Steep logistics costs and import duties on raw materials and machines are areas of concern, says Pawan Goenka

“There is a misnomer that because of lower labour costs, Indian manufacturing is very competitive,” says Goenka

Industry players largely want to do what is good for India, even if there may be some exceptions, believes Steering Committee for Advancing Local Value-Add and Exports (SCALE) chairman Dr. Pawan Goenka. While the committee is fleshing out sector-specific policy advice, it has also identified ‘horizontal enablers’ that India needs to fix in order to become more competitive across the board, including the cost of doing business. Steep logistics costs and import duties on raw materials and machines, along with over- regulation are also areas of concern, he said in an interview with The Hindu.

Edited Excerpts:

What are the big challenges ailing Indian manufacturing?

Our primary focus is on how to make Indian manufacturing competitive in terms of cost. There is a misnomer that because of lower labour costs, Indian manufacturing is very competitive. That’s a misnomer, because there are many factors that offset that advantage and make our manufacturing non-competitive in many fields. There are a few overall themes that run across almost all the sectors… We are putting it under the umbrella of cost of doing business. We talk a lot about ease of doing business, but the biggest problem India has is the lack of scale. Industry needs to come forward and invest for large scale and the government needs to facilitate that with a viability gap. But primarily, the foot is on the industry end on how to invest on a large scale as China did. Second is the cost for land, which is one of the most expensive industrial land in the world, and power, which is the most expensive industrial power in the world, part of which is the cross subsidy that happens. But now in the competitive world, Indian manufacturing industry cannot afford the cross subsidy burden it has. Third is the cost of capital. If you leave aside the current low cost of capital because of COVID-19 and low interest rates, the cost of capital in India is 20% to 30% higher than cost of capital in most other countries which are exporting. These are our factor costs. The third area which is well acknowledged, but we have not been able to make much headway is logistic costs. India’s average logistic cost by government data is 13% of the revenue when the global average is 8%. So India has a 5% disadvantage because of logistic costs. Obviously that disadvantage cannot be made up by industry in labour costs. The fourth area is labour productivity and skill which is primarily industry’s responsibility. The fifth area is to strengthen the micro, small and medium enterprises (MSMEs) sector because while the scale will be created by the large companies, they cannot do everything themselves without a strong MSME sector. The government’s focus always has to be on making MSMEs stronger, working together with industry. It’s not about giving some sort of financial benefit… That doesn’t make them strong, but a good technology and skill base will. Though we have improved the ease of doing business, for manufacturing, we still need a lot of things to be done.

How has your interaction with different ministries worked out?

The personal involvement of the Commerce and Industry Minister Piyush Goyal has been intense even after he set up the committee. He has spent at least two hours with us at over 15 such meetings pertaining to different sectors. I recall one meeting where we had six or seven ministers participating for over two hours to go through all the all the details of the recommendations. Mr Goyal has also personally taken up matters with other ministries in order to get traction for our ideas and create a buy-in for changes in policies and rules. Committed champions across sectors have helped tremendously in diagnosing and addressing challenges – for instance, in ACs, we had Panasonic India CEO Manish Sharma, FICCI and DPIIT additional secretary Anil Agrawal, combining to deliver results. The DPIIT, in fact, does a lot of the critical background work to co-ordinate with other ministries. The contribution of all the SCALE committee members who are devoting significant personal time to this effort on a voluntary basis cannot be ignored either.

India has been hiking import duties in a bid to dissuade imports over recent years. Is this the right approach to become self-reliant?

The SCALE panel is not in the mindset of increasing tariffs. Our thrust is on how to make Indian manufacturing more competitive, so that the need for import comes down and the opportunity for export goes up, not by some artificial means of increasing tariffs or putting non-tariff barriers. That might be required for a short term in some cases, but increasing tariffs basically leads to consumer prices going up. We have drawn a line that we don’t want to do anything that leads to higher consumer prices. In fact, we have asked for a reduction of tariffs in many areas to make Indian manufacturing more competitive. Moreover, while the need for more favourable free trade agreements (FTAs) repeatedly comes up in the context of Exports, we believe that it is important that India is not at a disadvantage compared to other countries in terms of FTAs. And today, with many countries in Europe, Southeast Asia, Middle East Africa, India has a disadvantage compared to others with more favorable FTAs. So our request has been only to see if something can be done to create a level-playing field where India is disadvantaged, rather than saying ‘let’s get the lowest tariffs’ to export everywhere… That is clearly not practical and feasible. Tariff reduction is always a two-way street. India cannot seek entry for Indian exports and continue to have high tariffs on imports.

Vietnam, one of our big manufacturing competitors now, has already sealed FTAs with the UK and EU…

Before the COVID pandemic, India was a $2.87 trillion economy with about $229 billion of manufacturing exports, with about 43% of its total exports from manufacturing. Now for India to see itself as a manufacturing country and get a good balance between Manufacturing and Services, it’s important for manufacturing exports to be higher. Vietnam, for example, is at 80%, Malaysia 70%, Thailand is 56% in terms of manufacturing exports as a percentage of exports. The second aspect is that even what gets exported from India, often it is a low value-add export. India is very poor in high-tech, with contribution to export coming from high-tech sectors at only 10%, which is a very dismal number. Vietnam is 40%. Malaysia is 52%, Thailand is 23%. So, my concern is not as much about the overall manufacturing exports as that number will be low because of a very strong service economy. My concern is more that high-tech exports are very low and often, we end up exporting commodities or raw material rather than exporting value-added products. In the last decade or so, Vietnam has focused very heavily on exports and a lot of China’s manufacturing has moved to Vietnam, often owned by Chinese companies, but in any case, adding value in Vietnam. Today, Vietnam’s manufacturing exports are same as India in absolute terms. So even though the Vietnam economy is 1/10th the size of the Indian economy, the exports are the same.

The target to reach $1 trillion of manufacturing exports by about 2027 is very good and India deserves it. But it won’t happen with business as usual. Some tough calls will have to be taken, some priorities have to be given, certain other compromises have to be made. Because to get something, you have to give up something more often than not. Sometimes you can get everything.

Third, for market access through FTAs and preferential trade agreements, what we are looking for is no disadvantage. Fourth is technology and quality. We know India’s spend on Research and Development (R&D) is amongst the lowest at only about 1.5% -1.6%, as opposed to 3.5-4%, which is the global average. And more importantly, industry is not interested enough in R&D, but it has to come forward and invest more. Finally, the Brand India is not strong overseas for manufacturing. It’s more known for cheap products rather than excellent products, which is a wrong perception. And we need to change that.

Given the challenges of aligning industry factions and convincing government officials, do you have moments when you feel – ‘What have I got myself into’ ?

No, I am enjoying it personally. I am discovering a whole new world beyond auto and tractors. All my life, I have worked in auto for 41 years with 10 years on tractors, and what I am finding is an exciting world outside autos and tractors. I am also getting the sense that: yes, of course, all companies want to do well. But by and large, even if there will be exceptions, companies want to do good for the nation. Okay, and there is this desire – is there a way that without compromising my company’s requirements, am I able to add value to the country. The AatmaNirbhar Bharat is a very motivating slogan. I am thoroughly enjoying just learning about all these industries and interacting with players … The auto industry in respected by most industries as I discovered, because of what it has done in the last 25 years. Fortunately, I’m reasonably well known because the auto industry gets a lot of exposure on TV and print media, so I’m able to get my point across a bit and they listen to me. That helps as if somebody unknown would have been doing this, it would be difficult to align everybody.

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