Back to the basics of manufacturing

The Indian economy must create more jobs. The target of 25 per cent of GDP for India’s manufacturing sector is a distraction because:

The boundaries between manufacturing and services, and even agriculture, are becoming fuzzier. Manufacturing enterprises have become ‘deconstructed’ by technology and new business models. Factories are being supervised remotely with technology. Products are being designed far from manufacturing sites. Thus, industrial engineering, product design, and even factory management, which are integral to the manufacturing process, now fall into services. Besides, is the processing of farm produce a manufacturing activity or an agricultural activity?

The target of 25 per cent GDP for manufacturing could be achieved if service and agriculture growth were to slow down. This would not help the economy.

Moreover, manufacturing output can be increased by high investments in automation, thus increasing the share of manufacturing in GDP. This will not increase overall employment.

The real problem is faster creation of productive activities for larger numbers of Indian citizens to earn adequate incomes — regardless of whether they are classified as ‘manufacturing’, ‘services’, or ‘agriculture’. Moreover, these activities should enable people to improve their skills and increase their wages. Shallow skill jobs, in simple service activities, or merely in manufacturing assembly operations, will cause wages to remain stagnant — which has become a problem even in advanced economies like the US.

The policy problem is not how to increase manufacturing to 25 per cent of GDP. It is to develop enterprises that can absorb a large numbers of Indians in income-generating activities with avenues for continuing skill development. Merely lathering more information technology into the economy will not produce such enterprises.

Many of these activities will conform with the traditional concept of ‘manufacturing’, which is to apply human effort to process materials to make products of higher value. When much larger numbers of people in India are engaged in such activities — for domestic consumption and exports — income levels in India will rise. This will make India a more attractive market for foreign companies accelerating a virtuous cycle of growth.

The shibboleths

Debates on policies for India’s economic growth seem to get stuck in old ruts. Should growth be export-led or domestic market-focussed? Is Aatmanirbhar ‘protectionism’ and ‘anti-trade’ or not? These debates are distractions from the core issues for ‘manufacturing’ policy, which are:

* How to grow enterprises in India which can manufacture products and services that can compete with products made in other countries — so that exports from Indian enterprises can be increased?

The policy problem is not how to increase manufacturing to 25 per cent of GDP. It is to develop enterprises that can absorb a large numbers of Indians in income-generating activities with avenues for continuing skill development.

* The production of more goods and services that Indian citizens can buy which will expand the domestic market. These will not be less quality: however, they must match customer needs at good price points. The core issue is not more or less trade, but how to build competitive enterprises in India.

Macroeconomists can explain conditions required for enterprises to ease their doing of business — that is, easy access to resources, low input costs, conducive exchange rates, etc. However, they cannot explain how enterprises build their internal competitiveness, which enterprises in developing countries must do in environments which are tougher than in industrially advanced countries.

Policy attention must shift to micro-economics — and specifically to ‘enterprise economics’. Within enterprises, the only force that aspires to improve its ability, and is a natural learner, is a human being — whether it is the entrepreneur who conceives of the enterprise or the humans within it. India must build its economic growth with its resources of human beings, and builders of organisations in India must learn how to nurture human energy.

India must build its economic growth with its resources of human beings, and builders of organisations in India must learn how to nurture human energy.

The development of competitive capabilities of enterprises in India is essential for increasing Indian exports and also for increasing the growth of the economy. It is vital for India’s strategic security too. Sadly, many commentators dismiss more self-reliance as ‘protectionism’.

They drag the policy debate back into an ideological rut — where ‘the clear stream of reason loses its way in the dreary desert sands of dead habit’, as Tagore lamented.

The resource factor

A smart competitive strategy, for a corporation or a nation, must build on the resource that the corporation or nation has more of it than others do. If a country has more petroleum resources than others, it makes sense for it to develop enterprises and technologies that use more petroleum. If a country has more human resources than others, its enterprises must build their competitiveness on the use of larger numbers of human beings. Moreover, they should use less capital if they have less of it than their competitors.

Enterprise level strategies that employ more people will also fulfil national objectives. They will create more gainful employment for Indian citizens and increase their standards of living. And they will make India a more attractive market for all investors. India needs strong industry builders. JRD Tata said, “Whenever I have a dilemma, I ask first what will be good for India, and second what will be good for Tatas”. Government must make it easier for enterprises to do business in India — that is its job. However, it cannot happen overnight. Meanwhile, great builders of industries must improve the competitiveness of their enterprises by building their own capabilities, not pleading for more government support.

JF Kennedy said, “Ask not what the country can do for you, ask what you can do for the country”. Debates on manufacturing and jobs must shift from what policymakers, and their economic advisers, must do for industry, towards what industry must do for itself. Industrial development is a collaborative learning process between industry and policymakers. Time is running out. We must shift our attention to build a faster learning system to build a larger economy with more jobs and rising incomes.

(The writer is a former member of the Planning Commission)