Sunday, December 30, 2012

Automobiles, Infrastructure, Metals and Services (AIMS): Aim to boost Indian Industrial and Economic Growth

The National Development Council at its recent meeting has downscaled the GDP growth rate to 8 percent, from the earlier envisaged target of 9 percent. Coming as it does after the current year low (in recent years) of 7 percent, downscaling of the GDP target is of concern. India has so much potential for growth that any growth target less than 10 percent is a letdown relative to potential. Growth, however, does not happen in vacuum. It requires careful economic, fiscal and industrial strategies in a liberalized policy framework that attracts and stimulates investments. While a holistic economic strategy that matches demand side and supply side economics at increasingly higher levels is always an ideal option, it is also possible to achieve a near similar impact by targeting for development certain growth sectors that offer core competencies for expansion and provide cascading triggers across the economy.  

India has growth potential across all sectors. Basic necessities such as agriculture and premium luxuries such as jewels, for example, have high growth potential. There is certainly an additional growth potential that could accrue in such sectors with policy initiatives. It is to be hoped that such initiatives will be carried out as part of the normal economic planning processes. There are, however, certain sectors where the Indian industry has acquired and demonstrated competencies, where there is still considerable import proclivity (and hence import substitution potential). These sectors are interlinked not only amongst themselves but with other sectors, and finally have the maximal incremental job potential. Automobiles, infrastructure, metals and services are the four sectors which can become globally competitive, world scale sectors and transform India’s industrial image. These sectors would benefit from certain degree of regulatory freedom as well as compulsion.
The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India manufactures over 18 million vehicles (including 2 wheeled and 4 wheeled) and exports more than 2.3 million every year. It is the world's second largest manufacturer of motorcycles; there are eight key players in the Indian markets that produced 13.8 million units in 2010-11. At present the dominant products of the automobile industry are two Wheelers with a market share of over 75 percent and passenger cars with a market share of about 16 percent. Commercial vehicles and three wheelers share about 9 percent of the market between them. The industry has attained a turnover of more than USD 35 billion and provides direct and indirect employment to over 13 million people.

Virtually, every known international automobile manufacturer has established facilities in India. While some players like Suzuki and Hyundai in the four wheeler sector and Honda in the two wheeler sector have gone in for scale, others have been content with low and mid scale volumes. In the indigenous sector, Tata Motors, Mahindra & Mahindra in the four wheeler sector and Bajaj, TVS and Hero have focused on high scale. What is of significance is the in-depth design and manufacturing capability that exists, in both the end product and component sectors in India, and the potential that exists to increase export turnover from the current low of 10 percent. India has the potential to become the second largest automobile producer in the world after China, deriving at least 30 percent of its sale from exports. Automobile industry must therefore, qualify for special policy support from the governments. At the same time, there must be clear shift away from the current thinking on import of luxury cars on low tariffs so that the Indian units acquire that expertise as well.
Infrastructure has been the Achilles Heel of the Indian economy. There is no other sector that has been an elusive mirage of fulfillment. There are several infrastructure sectors such as roads and road transport, airways and airports, shipping and ports, metro lines and trains, power plants, hospitals, oil and gas exploration, to quote a few that need a major leg up. There are two areas of concern. The first relates to the enormous delays in approving and executing the projects, thus scratching barely the surface of infrastructure development. As against potentially over 300 cities and towns that can support air traffic, India has just 125 airports. Even the airports that are built have high import content; it is, for example, strange that a country such as Indonesia can manufacture aerobridges and India has to import them. Metro services offer huge potential but take typically a decade to execute and are dependent again on imported tracks and coaches.  All other infrastructure projects also suffer from the same deficiencies of inadequate project formation, inordinate execution and overwhelming import content. Clearly, there is potential for a huge improvement in infrastructure build-out.

