Tuesday, December 11, 2012

NATIONAL MANUFACTURING POLICY: AN ANALYSIS


NATIONAL MANUFACTURING POLICY: AN ANALYSIS

Manufacturing growth in India is much below than what it should be. The employment and output generation in organized and unorganized manufacturing sectors exhibit a major imbalance. The share of the industrial sector in GDP has stagnated around 20-21% from 1991-92 to 2002-05, and thereafter actually declined to about 18% in 2010-11. The transformation of the agrarian economy directly to the one dominated by services, bypassing manufacturing has been a matter of concern for policymakers. This has inter alia, entailed a lop-sided growth with low employment elasticity of manufacturing growth and low value addition per unit of labour and capital. There is scope for improving efficiency and productivity in Indian manufacturing sector, only if India benchmarks itself with the globally competitive advanced nations. Benchmarking against the most competitive economies is mandates, if India needs to compete with the manufacturing giants in this era of globalization. India has, for various reasons, failed to expand its manufacturing base and capitalize on employment creation in the manufacturing sector . Several earlier attempts have not yielded the desired result of promoting growth in the sector. But the key to success will be policy implementation, but there are several challenges.

India is also not known for exports of manufactures and in a number of manufactured goods the country is not internationally competitive. National Manufacturing Council (2004) came up in 2006 with the National Strategy for Manufacturing. The Strategy paper not only identified a set of 12 challenges facing the sector ranging from general frame work conditions such as macroeconomics stability, and strengthening education and skill, infrastructure development to the needs for specific policies for promoting investments in technology and innovations and for increasing the usage of ICT in the manufacturing sector and improving firm level and specific industry level competitiveness. In order to deal with these challenges the paper made a number of general and specific recommendations. Following the publication of this government has also announced a number of sector specific policies , for instance , with respect to the automotive and telecommunications industry to name a few. Further , a number of general framework conditions have been created through the successive union budgets. A case in point is the raising the research and development (R&D) subsidy scheme to 200 per cent of the volume of R&D conducted and extending it to all industries. It is against this background of policies that yet another document called the National Manufacturing Policy (NMP) finally led to the clearance by the cabinet on October 25, 2011. Although , this is a well-crafted policy document having its various sections or parts clearly delineated, it does not contain a great deal of new ideas compared to the strategy document released almost five years ago. The NMP does indeed have a number of Merits even if at the same time it is in parts a mere repetition of various measures already taken by other policies.

Job Creation Target

The Policy document begins by setting the goals or targets for the Manufacturing sector in India :
(i) In a nutshell it aims to increase the share of the manufacturing sector in India’s GDP from the present level of about 15 per cent to about 25 per cent by 2025. (ii) And in that process creation of 100 million new jobs is an integral part of any attempt to take advantage of the demographic surge that the country is now experiencing.
(iii) The policy aims at improving local value addition by ensuring that the industry has most of the components, spare parts and raw materials locally available. No specific targets are fixed on value added and so the goal is expressed in vague terms which makes its monitoring virtually impossible. The average value added to the value of output ratio during the period 2000-2001 through 2007-08 works out to merge 16 percent. If this number is accurate, it refers, indirectly, t the import dependence of the manufacturing sector. The policy document alert one to this important issue of local value addition as a necessary condition for the manufacturing sector to increase its size.

In order to achieve these goals or targets, the policy prescribes appropriate policy action on five issues:
(i) encouragement to foreign investment and technologies,
(ii) improvement the competitiveness at the firm level,
(iii) reduction the compliance burden on industry, especially with respect to procedural and regulatory formalities,
(iv) encouraging innovation, and
(v) effective consultative mechanism to ensure mid-course correction. However , it should be pointed out that all these have been rehearsed elsewhere in other policy pronouncements ad even in the institutional structures established in the very recent past. Though, the mention of a consultative mechanism for mid-course correction is refreshingly new. In order to achieve its goals, the NMP proposes two new institutional mechanisms. The first its National Investment and Manufacturing Zone (NIMZs) and the second is a Manufacturing Industry Promotion Board (MIPB). The latter essentially to ensure coordination among central and state ministries.

