Why Indian manufacturing is yet to become world-class

Jun 7, 2011

In this issue:
» Is the new flurry of internet IPOs worrying?
» French FM looks to India for supporting IMF candidature
» Consumption story gaining ground in emerging markets
» US banking laws lack muscle
» ...and more!
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One similarity between China and India is that both have exhibited scorching pace of growth over the past few years. But while China has established a strong foothold in manufacturing, India's growth has been fuelled by the services sector. And while it is no match to China in the manufacturing arena, India is looking to make improvements in manufacturing and production which will provide a further fillip to GDP growth.

But that may not be so simple. Today India boasts of world class companies which set strong standards not just in India but also in the global markets. India Inc. is also hopeful of strong growth in sales and profits in the years to come led by strong growth in the economy. But unless Indian companies are careful, certain issues could well prove to thwart their growth efforts. Take labour issues for instance. Recently, auto major Maruti has had to deal with loss of production of around 1,800 units at its Manesar plant due to strike by workers. Earlier this year, a 50-day long strike by a section of workers at the General Motor's Halol plant cost the firm to lose production of 2,000-2,500 units.

While for the time being these might be near term concerns for Maruti, India Inc. in general will have to ensure that this kind of labour unrest does not become a regular feature. For indeed, a restrictive labour law environment has been one of the major hurdles to the development of the Indian manufacturing sector. Thus, corporate India will have to evaluate existing labour laws which are quite archaic on a priority basis. It will have to work towards ensuring that there is a major overhaul in these laws in keeping with the changes in the economic and industrial landscape. Otherwise, India's hopes to become a world class manufacturing behemoth will only be a distant dream.

Do you think that India's restrictive labour laws are the prime factor that could hamper its manufacturing industry in the future? Share with us or post your comments on facebook page.

 Chart of the day
India's GDP growth in the first quarter of 2011 saw some slowdown on account of interest rate hikes to curb inflation and surge in commodity prices. But today's chart of the day shows that India along with China still emerged as the top nations in terms of GDP growth during the quarter. And although both these emerging behemoths are likely to face headwinds as they battle to bring inflation under control, growth in these regions is still expected to beat that in the developed world.

Data Source: The Economist

A new wave of internet IPOs has begun to make its presence felt in equity markets. While shares of LinkedIn Corp have sold faster than hot cakes, others like Groupon, Facebook and Twitter are waiting in the wings. Clearly, never since the dotcom bust have so many internet companies longed to go public at virtually the same time. Will the script go wrong this time as well? It should be noted that the last stampede into internet stocks had an ending that few would like to remember. Billions of dollars worth of wealth was lost. While there were lawsuits galore and quite a few investment banks were pulled up, we don't think things have changed much. In fact, things have remained the same for a period going as far back as 70-80 years. Thus, watching out for things like a sound management team, a long track record of growth and profitability and reasonable valuations remains our only defense if we want to prevent our hard earned money from getting lost in IPOs.

It was just about two decades back when India air lifted its gold reserves to pledge with the International Monetary Fund (IMF). This was against a loan to relieve India from a critical deficit crisis. Ever since then, India's debt servicing ability has improved from strength to strength. And so has the importance of India and other emerging economies in the eyes of global economic heavyweights. We are therefore least surprised at the news of French Finance Minister Christine Lagarde, proposed IMF chief, visiting India to seek support for her candidature. Unlike China, India has maintained her opinion about emerging economies finding more voice in organizations like IMF. Hence the French Finance Minister is certainly not the top choice of Indian policymakers. Also, the Euro zone's obsession with retaining the top position in the IMF does not bode well for the long term prospects of developing nations. Having said that we will not be surprised if Ms Lagarde manages to fetch the India vote. A Chinese candidate for the post may do little good to India's standing at the IMF. And in the absence of a suitable opposition to Ms Lagarde, India may be left with little choice.

The consumption story for investments has been doing the rounds for quite some time now. Investors are hungrily lapping up stocks of sectors that are expected to do well on the back of higher domestic consumption. The emerging markets have emerged as the investors' favourite destination yet again even for this story. Global investors are now flocking to the sectors that are expected to ride the consumption boom.

Markets in US, Europe and even Japan have seen tougher times. Lower economic growth as well as the heavy burden of debt has forced investors to look away from them. With higher returns, emerging markets have been attracting investments in recent times. However, a major part of these funds were invested in the commodity sectors. However, commodity prices have seen a cool off in recent times. This has led global investors to look at alternatives. And consumption driven sectors appear to be the new hot favourites.

It's close to three years since the Lehman Brothers collapse. But, new banking laws in the US still do not have the necessary muscle to prevent another meltdown. In fact, the very bankers that created the subprime mess have an unfair advantage over their European peers.

