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EXECUTIVE SUMMARY

Manufacturing - that is where the foundation of a large economy lies. A small economy of only a few million people can get by with only services sector. But a large country with a billion people needs to have a correspondingly large manufacturing sector. Large here means that the value of the production of the sector should be large, because manufacturing produces goods and it is the availability of goods that make people non-poor.
In the last decade and a half, the Indian manufacturing sector has indeed come a long way, though the gains are reflected on a more sustainable basis in the last three years only. In 2004-05, the manufacturing sector grew at 8.9%, which has gone up to 9.6% so far this year. Manufacturing exports have nearly doubled to 14.2% over the last five years. This corresponds to a CAGR of 30% for exports against a sales growth of 15%. Outsourcing is making India a manufacturing hub, especially for the automobile sector, with cheap labor providing one of the competitive advantages. Government policy reforms have also been a facilitating factor. A liberalized government policy augmented by the flow of world-class technology aided the process of making investments to augment capacity and build world-class plants. Another significant boost has come from the tax reforms that have continued ever since liberalization in 1991, which removed considerable system bottle-necks in logistics. Indian companies are now aggressively tapping overseas markets, having proven that their products match the best standards anywhere in the world.

Manufacturing today stands at an inflexion point. Lack of proper infrastructure, higher transaction costs, inadequate power availability and other regulatory issues could be major issues holding back the sector in achieving its full potential from about 8 per cent. Growth in India is disparate due to the service industry and not due to manufacturing. For example, Reliance Industries can grow from Rs. 42k crore to Rs. 75k crore in 2 years with a decent growth, but even at a 50% or thereabouts growth rate, TCS will grow from Rs. 1.5k crore to Rs. 9k crore in 5 years.

Industrialization cannot take off without adequate infrastructure: better roads, and a reliable supply of power and clean water, better ports and airports. The average cost of electricity for manufacturing in India is about double that in China; railway transport costs in India are three times those in China. China has spent over eight times as much as India on its infrastructure.

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* Contributed by -
Varun Gupta,
B.E. (Electronics), Mumbai University,
MBA, ICFAI University, Hyderabad,
Currently working as Business Analyst with NSE.IT Ltd., Mumbai.