need for the external and internal challenges mentioned above to be also tac$led on priority% if manufacturing sector has to generate # million better )obs in a decade% as visuali<ed in the National Manufacturing Policy of India.

JPresident Industrial 0elations Institute of India *I0II+% 4ormer International 8abour ?rgani<ation *I8?+ official % 4ormer Corporate 2ead of Manufacturing - 20 of Novartis India 8td.% 4ormer Corporate 2ead of 20 of /CC 8td. E;Mail:ra)enmehrotraKgmail.com