Manufacturing accounts for 14 to 16 per cent of the GDP with 85 per cent of employment in unorganised sector, with a ‘missing middle’. This is unlike manufacturing hubs in Korea, China, Germany and Japan where 50 per cent of the firms are large with the benefit of economy of scale and 20 per cent are SEMs. Value addition in the global value chain for India was only one per cent in 2009 as against nine per cent in China and Germany. National Manufacturing Zone (NMZ) 2011 policy is limping big time in the absence of Centre – State synergy, tardy land acquisition and long drawn environmental clearances. Subir Gokran has rightly observed that increase in Incremental Capital Output Ratio (ICOR) from 3.1 per cent (2005-2006) to 5.9 per cent (2012-2013) is largely attributable to supply constraints such as power-coal imbalance and inordinate project delays.
The following table provides a trend analysis of exports by Defence PSUs and Ordnance Factories since 2008 – 2009.
Of the PSUs/OFB, HAL & BEL account for 66 per cent of exports. Export as share of Value of Sales (VOS) has remained around three per cent for HAL and around three to four per cent for BEL thereby showing the policies so far have not impacted on their export performance.
Almost 50 per cent of China’s GDP growth is attributable to total factor productivity growth…
Raghuram Rajan sounds a note of caution regarding the obsession for export-led growth by heavily subsidising inputs at the cost of fostering domestic demand. His call for “Make for India” to supplement “Make in India” is an extremely welcome alternative.
Impact of Offset Contracts
After promulgation of this policy in 2005, 24 contracts have been signed for $4.8 billion. However, discerning analysts observe that the expected benefit in terms of FDI inflow, high end technology, increased export and outsourcing have not taken place. The C&AG, in its performance audit of Fleet Tanker Contract (2010), has brought out how the full benefit of offsets provision has not been availed of from the OEM. Further, the C&AG’s comprehensive report of 2012 on offsets contracts severely castigates the inept contractual arrangement that underlies such offset arrangements and additional cost implication.
Manufacturing, “Make In India” Policy and Defence Manufacturing
Since liberalisation in the 1990s, the sectoral share of the primary, secondary and tertiary segments shows a tectonic shift wafting through the corridors. The share of Agriculture in the GDP shows a significant reduction while the share of Industry has remained stagnant with the Service sector showing the way as the sunshine sector.
The following table brings out the trends in the compositional shift.
A disaggregation of the Secondary sector shows that the share of manufacturing sector has increased from around 15 per cent to 25 per cent. The experience of manufacturing giants like Germany, South Korea and China reveal that manufacturing accounts for 30 per cent of their GDP.
The defence industry, be it public sector or private, has to be part of the national manufacturing policy mosaic…
Therefore, the thrust of the government to encourage “Make in India” option by facilitating the enabling environment to manufacture, improving ease of doing business, encouraging creation of national manufacturing zones in tandem with the states and investing one trillion dollar through the PPP route in the infrastructural sector make eminent sense. Professor Basu rightly observes out that the success of the “Make in India” policy will critically hinge on the cost of doing business in India.
Two critical factors for this would be the quality of human resources and cost of capital. India’s education system is presently mired in a mess and needs millions of skilled workers coming out of the ITIs with quality training. While access to education at the primary level through the Right to Education has improved access significantly, the quality deficit, both in the primary segment and higher education is palpable. While the private sector has contributed handsomely to the growth of technical and management education, the quality of education and lack of research impact on the employability of students adversely despite the global opportunity.
As regards the Cost of Capital, the following table would bring out the disturbing trend of exorbitant Costs of Capital in India compared to the developed countries.
What is interesting also to note that most of the BRIC countries are bedeviled by high Cost of Capital and unacceptable levels of inflation accentuating their “Misery Index”.
Importance of Total Factor Productivity
Professor Solow, a Nobel Laureate, in his seminal paper had brought out the importance of factor productivity. His equation Q=A * K∆ Lβ where Q is the production function, A is the level of technology and scale, K & L are factors of production ∆ & β are factor efficiency has demonstrated how US has become the premier technological hegemon after World War II. A case in point is the phenomenal growth in China from 1979 as would be evident from the following table. Almost 50 per cent of China’s GDP growth is attributable to total factor productivity growth.
Lessons for India’s Defence Industry
The defence industry in India cannot be impervious to these trends. It has to be sensitive to skill requirements in order to absorb high technology which comes as part of ToT. One of the predominant reasons for Japan’s phenomenal growth since the 1950s has been their highly skilled labour force which could absorb front-end technology from the US quickly and adopt it to harness commercial success through dual use technology. Japan’s success in electronics and automobile is testimony to this.
The DRDO remains mired in inordinate delay, huge cost overruns and deficient in critical technology areas like ‘seekers’ and ‘stealth’…
In India, on the other hand, the ToT experience reveals that the technology absorption has been inordinately slow leading to continued dependence for our foreign collaborators well beyond the originally contracted period. Experience of HAL in terms of production of the MiG series of aircraft and SU-30 and for MDL for producing Scorpene submarines are grim reminders of our poor high skill absorbing capability.
India is witnessing a significant stickiness in its manufacturing sector which is bedeviled by the huge presence of small scale and informal sector that are bereft of requisite skill levels and economy of scale. Their access to capital is also seriously impeded. However, the manufacturing sector provides a wonderful opportunity for India to be part of the global supply chain and generate high levels of employment opportunity to absorb around ten million young Indians who will come in to the market in search of employment every year. They also need to be properly skilled and trained and networked with their global peers.
The defence industry, be it public sector or private, has to be part of the national manufacturing policy mosaic. Unfortunately, the defence sector often chooses to distance itself in its interface with other civilian sectors. There is opportunity aplenty in areas such as aerospace and ship building where there is considerable civilian and military market. Lack of design capability to manufacture critical subsystems remains a major handicap. The DRDO remains mired in inordinate delay, huge cost overruns and deficient in critical technology areas like ‘seekers’ and ‘stealth’.
Tokenism like Rs. 100 crore allocation towards Technology Acquisition Fund or lip service to FDI policy by increasing to 49 per cent are not the way forward. Public Private Partnership, Joint Venture with foreign OEMs and design houses will require bolder policies such as FDI ceiling higher than 50 per cent and the political will to mentor and hold together the different stakeholders who are often at cross purposes. The new Prime Minister has set his foot in the right place. The Ministry of Defence, however, has to match his steps, shed its ghetto mentality and strive for better synergy with other manufacturing sectors to make “Make in India” the mantra for the days ahead.