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The Threat to 'Make in India' that We Want to Talk About

Nov 17, 2015

In this issue:
» Bank credit growth slows down again
» Exports fall for 11th consecutive month!
» ...and more!
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Rahul Shah, Co-Head of Research

Dear Readers: In a country of over 1.2 billion people, jobs and job-creation are always hot topics of discussion. So in a recent edition of The 5 Minute WrapUp, when we wrote about how new developments in field of robotics have the potential to completely change India's employment landscape, it struck a chord with readers.

Considering the significant implications these changes will have for India's large workforce and thus its economy, for today's edition we invited Vivek Kaul to share his much sought-after views on the subject.

Many of you know Vivek as the India Editor of The Daily Reckoning. He is also the author of a trilogy on the history of money and the financial crisis titled Easy Money.

Happy reading! - Rahul Shah

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This column is essentially an extension of the column Devanshu Sampat wrote for The 5 Minute WrapUp on November 13, 2015. In this column Sampat talks about the challenge automation will create for the Make in India programme.

As he writes: "The costs of robots fall every year. At the same time, their complexity is on the rise. It won't be long before cheap robots will be catering to the needs of a wide range of manufacturing firms." This Sampat believes "will prove to be major challenge to the government." "Will 'Make in India' be successful if a large number of people remain unemployed despite a manufacturing revolution?" he asks.

As I have said in several previous columns, nearly 13 million Indians are expected to join the workforce every year. This trend will continue up to 2030. Given this, the government needs to create an environment in which jobs are created, in order to accommodate this workforce at a fast speed.

With automation and robots taking over manufacturing the number of new jobs being created will come down. And this will mean trouble for the Make in India programme given that ultimately it's a job creation programme.

So what is the way out? The socialist mind-set of India's politicians will look at it in a way where they may want to make it mandatory for businesses to hire and employ a certain number of people depending on the size of a firm.

To be honest I haven't heard of such suggestions being made up until now but I won't be surprised if such suggestions are made in the years to come, if the Make in India programme starts to fail due to automation and various other reasons.

Also, it is worth remembering here that any businessman will automate if he can. A businessman is a capitalist and he works for 'more' profit and if there is an opportunity to make more profit he will try to cash in on it. And stopping that behaviour isn't the best possible way to operate.

Further, given India's surfeit of labour laws which make the business environment even more challenging, automation may be the best way out for any businessman.

Having said this, the question that arises here is that why should we expect the manufacturing industry to solve India's employment problem? This is a fair question to ask. A straightforward answer for this lies in the fact that every country that has gone from being a developing country to becoming a developed one, has gone through a manufacturing revolution. India is possibly an exception to this, given that we have had a services revolution before a manufacturing one.

Nevertheless, even with automation we should not be so worried. TN Ninan in his book The Turn of the Tortoise-The Challenge and Promise of India's Future offers a very interesting perspective on the basis of his interactions with some leading industrialists.

Take the case of RC Bhargava, the chairman of Maruti Suzuki, India's leading car maker. As Ninan writes: "The chairman of Maruti Suzuki says, in response to a question on the greater automation that exists in newer car plants, that car factories should not be expected to solve India's employment problem."

So what about job growth? "If job growth is to come, according to Bhargava, it will have to be in associated areas-manning petrol pumps or maintaining and repairing vehicles, which are service sector jobs and don't compare with high paying factory jobs."

Bhargava also points out that every third car bought in India is not driven by the owner but a hired driver. Data from the Society of Indian Automobile Manufacturers (SIAM) points out that 2.6 million cars were sold in India in 2014-2015. If every third car is being driven by a driver as Bhargava talks about, then that means 8.5 lakh new jobs for drivers were created just in 2014-2015. And that is a substantial number.