The US is yet to implement Basel II capital adequacy standards, which the EU implemented in 2006. Post the crisis, major industrialised nations agreed to cut back on incentives for risk-taking. But, the US mostly used non-binding terms to implement this deal. It does not enforce a particular cash-limit on executive bonuses. Paying fat-cat bankers hefty bonuses and later having to bail them out caused significant public outrage a few years back. For the public to have faith in the banking system and regulators, the US needs to work on ironing out these issues. They may not get a second life next time around.

It is close to four years now since OPEC has kept its official supply of crude unchanged. Speculations run high as OPEC plans to meet again. OPEC has a reputation to be indifferent to global energy needs. However, the situation has changed this time. We have seen supply crisis from countries like Egypt and Libya. Oil prices are running stubbornly high. The demand is expected to be high as summers arrive and of refineries' maintenance season approaches an end.

Saudi Arabia has already raised its production ahead of cartel's meeting. However, there are others OPEC members like Venezuela and Nigeria that choose to under produce. With underlying political tensions among the member nations, this meeting is definitely going to be a charged one. What makes the policy trickier is balance of supply among the member nations. Any proposition to change the relative share can lead to further political tensions among them. But what is in it for us? Any boost in quotas up to or less than 1.3 million barrels per day may not translate into actual increase in supplies. This is because the earlier supply limits have already been flouted and a limited increase will only formalize it.

In the meanwhile the Indian stock markets have been trading strong. At the time of writing, the benchmark BSE Sensex was up by 72 points (0.2%). All sectoral indices were in the green except capital goods. Asian stock markets were trading mixed with China, Japan and Taiwan among the gainers. The other Asian markets were trading weak. Europe has opened in the green.

 Today's investing mantra
"Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and skeptical." - John Templeton

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5 Responses to "Why Indian manufacturing is yet to become world-class"

Santosh Bhatnagar

Jun 8, 2011

It is not only the labour lawas alone that are the stumbling blocks in achieving quality. Uncertainty of Power, the quality of raw materials, skill of the workmen, the knowledge and understanding of owners and senior officers are the main hurdles. The Government should ensure continuity of power as most of the continuous processes need continuous power. One interruption means 2-20 % process waste, depending upon the process. The substandard generated during the interruption is normally sold at reduced cost or refined and mixed with the main product. Overloading the machines and shortcuts, directed by the owners / senior officers from time to time lead to almost. These persons are responsible not only for the poor quality of the product but also for creating hazardous conditions by taking shortcuts and poor maintenance of the plant and machinery. Every one needs cheap labour, though the cost contribution due to labour in the product is usually the lowest. You employ cheap labour and after picking up the skill, the labour vanishes. You would have noticed that the units started and managed by the technocrats are more successful than the units managed by finance or commercial people.



Jun 7, 2011

that is right know one thinks of bull, every body needs of production targets, as by the age working capacity is reducing but does"t says u can fire him ,you have to upgrade and tell and situation of the company.



Jun 7, 2011

Every body is concern about this labor, one day u will have no labor then what will happen to the GDP ,have u ever thought , in India u pay less to labors and give more to executive who's output is less, they can negotiate for there salary but labour can't, why labours are not given more salary then executives as they are the backbone of your company, now a days every body wants white color job one day labour class will be vanish then GDP will be not there to calculate,in America labours have become CMDs of company because they knows how to fine diamond from stone,here stones are there but no one to polish it to make diamonds,that is why they are ahead of us . British left india 63 years back we are still using there system of work and how to carry work,we do not have our own system or laws because all systems/laws are copy pastes,that is going on till date will carry on .



Jun 7, 2011

the labor laws in India are the real threat to india next to corruption.while the workers in organised sector are ( the worst are in the govt sector)pampered ,the workers in the unorganised sector are badly exploited.the minimum wages are mostly on paper and compliant officials make the exploitation beyond the law.the management principles swing from compliance at one end to exploitation at the other.



Jun 7, 2011

The labour laws in our country are indeed due for a change to match the needs of the current manufacturing enviornment of our country. It is not about wages and the facilities available to the workforce but todays manufacturing industry would like to pay wages commensurate with the skill set a worker possesses. The catagories of the wages prescribed in the various manuals defines the catagory but not the work out put that may expected from the worker. Another very important quality that is desired in a productive worker is DECIPLIN, this unfortunately is totally lacking in most of the blue collared workers. a manufacturer hires a worker out of need and his free will, he should logically then be allowed to fire the worker who does not yeild the desired work out put. WHEN ONE CAN HIRE THEN WHY CAN'T ONE FIRE ALSO?
Most often than not labour unions are formed under political patronage, they serve the political bosses and are exploited by the politicians for the benifit of the political leaders. This too must stop by having the labour commissioners who are answerable and responsible to safe guard the interest of the workers but MUST ALSO BE RESPONSIBLE TO ENSURE THAT THE PRODUCTION TARGETS ARE MET WITH.
The laws must be ammended to deal with labour rights and production targets. Let the law work as the bullock cart driver who nudges the bullock to keep moving till the destination is reached, he does provide the required food ,water and shelter to the bull that pulls the cart.

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