The National investment and Manufacturing Zones (NIMs)

Global experience shows that clustering and agglomeration of manufacturing units provides distinct advantages as it gives substantial economies of scale in the use of industrial infrastructure, enhances supply chain responsiveness, provides easier access to market and human resources , and substantially lower logistic costs. This concept was operationalised earlier by the government through special economic zones, which catered broadly to the export sector , and cluster development schemes formulated for the small and medium enterprises. The new manufacturing policy attempts to further broad base these efforts by using the cluster approach as one of the key instruments to catalyze the growth of manufacturing as a whole . NIMZs will be developed as integrated industrial townships with state-of-the –art infrastructure and land use on the basis of zoning, clean and energy efficient technology necessary social infrastructure and skill development facilities.

These can lead significant cost savings as well as improved productivity from :
(i) increased supply chain responsiveness because of manufacturing consolidation near suppliers,
(ii) decreased time-to-market as companies can more effectively leverage the capabilities available with vendor in the cluster,
(iii) better and cost – effective availability of labour and also reduced talent recruiting efforts because of the power of cluster in drawing labour, and
(iv) lower logistics cost due to proximity of customers and /or suppliers etc. Economic analysis shows that these benefits can convert into 5% to 8% cost advantage for plants in the hubs compared to stand-alone plants. What are the ingredients for industrial hubs which build and sustain competitiveness over a long period of time? Seven States – Tamil Nadu , Maharastra, Andhra Pradesh, Gujarat, Uttar Pradesh, Punjab and Karnataka-account for roughly 70% of all factories, employment and capital invested in manufacturing building an industrial hub in one of the Under-penetrated states would call for a more comprehensive effort and set of policies to provide the ‘hard’ enabling environment for success.

These should be active support and integration between SMEs and the large firms they supply. This can lead to emergence of new cooperative structure with smaller enterprises connected to large enterprises rather than merely selling at marker prices, development of shared services and training centers so that these value chains get benefit of both scale advantages of large enterprises and scope advantage from many small members with different capabilities. The final ingredient of success of an industrial hub is the development of its knowledge centre and the innovation ecosystem . The key to building such knowledge centre is location of (or close linkage to ) one or more universities and research centre within the hub. The emergence of Bangalore as the Silicon Valley of India has been driven by the location of prestigious institutions like the Indian Institute of Science and the large number of central research and technology organisations n the city. Industrial hubs will have to necessarily play a key role in making this happen. Providing land and other incentives is necessary but not sufficient . Setting up successful hubs call for much more in terms of enabling infrastructure, supply chain integration and perhaps most importantly, building a knowledge centre, and capabilities to evolve with changing times.

The first phase of NIMZ will be established along he Delhi-Mumbai Industrial corridor(DMIC). The DMIC project covers six states- Haryana , UP, Rajasthan, Madhya Pradesh and Gujarat, accounting for 43 per cent of GDP, 50 per cent of industrial production and exports and 40 percent of total workforce.

Size of NIMZs

A typical NIMZ will be of at least 5,000 hectares in size and will be chosen by the state government from its own land or through acquisitions. The preference will be for non-agricultural land with adequate water supply. States will have to wnsure that at least 30% of the total land will be utilized for setting up manufacturing units. If needed , the states may reserve a certain share of the land for MSMEs. Ownership of an NIMZ will either be with the state government , a State Government undertaking in joint ownership with a private partner or under any other appropriate model. But whatever be the ownership model of an NIMZ, the state government will ensure that the land provided to the manufacturing units can be mortgaged by the prospective allotted for securing financial assistance from banks and financial institutions.

