In less than three years, the prophecy on Indian manufacturing has swung from one of doom to one of boom. Till as late as 2000 there was a rare agreement among economists and industrialists that Indian manufacturing could be facing extinction. Some businessmen even feared deindustrialisation of India. The height of optimism today is inversely proportional to the depths of despair a few years ago. McKinsey has talked of $300 billion merchandise exports from India in 10 years. That is half of India's current GDP and 7-8 times its exports. This is not just hope and hype. Many Indian companies are competing with and complementing the best in the world. Nine Indian companies have won the Deming Award-the Nobel Prize of manufacturing-for quality. Given the speed with which we have moved from a position of ridicule to one of sublimity one wonders if the resurgence of manufacturing is a flash in the pan. If it is not, what needs to be done to ensure that it doesn't become so? More importantly, how soon and how much new investments and new jobs will the manufacturing sector generate? To discuss these questions India Today invited its think tank on the economy, the Board of India Today Economists (bite). Interfacing with the six economists-the preachers-were nine representatives of India Inc-the practitioners. The debate was moderated by Rajya Sabha member Jairam Ramesh. Excerpts:

PICTURE SPEAK

WHEN PROFESSORS MEET PRACTITIONERS: FROM LEFT: Bibek Debroy Director, RGICS; Siddhartha Roy Chief Economist, Tata Group; Habil Khorakiwala Chairman, WOCKHARDT; B.K. Goenka V-C & MD, Welspun India; Indira Rajaraman RBI Professor, NIPFP; Bharat Patel Chairman, P&G; Subir Gokarn Chief Economist, CRISIL; Aroon Purie Editor-in-chief, India Today; Shankar Acharya Professor, ICRIER; V.N. Dhoot Chairman, Videocon Group; Anil Ambani V-C & MD, Reliance Industries; Jairam Ramesh Member, Rajya Sabha; Prabhu Chawla Editor, India Today; Adi Godrej Chairman, Godrej Group; Ajit Ranade Chief Economist, AVB Group; Uday Kotak MD, Kotak Mahindra Bank V. Sumantran ED, Passenger Cars, Tata Motors; Prashant Ruia MD, Essar Steel

Is the manufacturing RESURGENCE for real?
Yes. But there could be huge variations in the performance of companies within a sector. In the new world, competitiveness of companies matters more than that of sectors.

Jairam Ramesh: Let us start with the company that once symbolised India's entry into the manufacturing age in the 1950s, then represented the demise of manufacturing in the 1980s and now represents its resurgence-Tata Motors. Sumantran, are you optimistic that the current revival is not just a blip on the horizon?

V. Sumantran: There is definitely a great sense of optimism that the revival is enduring. In India there is a direct correlation between GDP growth and per capita mobility. As we begin to see years of high GDP growth, the per capita mobility (freight movement or passenger movement) will go up. That is good for the auto sector. That is the internal trigger. Externally, the auto sector worldwide is going through a tough period. Margins have become tight and levels of investments are very high. That will prompt manufacturers to look for low-cost production bases like India. Having said that, the auto industry is prone to be cyclical. But the odds are that we are going through a sustainable growth phase.

Jairam: Let us move to India's traditional strength in manufacturing-textiles-which faces a new future beginning January 1, 2005. The industry accounts for a third of India's industrial employment and a quarter of its forex earnings. If it represented the 1990s, there is a view that in the next 10 years t (textiles) will fuel India's global foray.

B.K. Goenka: In spite of providing maximum employment and generating maximum foreign exchange, the Indian textile industry is far behind that of China. But for the small-scale sector (SSI) reservation, the garment industry could have generated massive employment with very little capital. SSI reservation has been diluted two years ago. With the quota system of exports also going, India could become a key manufacturing hub, simply because nobody wants to put all the eggs in the China basket. But the Made in India label is still far away.

Jairam: A third industry that represents the resurgence of Indian manufacturing is pharma. It also faces a new future with the transition to a new intellectual property regime.

SURVIVAL TO REVIVAL

CEOs are confident that Indian manufacturing can take on global competition both in Indian and foreign markets Click here for the Infographic

Habil F. Khorakiwala: Till 10-12 years ago the Indian pharma industry was primarily a domestic industry with limited investment in R&D. Today, 40 per cent of the industry's turnover is exported and leading companies spend 7-10 per cent of their revenues on R&D. Last year alone, about 200 patents were filed by Indian companies. Yet, this is only the tip of the iceberg. The pharma industry could grow much faster in the next 10 years. There are fundamental lessons for the entire manufacturing sector. First is the mindset: are we going to compete in India or globally? Second, industry must learn to innovate continuously, through investments in R&D. We can't be competitive by creating global capacities alone. That is important. But to be competitive in the long run we must keep abreast with changes and be a step ahead.

