CRISIL, INDIA
How can the new government make India a Global manufacturing Hub CRISIL Young Thought Leader

Senil Abraham

Contents
Executive Summary 2
Introduction 3
Labor Law: 4
Labor Productivity 7
Infrastructure 8
Taxation Laws 10
Frugal Innovation 10
Conclusion 11
References 12

Executive Summary
India has always been known as the services economy. Most of the investment inflows have been in services sector while the manufacturing sector has been left behind. This has resulted in lesser contribution by the manufacturing sector to GDP growth. Going forward, however the “Make in India” campaign might become the next big success story. With India maintaining its cost competitiveness, all global players are looking at it as the next opportunity destination. It could attract an investment of about $300 billion by 2015 leading to an overall increase in the share of manufacturing output. However there are various hurdles to achieve this target. This paper tries to analyze the key issues underlying the slow growth of the sector and tries to suggest various solution for a sustainable growth. The paper tries to understand the implications of labor laws on the manufacturing sector. How it has led to an increase in the informal sector and what all changes can be made in the law. Labor productivity and its overall implications on the industrial productivity has been looked upon in depth and various global best practices applicable to it has been suggested. Paper draws upon the critical aspect of infrastructure and the various processes that can be implemented to make it world class. It analyzes the current bottlenecks and tries to find a way to implement the projects effectively. Finally, the paper looks upon the USP of India, “Frugal Engineering” and suggests how it can leverage this advantage to make itself globally competitive country.

Introduction
Economist Nicholas Kaldor had proposed that growth in GDP is positively related to growth in manufacturing sector. Manufacturing exhibits faster productivity growth and thus helps in faster growth of GDP. In India services contributes to about 57% of GDP whereas manufacturing contributes only 15%.

India’s share in global manufacturing can be summarized as below. India's Manufacturing sector at a glance
Share of GDP
15%
Share of Global Manufacturing
2.1%
Growth in 2013-14
 
Average hourly compensation
$1.50
Key Industries
Textiles, Engineering goods, automobiles, electronics, chemicals, paper

Indian manufacturers have always performed below their potential. Most of the manufacturers have not been able to return their cost of capital, a factor that dampens the investment in the sector and makes it less attractive. However during the past decade India has been growing at an average of 7 percent and has also maintained its cost competitiveness. With the increase in labor cost and raw material cost in manufacturing hubs like China, Thailand etc. major manufacturing companies are looking into destinations like India wherein the cost has remained almost stable and also large human resource is also available. However the economic condition in India has not been conducive for manufacturing and also investors have not been able to get the required returns from their investment. If India has to become a manufacturing hub, it has to remove all these hurdles and make major reforms in the sector so as to make it conducive. Some of the areas which need to be looked upon are labor laws, productivity, and infrastructure and tax laws. In the next sections we will be analyzing each aspect and suggesting some reforms and changes that can be implemented.

Labor Law
In India, since the time of liberalization there has been inconsistency between economic growth and employment creation. During the period of 1992-2000, GDP grew at 6% whereas overall employment grew at 1%. The situation improved during 2000-05 period wherein employment grew at 1.6% whereas GDP grew to 7%. However post 2005 employment rate declined even though GDP grew at 8%. There is no denial that there was job creation, but mainly it occurred in the informal sectors. The below graph shows the percentage of people in ...

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