The broader point is that even though manufacturing jobs may not grow, the setting up of new factories will lead to an increase in jobs in services. As Ninan writes: "The ratio of non-factory to factory jobs in the car industry is said to be 7:1. The head of another car company puts the figure at 16:1. Other manufacturers of engineering goods endorse the view that shop-floor employment in the engineering goods sector is unlikely to grow rapidly because of steadily increasing automation as well as gains in productivity."

Ninan also recounts an interaction with Jamshyd Godrej, chairman and managing director of Godrej & Boyce, the diversified engineering company. Godrej "recalls a time early on when the majority of his company's employees worked in the factory." Now, the number of employees working outside the factory is four to five time the number of employees working in the factory.

The moral of the story, as Ninan puts it is "Success in quite a lot of manufacturing sectors, therefore, leads to employment growth in services, not manufacturing. Not that it should matter, since incomes will be better in both than in agriculture."

In this scenario, it is important that the government realises that the success of Make in India, should not depend on the number of manufacturing jobs it ends up creating. Even if it does not create manufacturing jobs, it will create jobs in services.

Hence, the government should keep working towards a better ease of doing business environment. The labour laws need to be simplified. The physical infrastructure needs to improve. The roads, railways and ports need to improve. The contracts need to be honoured. A bankruptcy law needs to be in place. The courts need to function well.

The simple things need to be done well.

Do you agree with the view that, even if manufacturing jobs do not grow, the setting up of new factories will lead to an increase in jobs in services? Let us know your comments or share your views in the Equitymaster Club.

2.40 Chart of the day

The woes of India's manufacturing sector won't go away any time soon. Domestic demand has been dull. Export opportunities are uninspiring. Labour issues have remained problematic. Tax laws are unhelpful. Land acquisition is a major worry.

To this, we can add the problem of obtaining credit. The data is clearly bad on this front as well. As today's chart shows, bank credit growth has reached a new low recently. This is partly because large firms have been raising funds via commercial paper. But that cannot fully explain the slowdown in the bank credit growth.

Falling credit growth to hurt manufacturing?

The problem as we have stated many times before, lies in the NPA menace. Banks are reluctant to lend, as they are worried about credit quality. We believe the pain in the banking system will last for some more time.

A healthy banking system is a prerequisite for economic growth. If credit growth continues to slow down, it could be a leading indicator of a more general deceleration of the Indian economy in the coming quarters.

3.50

No discussion about the Indian economy is complete without mentioning growth in exports or rather the lack of it. Data released by the ministry of commerce has confirmed that India's merchandise exports have fallen for the 11th consecutive month in October 2015.

The contraction was 17.5% on a YoY basis. It is indeed distressing that despite the size of India's economy, we struggle to export even US$ 25 bn worth of goods every month. The figure for October 2015 was US$ 21.3 bn. The main culprit was petroleum products, which fell by 57.1% YoY as per an article in Livemint.

The government has recently released an ambitious plan to boost exports (both goods and services) to US$ 900 billion by 2020 and raise India's share of global exports to 3.5% from 2% currently. It is difficult to be optimistic about such ambitious plans in our opinion.

While there is plenty of room for improvement, we don't believe such targets can be achieved without a revolution in the manufacturing sector.

4.48

The Indian stock markets were trading quite close to their yesterday's closing level on the back of mixed trading amongst index heavyweights. At the time of writing, the BSE-Sensex was trading up by around 25 points. Gains were largely seen in metal and FMCG stocks.

4:56 Investment mantra of the day

"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February." - Mark Twain

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst) and Vivek Kaul.

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6 Responses to "The Threat to 'Make in India' that We Want to Talk About"

V.Prasenan

Nov 18, 2015

Hi,
Mr.Bhargava has been to the point in mentioning that Make in India is definitely a solution forward to us as a nation to move towards INDUSTRIALIZATION.
However it does not necessarily mean that factory jobs are the only solution, the related service industries will also contribute towards this objective and the end result is distribution of wealth. The shining example of this is "UBER Effect". The general living standards of the car drivers has shot up substantially and each one of them has turned an entrepreneur himself. SELF EMPLOYMENT is the aim here and self sustenance of a family.
Having been in the machine tool sector for over three decades, and seeing the progress we have made in the automation field, it is very encouraging for us to move forward in this direction and SWADESHI movement of yore will yield better job opportunities and quality manpower overall.
MODI's vision for the country is far-fetched and we all should participate.

