Can India become a manufacturing powerhouse?

Aug 11, 2012

In this issue:
» Are state owned entities stifling China's growth?
» What Spain's inability to service debt will entail
» Food inflation is a global issue now
» Passenger vehicles fare better in FY13 so far
» ...and more!

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Notwithstanding the current slowdown, both India and China have grown at an impressive rate in the past. But the contributors to this growth have been different. While China has emerged as the manufacturing powerhouse in the world, India's success story has largely been a result of stupendous growth in the services sector. Indeed, as the Economist reports, manufacturing forms around 15% of India's output and the country will need a much bigger manufacturing base if it wants to grow rich in the longer term. Further, growth in manufacturing is also important if an ever increasing population of the country is to be absorbed.

There have been some successes on this front. Given the abundance of cheap labour in the country, manufacturers from all parts of the world have been attracted to India and have been setting up plants in the country in recent times. Certain cities such as Pune, Chennai and the state of Gujarat have also emerged as major industrial hubs for various sectors including automobiles and auto ancillaries. Various new special economic zones have also sprung up to bolster manufacturing.

But many problems still persist. These include lack of viable infrastructure, land acquisition problems, red tape and poor education. Archaic labour laws are also an issue. The recent violence at Maruti's Manesar plant is a classic case in point.

What differentiates India from China is that unlike the latter, manufacturing in India is focusing more on high end and sophisticated areas. Commodity manufacturing, where China rules, is not that successful. It could be if there is a major overhaul in labour laws. Also, as focus on high end manufacturing increases, so will the requirement for skilled labour. This will only happen if the younger population entering the workforce is equipped with the right skill sets. Indeed, while the country's demographic dividend is being flaunted as its asset, it could end up being a two edged sword if lack of education prevents the younger population from gaining employment. What this means is that in the longer term revamping labour laws and improving work skills are the two major factors that could take India's manufacturing to the next level.

Do you think that India has what it takes to become a manufacturing powerhouse like China? Share your views or you can also comment on Facebook page / Google+ page.

 Chart of the day
FY12 was a challenging year for the Indian auto industry. High interest rates and fuel price hikes took its toll on the industry. The scenario has been subdued for the first four months of FY13 as well. Although the difference is that passenger vehicles have fared much better. Today's chart shows that in April-July 2012, passenger vehicles clocked the highest growth at 10% YoY. Growth in this segment was largely driven by utility vehicles (up 54% YoY). The slowdown in the economy took its toll on commercial vehicles though. Medium & heavy CVs registered a 13% YoY fall in volumes. However, there was some respite for the CV segment in the form of a decent 18% YoY growth in light commercial vehicles. Exports, which did quite well in FY12, have failed to take off so far with growth falling by 4% YoY. One of the reasons for this has been that Sri Lanka has imposed a steep hike in import duties as a result of which demand has slacked.

Data Source: SIAM

There can be no denying the fact that China certainly has been the biggest success story of the past couple of decades. From an also-ran, it leapfrogged to becoming the second biggest economy in the world. However, as things stand today, some serious questions are being asked about the sustenance of the country's economic model. In other words, will its current strategy of dominating the corporate landscape with large state owned entities work? Or the time has come to gradually pass on the baton to the private sector?

Experience around the world does suggest that the private sector should be the way to go. After all, nothing matters more to sustainable long term growth than the fact that the capital resources are being deployed where the returns on that capital are the highest. And even the Chinese cannot dispute the fact that private sector does a better job of the same than state owned enterprises. Having said so, this is easier said than done we believe. Especially in China where policymakers have been brought up on a steady diet of state controlled capitalism. However, the longer they persist with such a line of thought, the bigger the price they will end up paying we believe.

The Reserve Bank of India (RBI) and some of the best financial institutions in India are ruthless about a key lending metric. It answers to the name of loan to value ratio. Being the indicator of the extent of loan available on value of an asset, the ratio helps mitigate risk. Especially in the event of rising interest rates. Prudent organizations in India keep the loan to value multiple extremely conservative. This ensures that servicing interest does not become impossible for the borrower even if rates rise.

