The Indian economy has seen major reforms since 1991. Different governments have taken the process forward since then. All sectors of the economy have certainly benefitted. It is no secret that the service sector did very well for itself. However, India's vast potential in manufacturing has remained unutilised. In terms of percentage to GDP, manufacturing cuts a sorry figure. At just 15% it has a much smaller share of the economy than China (30%) and Germany (21%).
But this is a problem that can be fixed. Many solutions have been put forward. Some believe in following China's model. But this may not be the right path for India. China has a labour intensive model. Large factories employ thousands of people at a single site. Sops are given by the government. Products are manufactured on a large scale for export. An undervalued currency provides an extra boost. China has been able to do this because it has usurped property rights and democratic freedom of its citizens. India cannot afford to go down that path.
Germany has taken a different path. Germany has very strong labor laws as well as strong unions which ensure that its employees are well paid. Yet, the country is a manufacturing power in the world. The answer lies in its labour policies. Employees in Germany are given a stake in the decision making process of their respective companies. Both labour and management follow a collaborative approach. Union leaders are provided places on company boards. There is a healthy debate between various parties on various issues. When key decisions have to be taken or important laws have to be passed, employees are always in the loop. This results in more responsible decisions being taken. Also, when economic times are bad, the labour force strengthens its skill sets and comes out of the downturn stronger.
India's economic, political and social structures are similar to Germany than to China. While changing obsolete labour laws in India, the government must prefer the German model over the Chinese one. Simplifying and reducing procedures, ensuring greater transparency and the use of technology to improve productivity should be on top of the agenda. The new government has promised to revive the manufacturing sector. Let us hope it avoids a path of confrontation and takes the prudent path of collaboration.
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