Administration of NIMZ

The administrative structure of NIMZ will include four entitles, namely an SPV, a developer, the state government, and the Central Government . An SPV will be constituted to exercise the powers, discharge the functions and manage the affairs of the NIMZ . This SPV can be a company, depending upon the MoU between stockholders. The CEO of the SPV will be a senior central or state Government official. The SPV will include an official /expert conversant with the work relating to pollution control/environmental protection. There will also be representation to the industrial units functioning in NIMZs. The main functions of the SPV will include maser planning of the Zone, preparation of a development strategy and an action plan for self-regulation to serve the purpose of the policy, formulation of rules and procedures for development, operation , regulation and management of NIMZ a and their enforcement . Further, NIMs will function as self-governing and autonomous bodies as the State government will designate them as industrial townships under Article 243Q© of the Constitution . thus NIMZs will provide developed land with adequate infrastructure and the needed ecosystem for promoting world class manufacturing activity.

Flexible Labour Policy

NIMZs will put in place a comprehensive and liberal exit policy that will promote productivity while providing flexibility by reducing some of the moving rigidities in the labour market and by ensuring protection of workers’ rights as laid down in the statute. Firms operating in NIMZs will have a job loss policy to insure workers against loss of employment in the event of closure or retrenchment. This policy will be used to make compensation payment to workers at the time of closure or right sizing . similarly, the SPV will help redeploy labour from one unit to another in case of closures. To deal with the ensuring job losses , the NMP proposes a suitable compensation to be paid to the workers through the operation of two alternate funding schemes, the job loss policy and the sinking fund. Under the former , the firms that are operating in NIMZ may insure their workers against loss of employment in the event of a firm that has to close down or reduce its workforce consequent to the activation of a redundancy scheme . Under such circumstance the insurance policy will be used for payment of compensation to the affected workers. It truly breaks new ground when it talks of an insurance policy that would facilitate payment of retrenchment compensation without recourse to lengthy legal processes and early closure of an unviable unit . The second scheme , known as the sinking fund, is also to be funded by contributions as decided by a Special Purpose Vehicle (SPV). A certain minimum level of money commensurate with expected liabilities will at all times be maintained in the sinking fund and the fund must be continuously replenished in case amounts are drawn from it . Both the schemes are only applicable to those workers who are in continuous service in the affected firms and on. The NMP has also some specific provisions for redeployment of assets of firms which have been declared sick and this will be decided by the SPV created with the narrow purpose of dealing with industrial sickness.

Some Critical Issues

(a) However, the NIMZs raise some important issue :
(i) land acquisition, which in the light of recent instance in west Bengal and in Odisha, is a point of irritation and delay,
(ii) although the NIMZs are supposed to be different from Special Economic Zones (SEZs) in the sense that they may not provide its occupants with tax concessions, there are a number of tax concessions, there are a number of tax incentives and these will also add to the tax forgone by the exchequer, and
(iii) the NIMZ is based on the theoretical belief that firms located in a cluster are ore innovative than those that are not , as the possibility of technology spillovers is higher in a cluster besides other economic benefits that agglomeration would bestow upon its constituents. Public policy induced clusters are , on an average , less innovative than natural or historical clusters. Very often different Central and state ministers work at cross purpose .

(b) The big question is whether the Government can muster the political will and moral authority, to bring about a consensus among the stakeholders in the new policy regime . The first question : can we really create NIMs and if we can, why not make the whole country a NIMZ? If we can provide good infrastructure , progressive exit policies , business friendly approvals, etc., why not provide these throughout the country? Creating NIMZs could be harder than making the whole country NIMZ, for instance, because of games that states and the Centre could play. Unfortunately, this is yet another attempt at a band aid type policy formulation and if one expects that this will provide an impetus to industrial revival to significantly enhance the manufacturing sector’s share in GDP and employment, one may be sorely disappointed. How is a set of incentives , administered by bureaucrats better than a deregulated environment in which capital is free to enter and exit any business? If anything the one big impediment to industrialization is the set of labour laws that discourage any employer from hiring labour: Once hired getting rid or workers is a nightmare.
The critical issue is whether enclave-type development of industrialization in the country is the only way forward? Should we continue to have one layer of enclave after another? In this world of scaffolding , it seems, we will have to think of industrial castles without having walls. But it is the industry rather than the government that would have to innovate and evolve these new models for manufacturing New design philosophies would be needed for design or easy assembly or finish and for easy repair as well as new ways for partnering with small or microenterprises to share profits ‘ equitably’.