However, governments in the West have not had a brush with prudent regulators. The economies facing sovereign default are on the brink on defaulting on their interest payments. Let alone repay debt. As per Firstpost, the economy of Spain is in a particularly bad situation. One that is not only threatening its own solvency, but also that of other Euro nations. So far, Spain kept servicing its debt by taking more debt. But now the problem is that there are hardly any takers for its poor quality debt. Plus the interest on the existing debt is mounting. Spain's inability to service the debt and repay it will affect European banks tremendously. German and French banks are exposed to half and a third of Spain's Euro 134 bn debt from banks. Like Greece, this economy may also seek a temporary bailout. But unless it takes more concrete fiscal measures, the leverage problem is here to stay. It is time the ECB takes some lessons from our RBI.

Food, cloth and shelter have been cited as the basic necessities for human life. And if statistics are to be believed, one of this is really going to be tough to afford. It's not just India that is out of favor with weather gods. Bad weather induced food inflation is becoming a global issue now.

Global economy is already facing a slow down. Food inflation in such times could be a spark to the full blown crisis as a rash of bad weather across the globe strains global food chain. As per reports from United Nations Food and Agriculture Organization, the global food price index that measures export prices of food has taken the steepest leap since November 2009 in July. At these levels, it is only 10% below its February 11 record. While one can do little about the weather, let us hope that the Governments don't react to the situation by hoarding, leading to global price rise.

The week gone by was a positive one for global stock markets. Asian markets on the whole outperformed the other regional ma,rkets with Japan leading the pack of gainers. It is believed that during the week gone by the Japanese markets witnessed their biggest weekly gains since February this year. The gains this week were largely driven by speculation of stimulus being announced. Also, with no major developments from the US and European regions, there was a lot of focus on the news relating to the slowdown in Asia, which is why markets saw pressure towards the end of the week.

Amongst the other top performers were Brazil, Hong Kong and France which ended the week higher by about 2 to 3.5%. The US and Singapore were amongst the weakest performers this week.

Data Source: Yahoo Finance

 Weekend investing mantra
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher

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6 Responses to "Can India become a manufacturing powerhouse?"

Kuldeep Nayar

Aug 12, 2012

India can never become a manufacturing powerhouse as long as the Government retains a plethora of outdated laws that hamper every manufacturing activity. This coupled with thoroughly corrupt inspector class with powers to harass industry. Secondly, policies are framed not for universal good but for benefit of a few cronies.

Like (1)


Aug 12, 2012


Like (1)

B K Nandi

Aug 11, 2012

India service sector growth is an incidental coincidence of IT boom and the more English speaking people. If India is compered with China, India is living in a foolish world. See the Olympic medal count. India can never be a manufacturing power house like China. It is not the question of educating young workers, this is a hypo critic statement to distract real problem. These young workers when going abroad, they are producing their best and being appreciated. Indian dynasty Nehru-Gandhi rule created a corrupt India. Everywhere it is corrupt. It is ministers, political leaders who have to take education, who has to respect their nationality. Now people do not respect political leaders, PM even the Indian President. All these big people don't care Indian development, no respect to India, they only fear dynasty queen Sonia Gandhi. To day India is fit to be compered with Bangladesh or Pakistan but not China, USA.

Like (2)

pradyumn kumar jain

Aug 11, 2012

Manufacturing is the need of the hour in India,specially where cost of labour is quite reasonable. Only problem in India remains is that skill,before that,sincere efforts by our policy makers and industry leaders.In fact NITI and NIYAT are not in synchronization causing unrest in the atmosphere of industrial /manufacturing environment.Examples are TATA Motors and of course Maruti as quoted.This needs to be addressed immediately.

Like (2)


Aug 11, 2012

India's manufacturing industry should grow faster to create jobs. Application of IT,improvement in productivity,more skilled labors are demands of the time.Business bodies,Trade unions, political parties should be taken into confidence.Improvement of scale requires product varieties as product life cycle has become shorter.

Like (2)

John Pereira

Aug 11, 2012

Export market is declined mainly because the quality India produces is poor. I read all the time and a lot about TATA being the best in everything but being in a foreign country for nearly four decades, I am ashamed how TATA products are faring in Saudi Arabia. The worst performing pick ups and buses you will find in TATA in Saudi Arabia. It is a big shame for our country.

TATAs reintroduced their vehicles with a big bang and it was almost a total sell out few years ago. Now believe me I do not see these pick ups or buses any more!

I am just a well wisher for TATA AND MY COUNTRY.

Like (3)
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