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How India Can Become The Manufacturing Capital Of The World

Over the last two decades, China has been the hardware base of the world, while India has been the software base. With the new Samsung factory coming in, will India turn the tide and become the world’s hardware capital.

The South Korean giant’s mobile phone factory at Noida will be the largest in the world, and close to 30 percent of the handsets made there will be exported. What does this signify for India? Can India overtake China in manufacturing supremacy? What should the government do to maintain the momentum?

The coming of the Samsung factory might do to electronics manufacturing what Maruti did to the auto industry in the 1990s. When Maruti came in collaboration with Suzuki, the industry suddenly saw disruption. Suzuki brought scientific manufacturing techniques. And, the auto manufacturing industry here went on an upward trajectory.

According to a study by Deloitte, India is expected to jump six ranks to No. 5 in the 2020 Predicted Manufacturing Competitiveness. Interestingly, India’s manufacturing labour cost in 2015 stood at USD 1.72/hour compared to USD 37.96/hour for US. Even China’s cost is almost double that of India. The Indian government has set an aggressive target of increasing the manufacturing share to 25 percent of GDP by 2025. What are the strategies that will get us there?

For India, this could also be a start of Industrial Revolution 4.0. The convergence has already started between digital and manufacturing. If we see some industries, it is already visible in Internet of Things, sensors, robotics, predictive analytics, etc. The cost of production can come down heavily with the help of 3D printing and automated real-time processes in manufacturing. The UK, Australia and UAE give incentives, tax credits and grants for investing in this technology.

The government can replicate best practices from these countries to improve India’s ranking on competitiveness. Incentives for export of electronic goods will also help. The government’s phased manufacturing programme is trying to move electronics manufacturing from semiknocked down (SKD) to completely knocked down (CKD) kits. This would mean more components getting imported than semi-assembled parts and more jobs.

But moving from SKD to CKD alone is not enough. The scale of manufacturing in India needs to be increased, but that cannot happen by catering to the domestic market alone. Companies need to be able to tap global markets, for which India needs a strong policy that provides incentives for export of electronics goods. This will create the scale that will attract FDI into the country from global electronics component manufacturers and create jobs. This is what happened in auto manufacturing as well.

The ease of doing business could probably be the most important factor in making India a hub for manufacturing. India moved to the 100th spot in the World Bank’s Ease of Doing Business global rankings due to sustained business reforms. But global investors won’t put in the investments just looking at the overall ranking. They will look at each parameter and every state’s ranking on the input parameters anddo their own due diligence. The cost of logistics is also an important concern for foreign investors and for Indian companies.

As per a World Bank report, the cost of transporting 1 ton of freight over 1km works out to Rs 2.28 by road, Rs 1.41 by rail and Rs 1.19 for waterways. Using ports in a big way can help India lower logistics costs substantially. The saving could be about USD 50 billion if logistics costs are brought down from 14 percent to 9 percent of India’s GDP, according to an Assocham report.

This will make domestic goods more competitive in global markets. The other areas where the government could focus on is enforcing contracts. India ranks still ranks 164 amongst 190 countries on enforcing contracts, according to the World Bank. On an average, it takes almost 4 years for a dispute to be resolved in India compared to less than six months in Singapore.

If India has to win this battle for global manufacturing supremacy, it has to focus on these areas. Only then it can drive innovation and cost competitiveness and be attractive to global companies. Having large scale manufacturing plants in India where the domestic market could swallow large percentage of manufactured goods could be a double advantage for global corporations. And incentives for exports could be the icing on the cake. ― Economic Times

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