Thursday, August 21, 2014

Making it in India!

This Monday, I took my two grandchildren for lunch at a nearby McDonalds. While we were eating, I looked around to see the restaurant jam packed with young college going kids happily chatting and blabbering sweetly. Obviously, they were in their own world, undisturbed by harsh realities of life. As I watched them, I thought that within next two or three years, they all would be graduates and would be looking for jobs. Can the country really provide jobs for them?

I remembered that way back or in 1967, when I had obtained my Engineering degree, I also was looking for a nice and cushy job, just like these youngsters. In the present generation, everyone aspires for IT or at least some service sector job like insurance or banking. In my days, things were totally different. Our top aspiration was a job of an engineer or a technical job in some manufacturing unit. To be specific, I wanted to do a research and development job, which was more to my liking. In my times, manufacturing jobs were the first priority followed by sales and other departments. There was no IT at all and services sector was not much of a choice.

This essentially was so, because the Government gave top priority to manufacturing in India with local content and minimal imports. So manufacturing jobs, paid highest and were in much demand. Import substitution and indigenization were the slogans as Government tried to match the hefty import bill with not so healthy exports.

But all this changed in 1990's, when new ideas like globalization came and everyone felt that the Indian economy, instead off trying to balance imports and exports could leapfrog manufacturing and the current account deficit by taking the global services expressway by catering to world with services like IT. The growing services sector would provide extra jobs for the extra millions of young Indians.

The bubble has finally burst. India is balancing its current account deficit through foreign direct investments or equity. I am no economist to go in merits and demerits of this. But my simple proletarian logic tells me that revenue expenditures have to be met with revenue earnings. Equity capital should be used for plant and machinery and growth. Off course I could be wrong.

It has also become obvious to the Government that services sector alone can not meet the rising job aspirations of young millions. Only way, a country can provide increasing number of jobs in future is by promoting its manufacturing sector once again. It is no wonder that India's new prime minister has hit the nail on the head when he declared in his speech on Independence day ”Come, Make in India”, as he invited the world to set up industries in India.

Unfortunately, it is easily said than done. Let me first take you back to 1990's, When Government opened the doors of globalization and subsequently started signing free trade agreements with neighbouring countries like Singapore and Thailand. With these moves, it swiftly killed the local manufacturing industry in one stroke. The local industries, already suffering under suffocating environment of socialist regime industrial licenses, restrictions on growth, imports and exports and stifling labour laws, found it much easier and profitable to close down local plants, import finished products from China, already labled with their names and simply market them with handsome profits. This made shareholders, taxmen and stock markets all happy. Only sufferer was manufacturing, but Government thought that what is lost in manufacturing can be gained in Services.

I can give examples two companies, whit whom I am quite familiar. The first company has been producing various types of fans in India from 1940's. This company now imports all its fans from China today. Similarly is a case of another company making electrical appliances. It completely replaces its full range of manufacture with imported ones from China. Both these firms are highly profitable today.

Somewhere around 1975, I had set up mu own small scale manufacturing unit. I can say that I was moderately successful in my business with products that offered import substitution in spite of a killing, bank loan interest rate of 19%. But after 1990's, I found my business environment first getting cloudy and later murkier. My long time clients felt that importing instead of buying from me was a far better choice. I tried to switch to component manufacture for bigger industrial units. But low profitability here meant that sustenance over longer periods itself was questionable. After three or four years I decided to quit.

I think that my story is fairly a typical one. Hundreds of thousands of small scale industrial units closed down in 1990 decade. We have an electronic industries estate in Pune. Once there were 40 or 50 thriving manufacturing units there. Today a few units that can be counted on fingers of hand, survive. Rest have rented their industrial sheds to IT sector.

Readers would be able to appreciate, why in spite of the wishes of the prime minister, revival of manufacturing industries in India looks very difficult. All is not lost however. If Government carries out reforms in four or five sectors such as skill set development , labour laws, land acquisition, environment clearance and finally replacing number of taxes with a single Goods and Services tax, I feel that it can still make India attractive to world industries. If this is done, even local industrial houses would not mind changing back to local manufacture. Small scale industries however can only survive as subsidiaries or components suppliers to big ones at least in the present context. There are other reasons for that.

The world is likely to go through a big transition over next few years. China's labour is no longer cheap and many companies have already started looking for alternate sources. In all other advanced countries, manufacturing is not economically feasible. India has a great window of opportunity. It is up to the Government to grab it. Only this way, it can find jobs for India's growing millions that would match their aspirations and expectations of better life.

21st August 2014

1 comment:

  1. Greetings.
    Very well written sir.I read your blogs regularly.They are really informative and thought provoking.Keep up the good work you are doing.Thanks!!!!