Like (2)

ASHIT KOTHI

Nov 18, 2015

The point Mr.Sampat and Mr.Kaul has raised with regards to threat to Make In India Initiative and also observation of Industry Stalwarts is eye-opening as well as scary. It makes one thing very clear, the employment scenario will remain fluid and the government think tank as well as industry will have to think and plan for at least 50 years from now on. The best example is Auto Industry. If Mr.Bhargav is talking about more demand for Drivers, Mechanics etc., what will happen when you have driverless vehicles, testing for which is already on.

The point is, it is not just Skill India or Make In India will take care of unemployment. IT IS RESKILL INDIA, WHICH CAN TAKE OUR COUNTRY AND OUR PEOPLE TO NEXT LEVEL OF DEVELOPMENT. It is reskilling of labour as well as educated or white collar labour which is the need of the hour or otherwise, disruptive technologies will convert today's strength into tomorrow's weakness.

Like (2)

S G Chellappa

Nov 18, 2015

A good article. Having worked in Auto/Auto Ancillary industries for more than 35 years, I have seen the improvement in productivity whenever we tried successfully like KanBan, single piece flow and group activity etc there was stiff resistance from the work force. management has to adopt techniques which will motivate the workmen.we at Lucas TVS engaged the best brains like Prof. Washio to implement these activities. company did not force any worker from adopting the new system. it was accepted by younger generation and over time they received much higher wages and incentives much better than the older workforce. hence they also joined the bandwagon and we had a successful story. we had reduced the manpower from 3000+ to 1500+ by not recruiting people as replacement for the workmen who retired from service. the effort has increased substantially the activities at sub contractors end. in fact a few subcontractors were such that they could affect the daily production if there is any problem at their workplace.

but it is not an easy affair. the management has worked hard for many years and achieved the success story. it can be the same story in all the TVS group companies involved in manufacture. any improvement in manufacturing will improve the product quality and bring in Six sigma quality thereby enabling India to be the foremost exporters of manufactured goods. we need good leaders to name a few -like Mr. Suresh Krishna, Venu Srinivasan, Magesh Krishna and T S Balaji of TVS family.

hence i am fully confident that the effort to make in india will be a success story and mane employment will be created.

Like (2)

RAVI KATARI

Nov 17, 2015

It is a very probable scenario - creation of non manufacturing jobs in the service sector around industries like automobiles, computers, solar installations etc. The problem is that much of the mechanical repairs involve 'plug and play' where the mechanic plays no skilled role but merely replaces a component. This is not a good thing and one cannot help remembering the days of the ambassador 7 Fiat where millions of roadside mechanics around the country learned real skills in repair, tuning, etc which they then extended to vehicles like trucks and tractors. It would be important to ensure that these do not go too hightech as it may then be beyond the capability of a simple roadside mechanic.

Like (2)

vipul jasani

Nov 17, 2015

Hi,

I do not consider "so called developed countries" as developed.
India is developing country!!! And moving towards becoming under developed country.

To solve the issue of unemployment, there is only one solution that was given by Mahatma Gandhi and that is Swadeshi.

All these industries were supported by So called Subsidy for capital investment or else none of big factories can compete small companies barring few industries.

Thanks

Like (2)

MURALI

Nov 17, 2015

ACCEPT OR NOT.... India will be part of the global automation RACE. We are staring at a NIGHTMARE of gainfully employing the world"s largest young population. A large portion of this AUTOMATION push is because of the poor attitude of our workforce and the quality of youngsters coming out of our MECHANISED educational institutions.

Like (2)
  
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