Shankar Acharya: The success that manufacturing, particularly the sectors that we have already talked of, has had is largely despite government policies. Though in one very important way, government policy did help and that was the combination of de-licensing and opening up to foreign investment and trade in the early 1990s. Mind you, many in the industry did not want open investment and trade policies in the early 1990s. But by and large, the success of Indian industry has come despite the rigid labour laws, infrastructure inadequacies, high (though lower than before) capital costs and SSI reservations. Congratulations to the captains of industry that they have been able to overcome these handicaps. But we need to overcome these handicaps to be able to attain 10-12 per cent a year growth that we see in China.

Subir Gokarn: We have not seen across the board revival in manufacturing. We have seen certain sectors do extremely well. It is important to interpret the success of these sectors in their own terms. For example, India's auto sector is among the most protected. Surely, every country that has developed an auto industry has done so under protection. In fact, the British built cars with the steering wheel on the other side to escape US competition. The fact that we succeeded indicates that there is some inherent strength. Pharma isn't the typical labour-intensive, blue-collared industry where Indian manufacturing had a huge disadvantage. It uses knowledge workers where we had an advantage. So let us not ignore the sector-specific advantages some of the industries had.

THE BITE INSIGHT

The Board of India Today Economists is sure that raising GDP growth from 6-8% to 10-12% will require removal of policy and infrastructure hurdles Click here for the Infographic

Jairam: We often forget that more than 50 per cent of employment in manufacturing comes from the small-scale sector. Bibek, is the revival spreading its wings there too?

Bibek Debroy: I am afraid no one knows what the genuine SSI contribution to either manufacturing or export is. SSIs are subjected to a lot of distortions. A census of SSIs has revealed that there is a huge gap between registered and unregistered SSIs. Why shouldn't an SSI want to be registered given the benefits of registration? The answer: horrendous procedures. The most critical discrimination against SSIs, I would say, is procedures because there are economies of scale in bribery too. On whether the manufacturing revival is broad-based or not, I think the simple point is that manufacturing as a sector does not compete; individual companies do.

Jairam: Indian steel industry is riding the crest of a major wave. Who would have thought that Indian steel would occupy 6-7 per cent of the Chinese market? The Chinese Steel Association is worried about dumping of steel from India.

Prashant Ruia: The Indian steel industry was written off a bit prematurely. India is among the three or four countries in the world that have very high quality iron ore. The industry has been through a long downturn, but we are now on a growth spike. India's own manufacturing is still quite small-about 35 million tonnes compared with the global production of 1.05 billion tonnes. But there is an opportunity for us to become a major producer. The domestic demand alone is expected to grow to about 120 million tonnes in 10 years. We will require investments worth Rs 2,50,000 crore to meet this demand. If we want to do well in auto components, auto, white goods, it will be very difficult without a globally competitive steel industry. China raised its steel production from 100 million tonnes to 300 million tonnes in the past five years by investing Rs 2,00,000 crore.

Is India Inc. ready to take on the WORLD?
Yes, in many instances it already is globally competitive. But tax restructuring and reductions are crucial.

Jairam: Let us hear from makers of consumer goods. Mr Dhoot, growth and investment in the consumer appliances industry has been triggered by the entry of Korean firms. Is there a decline of Indian brands?

PICTURE SPEAK

CORPORATE CONFIDENCE: Khorakiwala, Godrej and Ambani at the BITE meeting

Venugopal Dhoot: The foreign companies you mentioned mostly import and sell-local manufacturing is very little. Besides, Indian companies still hold a larger share of the market. We (Videocon) own a compressor manufacturing facility in Italy. Many plants are closing in Europe. Indian manufacturers should buy those plants, absorb the technology (or buy technology from elsewhere) and use Indian labour to manufacture. We are doing this. You can export very profitably from India and invest in brand development. India's labour cost advantage is huge-for Indian labour the maximum you pay is Rs 1 lakh a year. In Italy you pay Rs 25 lakh a year. In future, Indian companies will be able to build global brands and markets, just like Haier of China has done.

Jairam: Bharat represents the largest FMCG company in the world. Can India be a global manufacturing base for you?

Bharat Patel: Absolutely. The answer is domestic consumption. To become a global supplier, you need to have a huge domestic market. In Procter & Gamble, India is the largest Vicks Vaporub market. Right now we supply Vicks Vaporub to the whole of Asia. Conversely, India is relatively very small in the shampoo market, so we import shampoos. The point is that manufacturing happens when there is consumption. The focus should be on how to increase consumption. Consumption happens either when people get more money or you reduce the price. Indians are getting richer, partly because GDP is growing at more than 6 per cent and partly because the tax structure is putting money in the people's pocket. But we still have very high indirect taxes.