Typically, each ministry of the government is mandated to look after the infrastructure projects in its domain. However, infrastructure projects require the support of several ministries and are often stalled for multi-ministry coordination. The government would be able to fast-track infrastructure building by establishing a dedicated ministry for infrastructure which would be an apex       program-managing ministry across all the ministries. The second measure would be to involve private and public sector enterprises on a proactive basis for manufacture of import substitute equipment. This, again, could get a boost by creating a watchdog commission for import substitution. The third measure could be to develop dedicated five year and ten year strategic plans for infrastructure by the Planning Commission. In addition, specific projects like freight corridors, bullet trains, mono rails and metro trains would provide exemplary start for an infrastructure revolution in India. A number of industries such as cement, steel, construction, capital goods, transport vehicles and construction equipment would benefit from the suggested infrastructure push. 


The world steel production is around 1500 million tonnes(MT). China at 683 MT, the European Union at 177 MT, USA at 119 MT and Japan at 108 MT are some of the largest steel producing countries of the world. India at 72 MT has the potential to race up to the second spot after China. Steel manufacture is a competitive game of bringing out newer varieties with higher strength and greater purity at lower costs. India has not addressed the core issues of ensuring access to high quality coking coal, low cost uninterrupted power and cost-efficient production technologies. The initiatives, in these domains, are largely left to the option of individual firms. Steel being a highly investment intensive industry special financing arrangements to support new projects and selective overseas acquisitions are also called for. Besides these, government to government alliances are required to provide access to natural resources. 

Simultaneously, India needs to step production capacity and mining capacity for a range of metals such as copper, aluminum, zinc and nickel which have major industrial and civilian uses. The growth of iron and steel and other metal industries is linked to proactive environmental planning, assured compensation, resettlement and employment for affected villagers and fast track project approvals. The ministry of environment and the ministry of rural development will need to be co-opted by the ministry of metals and minerals in the endeavor to build a world scale metals and minerals industry in India. In today’s global economic environment, it appears that steel is one industry which has not sufficiently moved to India. The experience of Corus and Tata Steel indicates that creation of fresh domestic capacity could be a less problematic option. However, the governments need to work towards low cost energy sufficiency and firms have to work towards cost-efficient production technologies.


The world has 6 billion cellular phones. China and India approximately have 1 billion cellular phones each, thrice the level of the USA. These amazing statistics demonstrate the power and potential of the services sector in India. The recent opening up of the retail sector to foreign direct investment could offer similar potential in a number of sectors. While the policy has been controversial one has to only look at how cheap and innovative goods from China have flooded the Indian markets. Rather than avoid foreign investment in retailing, the right approach would be to enable the Indian manufacturing sector to compete with China for retail shelf space. The restrictions sought to be laid by the government on local sourcing are well-merited in this context. The critiques of the retail FDI policy need to consider that superior supply chain and distribution practices need to be adopted by the indigenous retail chains so that the retail sector has a balanced mix of national and international retailers. It would be unfortunate if the Indian retail chains view the current opening up of the retail sector to foreign investment merely as a way to cash out. 

India needs several innovative services going forward. These would range from meeting home and office needs to a host of outsourcing services. Yet, the concern is that India has not understood the importance of quality and cost-effectiveness in services. India, as a result, has been fighting to retain the initial advantage built up in business process outsourcing services. India has so far successfully fought off competition from new and emerging outsourcing regions such as the Philippines, South Africa, East Europe and Latin America to retain its position as the world's BPO hub as per data released by Nasscom. While the competing emerging regions focus on voice-based work, India is increasingly focusing on financial, accounting, and other domain-specific data analytical work. It is to be hoped that India would achieve a more sustainable position in business analytics, which is promising to emerge as the next frontier. The ultimate win for India could be when India develops products and platforms for rendering services. It would be in order for the Indian Institutes of Management to structure specific programs that facilitate innovative service platforms. Given India’s strong position in information technology IT based services delivery could be a logical area of dominance for India. 

AIMS as an aim 

The four sectors outlined in this blog post, namely automobiles, infrastructure, metals and services have all the track record and potential to become new growth drivers for India, with several upstream and downstream linkages in the economy. Each of these can achieve world scale in physical and financial terms. However, each would require speedy policy disposition, timely execution and integration with the social and natural environment. By constituting special ministries and commissions as well as global alliances for infrastructure, and providing incentives and mild regulations for other sectors India can achieve a 10 plus percent growth covering the full economic spectrum just with a focus on the four sectors as the lead engines of growth. 

Posted by Dr CB Rao on December 30, 2012    


No comments: