IPA Day 2015 : MAKE IN INDIA

Panel discussion on ‘MAKE IN INDIA’.

The Indian Government led by Prime Minister Modi has just completed its first year in office. It’s time to check if its goal for large-scale job creation, especially in the manufacturing sector by promoting ‘Make in India’, is on track. IPA invites you to come and watch eminent panelists sharing their insights.

Panelists

Alain Davezac is the founder and CEO of AMCA, an advisory firm, providing support and guidance to leading French companies in designing and execution of their business development strategy for projects in India.

Ashok Sudan is the CEO of SGD Group (previously a part of Saint Gobain group). SGD is headquartered in Paris and has manufacturing plants in France, Germany, Spain, USA, Brazil, China and India. SGD specializes in the manufacture of glass bottles for various industrial uses. e.g. Cosmetics and pharmaceutical. Ashok recently set-up a manufacturing unit in India.

Ashwani Gupta is the Global Head of Light Commercial Vehicle Business Unit at Renault. Prior to that, as Global Program Director with Nissan Motor Corporation, he led Profitable Product development for the Datsun Brand product line-up in the high growth markets. Ashwani has set up the Greenfield of Renault Nissan in India with a lead on sourcing.

Frederic Jumel, as Head of Global Diabetes Division at SANOFI, is in charge of all strategic/financial initiatives in collaboration with key stakeholders within and outside the Division.

Nikhil Kanodia is the President and CTO of Precision Electronics Ltd, India. ,a leading Small Medium Enterprise (SME) engaged in design, manufacturing and supply of high technology products and solutions in the areas of Defence & Security, Railways and Energy.

Philippe Advani is Vice-President Global Sourcing Network at AIRBUS group based in Paris, Munich and Toulouse. Philippe has held various senior executive positions in Sourcing and International Affairs across the globe including the creation and running of AIRBUS group activities in India.

 Moderator

Pradeep Kumar Singh, Executive Project Director at Technip, has over 40 years of experience in managing mega-projects in the field of fertilizers, refining & gas processing across the globe including 15 years dealing with a wide cross-section of Indian industry.

SUMMARY OF DISCUSSIONS

The Indian Professionals Association of France held its annual IPA Day conference on the theme of MAKE IN INDIA – THEN, NOW, WHY & HOW at Maison de L’Inde (India House) in Paris on June 13th 2015.

The first talk, the keynote address was delivered by the Indian Ambassador to France, Dr Mohan Kumar. He addressed the need to generate millions of jobs, get fresh green investments, to improve the ease of doing business, legal frame work, labour laws and industrial acts. He also stressed the need of skill development but highlighted that it will take a considerable amount of time. He also observed that India has never been an export driven economy and wondered how much creative destruction or created obsolescence a democratic country like India can absorb.

The panel discussion then started where Indian and French speakers from different backgrounds participated.

At the outset the seminar addressed the historical perspective of Indian manufacturing and then debated the main issues that have been a stumbling block and what needs to be done to overcome the difficulties. The contents and conclusions are summarised here.

HISTORICAL PERSPECTIVE

It was observed that a little over 250 years back China and India alone contributed nearly 58% of the world’s manufacturing output. To be precise, around 1750, China with about 33% of the world manufacturing output ranked number one in the world followed closely behind by India with 25%. Whether it was led by silk production in China or textile production in India is only of academic interest. Ever since and for a multitude of reasons, the most important being colonial domination, the dominant ranking of these countries nosedived.

Till as recently as 1992, the US, Japan, Germany, Italy, France and UK led the pack though China had managed to clamber up to 7th position in the world ranking of manufacturing value added while India had simply slipped beyond the first ten countries. Over the next decade i.e. by 2002 the packing order still remained more or less intact but though China had muscled its way to 3rd position just behind US and Japan, India was still farther behind.

The 2012 rankings show that India has broken into the first ten in terms of world manufacturing value added output at number 9 while China is fast regaining its predominant position that she once enjoyed. In terms of percentages: China 22%, US 17.4%, Japan 9.7%, Germany 6%, Korea 2.8%, Italy 2.4%, Russia 2.3%, Brazil 2.2%, INDIA 2.1%, France 2%. However these rankings are also a function of the population of the countries and reflect more an absolute volume driven number. Instead when this is broken down on a USD/per capita basis the picture is very different. There Japan leads the pack $8800, China is $1800 and India is $ 200.

The above therefore help us to place India’s manufacturing capacity in relation to what it used to be at one time, where it has reached but above all where it should be headed in the normal scheme of world order with second largest population. Most of the advanced economies, and now including China as well, first developed a huge industrial base which created widespread employment and helped develop a skilled workforce before moving to the service sector. India on the other hand went more towards the services sector but there is no substitute for a massive industrial base. In other words there is tremendous need to increase the manufacturing capacity further. For the conference it was important to first look at this historical perspective to appreciate the need of the “Make in India” initiative launched by the Indian government.

WHAT IS HOLDING US BACK AND HOW TO OVERCOME THE OBSTACLES

The seminar noted that as per World Bank India ranks a lowly 142 out of the 187 countries when it comes to ease of doing business. Similarly on ease of issuance of construction permits it comes at 184 out of 187. India ranks at 186 out of 189 when it comes to enforcing the contracts notwithstanding the famed Indian judicial system. The factors causing these low rankings have been in public domain for a considerable period, have been debated in India by various industry bodies e.g. CII among others/ think tanks and by overseas investors. The IPA Day debate brought out a multitude of such factors that, individually and collectively, have proved to be major bottlenecks.

Low Manufacturing Base and Rigid Labour Laws: These are interlinked and often seen and discussed in isolation. Without an enlightened work force and responsible workers unions the industry cannot be healthy. The reverse is equally true. The seminar talked about the Indian labour laws which on one hand must protect the interest of the workers but at the same time be in tune with modern industrial requirements.

The Indian manufacturing forms 16% of India’s $ 2 trillion economy while for China it is 32% of its $10 trillion economy. One of the major factors is our labour laws which as per World Bank are among the most rigid in the world. Some of them are indeed antique: The Trade Union Act goes back to 1926 and the Industrial Disputes Act to 1947. It does not stop here. Some of them are effectively a deterrent for the growth of business. As per Mckinsey 84% of Indian manufacturers employ less than 50 workers to get around the rigid labour laws. In China it is only 24%. We have seen some acknowledgement of the problems and beginning of a change with states like Rajasthan but it is only a small beginning.

It is within our capability to modernise the labour laws, carry trade unions along for changes like Germany did two decades back. The German industry unions were made stake holders in the success and survival of the industry to an extent that during European financial slow down the employees readily agreed to work at a lower salary than be laid off and the factories closed. Similarly unions in India can and must be convinced of the benefits of increased productivity. We all recall that the unions, particularly in the banking sector, had raised massive concerns and held protests when computerization was to be introduced. Yet today it is not even an issue.

The seminar then addressed the status of Indian private industry. The Indian private sector has grown over years in size, technological know-how and financial capabilities. In areas of infrastructure and defence, one of our biggest import bills, not only the big players but even SME’s are becoming nimble footed and tying up with foreign partners, even smaller ones, for transfer of technology and to bring in investment. The SME’s in particular must be given encouraging conditions to move forward like relaxing caps on foreign investments. We need to involve foreign players as partners and work with them and not against them. Here setting a clear Offset policy will be a great facilitator. Let the government policies include any foreign investment as an offset credit with high multiplier.

Another specific input that came out in the debate was the need to involve the government/ public sector and the private players in framing policies to create an eco-system that works in tandem and not on cross purposes. Japan has led the way in government/ industry cooperation.

Deficient Energy Scene: Overall we are an energy deficit nation, whether for electricity generation, coal production, oil and gas import and unlike the US, Shale gas exploration has hardly begun. The way coal industry is moving is a good pointer with resources allocation in a transparent manner. At the same time we need to bring modern mining techniques. Most of the power generation and distribution is in state hands, open to manipulation and highly inefficient. We must unshackle the state power boards from undue government/ political interference and rejuvenate them with professional talent with right remuneration.

We can accelerate our oil and gas exploration and invite foreign technology, particularly for Shale gas extraction, to meet our ever increasing energy requirements. The US is a great example where the country has not only become self-sufficient but is now the biggest oil producer in the world. Investments in oil and gas fields, whether in Central Asia or East Africa or Western Australia must be a coordinated effort between the industry and the government. This is what China has done. Alternate or renewable energy sources like solar are fine up to a point but by not yet being competitive, will drain away a substantial chunk of country’s finances.

Stressed Banking & Financial System/ Unpredictable Tax Regime: As per The Economist magazine, Indian public sector bank’s share of troubled loans is 12% compared to the 4% of the private banks. It will require $40 billion or 2 lakhs, 60 thousand crores of recapitalisation by 2018 to meet international guidelines. Government must bring down its stake in public banks significantly and attract the right talent with right remunerations from the private sector.

The tax regime remains fragmented with multiplicity of jurisdictions and uncertainty about the policy implementation. The proposed introduction of GST that will apply throughout the country is a step in the right direction but it must be implemented now and made attractive for the states. Another issue that has bedevilled the international investor is the so called Retro tax that can upend the whole business model. This practice must be formally done away with. We are all aware of how the retro tax application (Vodafone case) adversely impacted the investment climate. However the tax regime must bring the states on board else the system will be incomplete.

Skills Deficit: As per World Bank by 2020 the world will have a deficit of 56 million skilled workers while India alone will have a surplus of 47 million skilled personnel. But a sobering thought here: as per Indian industry, up to 37% of our engineers are not employable and need to be trained further for specific skills. Our focus has been on school enrolment (but not always with the requisite infrastructure) and higher education (but without specific focus or facilities).

Yet nothing builds a base like vocational training. Germany has done an excellent job of creating a huge vocational training ecosystem which has produced the required number of technically skilled workers to boost and sustain the manufacturing base. More and more vocational training institutes in partnership with private industry, including in non-metro areas, can be opened. This will ensure not only employment opportunities for our youth but also a steady source of technically competent employees. We need to have a technology based industry and the skills to be able to absorb the foreign technology where needed.

Another suggestion was to become part of the global intermediate supply chain like Mexico has successfully achieved. This provides knowledge infusion, integration in global supply chain, nurtures the local industry and creates jobs that become progressively more and more sophisticated leading to an ever increasing skills level of the local workforce. We thus need to treat foreign players as partners.

Always taking the skills set a notch higher is to encourage foreign companies to set up R&D centres in India. Make in India should just not be about manufacturing but also about innovation. Many companies (Microsoft, Sanofi among many others) have done so and have helped in not only developing products for local needs (Made for India) but in the process have also trained the Indian specialists to look at higher quality targets. That India can be the land of innovation is increasingly gaining traction. Not only many MNC’s have been sending Indian engineers and technical staff to their foreign operations and often they come back with world class skills level. This must be encouraged by offering incentives.

A Comprehensive but Glacial Legal System: Despite having a comparatively lower level of literacy, India has 14 judges per million people against 100 for US. Further compounding the problem is the multi layered appeals system and obtaining ‘stays’. These are some of the reasons of the cases dragging on over generations with many of the litigants often dead in the meantime. It should therefore is no surprise that we rank 186 on 189 when it comes to enforceability of the contracts. The regulatory and redress system is often neither as transparent as normally expected by international companies nor are the law and order agencies able to arrive in time. This issue was highlighted by the industry representatives in the seminar and was considered a dampener for foreign investors.

The judicial overhaul (as are the police reforms) has been on the cards for a long time and an innumerable number of committees have made recommendations to streamline the system. Ultimately it is the political authority with the judiciary that must take it up in a time bound manner.

Infrastructure Woes: Inadequate roads, overwhelmed railways, intermittent power supply and clogged ports in contrast to many of our smaller South East Asian neighbours have been an issue for a long time. The solution is not rocket science. The well tried Public Private Partnerships is one model and where domestic private players are not available, the government can take a lead. We can also attract foreign firms with their technology and financial muscle to come in provided we create the right conditions for them. Above all the states have to be on board. There is no reason why the development of roads, railways, ports and power generation, clean drinking water and a reasonable environment cannot be created in one generation. Small countries like Malaysia and a big country like China have done it.

In the context of the discussion on infrastructure, one of the participants talked about the need to be aware about the facilities that the foreign staffs expect to find when they move to India for long term assignments. Often when given a choice, many expatriates prefer to relocate to places and countries that boast of better infrastructure and offer a cleaner environment.

Cumbersome Land Acquisition: This is the single biggest impediment with protracted and unpredictable formalities and clearances. As per CII, for the economy to grow at the healthy 8 to 9% annual rate, the secondary and tertiary sectors must grow at 10 to 11% with agriculture at 4%. This needs a large migration from primary agriculture to secondary and tertiary as has happened in all developed economies earlier. The projected incremental demand is for 240 million jobs by 2022 that must be filled by skilled personnel. Some compromises in enacting the latest land bill are perhaps necessary but the states must be made to understand the advantages and the investments that can accrue to them. The farmers, with right training and safeguards can be weaned off the land to increase manufacturing output and increase the labour pool. As it is, a major part of the farming community does not find it economically viable to continue to subsist on ever shrinking land holdings. In all developed economies the proportion of agricultural labour force is much lower.

Intercultural Differences: Not always included in any serious debate or seminar, many panellists repeatedly raised this issue that has bedevilled both sides. Without generalising the issue, one specific aspect was the difference in how commitments, hierarchy levels and deadlines or respect of time is understood between West and East. One statement mentioned that “West has watches while we have time”. Many investment ideas have floundered on such issues and need to be addressed by both sides before undertaking any initiatives.

CONCLUSIONS

All the above factors are interlinked. Non-availability of land does not allow industrial parks to come up, power shortages destroy the production output, lack of skilled work force impacts the productivity, unpredictable tax regime impacts the business model, poor infrastructure renders our production uncompetitive, inadequate quality consciousness leads to shoddy products and so on. As a consequence we ultimately end up importing ‘Ganeshas’ from China.

It was concluded that technical and interpersonal skills, creativity, innovation and entrepreneurship are all interlinked. These in turn are dependent upon the link between our educational systems from school to universities to our research facilities to our industry (US is a good example). All of these in turn are dependent upon a transparent governance model and the involvement of all the states in the country in tandem with national requirement in a manner that the sum of all the parts is bigger than the total. In short a holistic and a long term approach with involvement of all the stake holders is required.

The required changes are doable but are so overdue that people are fast losing patience. Unless all these steps are taken up on war footing, and implemented as fast as possible in our system, India will not be able to create enough jobs for its demographic bulge. THIS IS WHERE MAKE IN INDIA COMES IN………..BUT THERE ARE RISKS.

THE RISKS

India has been a land of some brilliant ideas for as long as can be remembered. The concepts and ideas were always there, possibly too many. A ten thousand years old Indian civilisation that gave to the world the Hindu Numerals (the so called Hindu Arabic numerals) and the decimal system, the mathematicians who proved 1500 years back that it was the earth that rotates around the Sun, and not vice-versa are only too well known.

In our times, success stories of India’s space research and mission to Mars, prowess in the field of Information Technology, the widely respected Indian Diaspora and the reach of Indian pharmaceutical companies for generic medicines that have given hope to millions of poor people the world over, are well known. It has been the inadequate political will, a lethargic bureaucratic system, lack of insistence on excellence and endemic corruption that has only intermittently allowed brilliant ideas to reach due implementation.

The questions that inevitably arise thus are the obvious ones:

1. Can India sustain this initiative in totality till its logical conclusion?

2. Will good intentions be thwarted by political fights and vested interests? Will all the stake holders i.e. politicians, bureaucracy, industrialists, farmers be able to appreciate the big picture?

3. Will the nation be able to ensure that right policies are indeed enacted and implemented?

4. And should not Make in India also include Make for India to cover not only the export market but also the huge domestic market?

If these can be overcome, then the MAKE IN INDIA initiative indeed has the potential of transforming the country from an also ran to a major player on the international stage. That is the question for 1.25 billion people to face.

Event Date & Time

June 13, 2015 – 2:00 PM

Venue

Tenue de Ville

RSVP closed as this is a past event.