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.
Automobiles
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
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.
Metals
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.
Services
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
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