Multi-national companies are looking for a country with a large domestic market with low cost labour, to produce products outside China. However, to become the “factory for the world”, India needs to take some crucial steps
What the new government is inheriting?
Government industrial policies have great influence on developmental trajectories of specific industrial sectors. Infant industry theory has been dominating as the basis of our industrial policies so far. This approach to protect and foster our immature industries has indeed not worked. After effects of protecting our trader owned industries is reflected in shoddy product quality and total lack of customer care almost till the end of 80s. Just recall at the packing boxes of the consumer goods during those nightmare years!
In 1991, the central government took a U-turn and removed this protection under international pressure but still did not give up its bureaucratic control over the industry till now through inspector raj and complex multi-level taxation and its corruption ridden recovery. Manufacturing efforts in India slowly, have become a scary nightmare. Many entrepreneurs just gave up.
Today industrial estates barely function and are unable to compete with low cost quality imports. Big trader-owned 'industries' gave up manufacturing and are selling imported products under their labels, claiming it as Indian manufactured output! Only exceptions are pharmaceutical industry (thanks to growing ill-health due to malnutrition at one end and greedy over-eating at the other) and the automobile industry. Technical entrepreneurs are struggling but their talent gets no support from the bureaucratic corrupt apparatus of the government. Nothing is done on time, and whatever is done, is shoddy and problematic. Slowly, work culture in India has degraded. Engineering education turns out sales managers, sans any hands-on engineering knowledge, or skills, or any aptitude to be hands-on. IT is limited to services with no IT products to our credit. (Sorry for pointless outburst!)
In 2013, the United Progressive Alliance (UPA) government had proposed a new industrial policy for the electronics sector. Alas, again I found we were going to the old regime of protecting and fostering our immature industries with government taking the role of a boss with a promise of subsidising industries using government funds. One knows that such a process can become a breeding ground for corruption and misuse. This needs to be abandoned.
My success with electronics industry from 1983 to 90 as policy maker
From 1976 till we lost him in 1991, Rajiv Gandhi was my friend. First, during his non-political years as a pilot, I convinced him the electronics and communication technologies could be used as building tools by integrating India through easy information movement. Later, when he joined politics, I could convince India Gandhi in 1982 to de-license at least the consumer electronics sector and put thrust on software and wrote a paper, at her request, to bring about the change. The new policy came into being in August 1983. Ratan Tata and other industrialists of that time are aware of this. As a result, domestic manufacturing grew from a mere Rs1,200 crore in 1983-84 to Rs9,400 crore in 1989-90 when I left; 40% annual growth in manufacturing! Later, I introduced Material, Technology Brand (MTB) name Plan for small and medium enterprises (SMEs) to market high quality black & white (B&W) and colour television sets (CTVs) at extremely competitive prices. In 1988-89, I did the same for India-made personal computers (PCs) by supporting our private, medium scale industry with technology and sell them at Rs10,000 when Wipro and HCL were selling them at double the price. Soon, both dropped their prices to similar levels. After I left, the bureaucrats managed to kill those initiatives one after another. What a pity! But Rajiv's loss ended my "capital punishment" and I returned to Mumbai for good. (I did not want to work with VP Singh)
How do we rebuild our manufacturing sector?
We have a model right across the Himalayas that we should learn from but not ape. In a short span of 25-30 years, by doing the right things, at the right time, China moved from nothing to become a 'factory for the world'. I told Rajiv (Gandhi) in 1988, just before his ice-breaking visit, that nine out of 10 of China's politburo members are all hands on engineers, unlike his street-smart cabinet colleagues! Clever Chinese also managed to have all the modern technology from the world without paying a penny for it. We should, however, learn but not copy them. I spent two years in China between 2008 and 2009 with regular visits and studied the development of SME Sector in China as well as its taxation policy. Several copies of this report are lying in related ministries of the former government. Except for a smile and a cup of tea for me, nothing was done to study it.
Strangely, I think now is the right time for India for three reasons.
China is growing too big, causing discomfort for the western nations. They do not want to keep on feeding the dragon and looking for other places in Asia.
China's costs are rising alarmingly; skilled workers are today being paid as much as those in the US or South America.
Multi-national world today is looking for a country with a large domestic market having low cost labour in abundance like India, to produce intelligent products outside China due to Intellectual property (IP) issues.
Our Option is to benefit from this prevailing sentiment:
A. Under the above circumstances, India should gear itself to attract foreign companies by eliminating bureaucratic control over Indian industry and labour law relaxation as China did.
B. This apprenticeship is essential and will certainly reward us later in many ways as China has been. They will train our manpower at all levels for appropriate work culture and work practices. It will teach our engineers, material technology and hands on hardware engineering geared to produce products for the world market and get a grip over engineering processes and practices. China's private industrial entrepreneurs largely come out of multinational manufacturing plants in that country. Instead, India should now create economic and industrial environment and focus on developing infrastructure conducive to enhance industrial efficiency on one hand and on the other hand, attracting domestic and foreign direct investments in this sector.
C. China has cleverly used its taxation policy to strengthen its SME sector. Subsidy is given very meaningfully to help EME to compete. This includes low cost rental premises for SMEs (as low as Rs2 per sqft in Guangdong!), reduced power rates for two three years (in many provinces, free power for two years) and clever way to recover VAT on industrial inputs (66% VAT offset, on the assumption that material input is 66%) to offer low cost products. These are just a few examples. One has to study the complex dynamics between policies and industrial development as well as the interactions between government and industry; especially non-invasive intervention by banks to companies struggling for economic recovery.
D. There is also a lot to learn about public sector industrial reorganisation and reforms like dilution of ownership to benefit inside stakeholders in its successes.
Some rewarding suggestions for taxation policy are stated below:
Effective Ways to encourage growth of manufacturing in SMEs
1. MTB Plan for SME (Innovative Cluster Approach)
We are a huge nation, each state being as big as some nations in the world. SMEs normally serve markets in their own states or regions. All of them struggle to give high quality at low price. We can help these very innovatively as I did in 1985-90 by way of MTB Plan
What is MTB Plan? Problem of SMEs is three-fold;
a. Technology: Access to good quality reliable and durable product design
b. Material: Inability to buy in bulk and therefore, high material cost.
c. Brand Name: Inability to benefit from a Brand Name in the market like big companies.
I used ET&T Corp, owned by DoE to act as a Cluster Enterprise of 140 SMEs making colour and B&W Televisions. And gave them three-pronged support.
a. Technology: I developed a 14" B&W and a 20" CTV and shared that design will all of them and trained their engineers to understand and produce them in their own SMEs.
b. Material: ET&T bought all materials that were needed for these sets in huge bulk of 100,000 sets. Using that volume strength, reduced to material cost by over 40% while ensuring high quality sourcing. Sold these kits to member SMEs by keeping 15% with ET&T Corporation.
c. Brand Name: Had a central quality approval group and allowed these companies to use the brand name of ET&T. Charged 7% of kit cost for brand promotion.
d. Member companies produced these and sold them in their areas. ET&T brand of B&W sets shared 40% of the national market share. CTV had 20% share.
We could encourage the creating of clusters of similar independent self-owned SMEs manufacturing and the selling of the same product line in various states and regions in the country. They could then collectively own a central entity, say Cluster Enterprise. This will have a similar role as ET&T.
Any consumer product is suitable for such a cluster approach. As one can see this is quite a different animal from franchisee outlets and will support SMEs in any production area that uses local human labour in distributed SMEs that are gathering them in central mega-plants.
2. Control of the potential misuse of low cost loans/ funds to enterprises to encourage industrial growth Whenever such efforts are made, all representative bodies of industries seek low interest rates and subsidies on capital equipment. Often, these measures are misused and become open-ended cash assistance by the government without meeting the desired objective. There are ways to do so meaningfully without using government inspectors.
Simple easily auditable measures would prevent misuse of such loans and advances.
Enterprises that receive such loans and advances should be banned to:
give loans to any other individual or company or invest in stock markets, or invest outside its use as working capital for the core activity.
give advances to anyone except short-term advance to a supplier, not exceeding three months.
insist on such companies to get their accounts certified from independent chartered accountants with special attention to such loans and also subsidy utilisation.
3. Encourage employment through Income Tax concession
1. Consider two profitable Small or Medium Enterprises with annual sales of say Rs50 crore; one manufacturing products from raw materials (A) and the other marketing branded goods (B).
2. Manufacturing Unit A will need say 150 -200 employees to make that business.
3. The Goods Trading Business, B, will probably have 10 to 50 employees.
4. Both A and B today pay the same Income Tax on their earnings. Which of the two companies does the government want to encourage? Obviously A.
5. Why not give, say, 50% tax exemption to A since it creates more employment?
Beneficial Aspects are:
a) This way we will encourage only profitable enterprises and not the inefficient loss making ones.
b) A simple Audit Certification about the number of full time employees working for the company for a continuous period of say 9 months needs to be considered, while scoring the level of employment per crore of sales.
is founder and former chairman of the Aplab Group of companies. He is also the former chairman of the Electronics Commission of the Government of India and was an advisor to late Prime Minister Rajiv Gandhi on electronics. He also was the chairman of the Broadcast Council in 1992-93 that set in motion the privatisation of the electronic media with metro channels.)