Adi Godrej: We shouldn't underestimate the problem we face in manufacturing because of high indirect taxes. Today, we pay roughly 25-30 per cent in indirect taxes. That is twice the average global level. High indirect taxes is a bigger inhibition to manufacturing growth in India than even labour laws. High taxes keep prices high. That keeps demand low, which, in turn, keeps supply (and manufacturing) low. There is also a lot of tax evasion which affects government revenues. If we could break this vicious circle, maybe through an integrated value-added tax (VAT), our GDP growth should be at least 2 percentage points higher and manufacturing growth could be 5 percentage points higher.

Khorakiwala: If you are looking at manufacturing competitiveness on a global scale, flexibility of labour laws would be desirable. But it does not affect competitiveness very significantly. We have a company in Germany and the labour laws there are more inflexible than in India.

Indira Rajaraman: The agreement to introduce vat in most States by April 1 is a major step forward. But it is going to be a paper-based vat, not an it-based vat, so fraud won't be checked effectively. Indian industry will see a great advantage initially but will be hassled later on as state governments see their revenue falling. But overall, vat should benefit manufacturing, though it will be inimical to the Centre's finances.

Ajit Ranade: vat holds out lots of promises. I'm not as pessimistic as Indira is. It will be good for manufacturing, though it may deteriorate the fiscal deficit in the short run.

Siddhartha Roy: Compared with China, Indian companies suffer a 25-30 per cent cost disadvantage. Of that 17-18 per cent is due to taxation alone. Under a comprehensive vat, this 17-18 per cent cost disadvantage is likely to go. On another note, if you look at our exports between 1993 and 2003, the sectors that have grown in double digits are not agriculture or gems and jewellery but engineering and chemicals. This happened despite the policy hurdles.

Jairam: Uday, macro-economic data show investment rate in the economy stagnating. But if one talks to industrialists, as you do all the time, there is a great investment buoyancy. What's behind this dichotomy?

Uday Kotak: In the past couple of years what has changed dramatically and profoundly is, in one word, liquidity (availability of funds). The amount of liquidity in the Indian financial markets today, supported by global liquidity flows, is a key reason behind corporate India's exuberance. Another major change is the integration of the financial markets-across countries and across different sectors. Today, for the first time, you see something happening in the oil market having an impact on the equity markets. Global fund managers say the first thing they do in the morning is to look at currency markets before taking decisions on equities. The market integration is changing dramatically the way we manage businesses. It is something practitioners and policymakers are still coming to terms with.

Jairam: This is the time to bring Anil in because he straddles many sectors...

Anil Ambani: Indian industry has slowly blurred the difference between the domestic and the export market. Just four years ago, Reliance Industries' exports were zero. Today, our exports are worth Rs 15,000 crore, which is 7 per cent of the country's exports. 24 per cent of our sales comes from exports. In the early 1990s Indian industry had the choice to either isolate from the global economy or integrate with it. We have graduated from stages of "will we survive" to "will we sustain" to "will we revive" and I think we are right now in the rejuvenation phase where we feel we have taken on the challenges and performed well. But you can't paint an entire industry with the same brush of competitiveness and say the entire textile industry is competitive or uncompetitive or the petro-chemical industry is competitive or not.

Ranade: On exports, the Reliance experience is being emulated by other companies-profits outpacing sales and exports outpacing both profits and sales. Exports have become a key driver of growth. But in the past, impact of cuts in customs duty was partly neutralised by the falling rupee. Now that the rupee is rising and duties being cut, will that affect export competitiveness?

Ambani: Exchange rate is only a small part of overall competitiveness. Competitiveness also depends on costs, service, quality, logistics and customer relationship. In future Indian industry will have to get off the crutches of exchange rate depreciation as a profit contributor and look at costs, customer relationships and brand equity. It is like anywhere else in the world. The Japanese are crying that the yen has risen from 125 to 95 against the dollar.

In general, whatever Indian industry has achieved across the blurring lines of services and manufacturing has been in spite of the government. The more government stays away from us, the better it is going to be. On Uday's point of liquidity, I think availability should not be confused with costs. We talked of import duties for the manufacturing sector. What about the effective rates of protection that India offers to the financial services sector? They are among the highest in the world.

Gokarn: I would like to know from the CEOs, why aren't many new projects coming up in the manufacturing sector?

Kotak: Most manufacturers have barely got over licking the wounds of the late 1990s. Unlike the animal spirit that was unleashed in the early to mid-'90s, when they created excess capacities, they are going in a calibrated and what they believe is a sensible manner. Probably the time has now come for them to show the boldness of the '90s. But the memories are making them very cautious.

Godrej: During the adjustment phase, which this is, there won't be much job creation. Once the adjustment is over and there is growth in manufacturing, jobs will be created.

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