(C) The most elegant policies or economic growth are no proof against a governance structure that is held hostage to a combination of administrative sloth and the rapacious rent seeking behaviour of its rulers in both the state and the central administrations. That is the challenge that awaits the Government, which has unveiled a policy to give a leg up to the manufacturing sector , not just for exports but local consumption as well .Its conceptual underpinnings are flawless. Excellence in manufacturing is achieved , ideally, in an ecosystem involving people-not just those directly engaged in manufacturing but their dependents as well, the satisfaction of whose personal and professional needs requires a parcel of contiguous land that is much larger in scope than anything conceived under the present policies for export promotion.

(D) Corruption is not the forbidden fruit in Indian politics, but its life blood. It is not enough to slap down the hand that reaches out to break the bank; we need a total transfusion to cleanse the body. It is not sufficient to look up for leadership. We need Indian industry to take the lead in this reform, with the conviction that we can, indeed overcome. India lacks the environment in which such enforcement can occur. If anything the NMP can turn into another instrument of patronage and runaway corruption; friends of ministers and politicians can be rewarded with land, credit and all the help at the hand of the government. There is a good chance that cronyism will be the end point of the NMP. Perhaps, this is harsh judgement but recent policy-making experience gives enough reasons for skepticism.

Administering various incentives could quickly

Degenerate into another kind of licence and quota system. In theory there are no grounds why one industry or one firm should get preference over another when it comes to doling out incentives. In fact, experience shows that it is impossible to align administered incentives with performance: these incentives can soon turn into rents, and an altogether different and unproductive type of ’competition’ can emerge.
Gujarat has cut down the compliance cost of environmental norms for industries by grading districts on the basis of pollution control measures needed. Tamil Nadu has exempted 135 categories of industries from the State Water Act. These are some of the best practices the National Investment and Manufacturing Zones (NIMZs ) want to replicate to give industries the cutting edge to face international competition. The NIMZ document , for instance , quotes the example of Haryana where industries set-up under the Water (Prevention and Control Pollution) Act,1974.

(E) Management practices in Indian are often weak, by measurable criteria, and with measurable consequences in terms of reduced financial success. More broadly , lack of best practices in supply chain management and attention to innovation. Lack of trust along the value chain of Indian manufacturing and specific practices that contribute to the lack of trust , such as delays in reimbursing suppliers. Hence, problems in India’s manufacturing go beyond the obvious problems in the policy environment. There are several inferences to be drawn from these detailed surveys and analysis. First , inefficiencies in management are mostly likely indicators of lack of sufficient competition policy. More broadly, it needs an overhaul of the legal frameworks governing the doing of business in the country. This is happening, but slowly.

Second, a more robust system of financial intermediation needs to be built. There are two aspect of this . One is lubrication of the supply chain, through short-term credit from financial institution of - this needs to be complemented by more efficient legal enforcement of contracts and associated financial obligations. The other is better access to financing for investment and innovation. This will require innovation in legal structure for providing such finance, including venture capital. India’s financial sector needs to do a much better job of serving small and medium firms: this issues is outside the area of manufacturing policy, but critical to the success of manufacturing . Third, the extreme shortage of skilled workers in India. The problem extends from traditional education at all levels to a wide range of vocational and practical training. Manufacturing policy will not succeed without correcting this problem of skilling the population .

(f) Currently, a manufacturer in India has to comply with 70-odd legislations and file returns periodically, the total returns amounting to more than 100 in a year. Though , the National Manufacturing Competitiveness Council (NMCC) started functioning from January 2005, nothing much is heard about the work done by it . No wonder then that in recent years, Indian corporate houses found it easier to acquire manufacturing bases abroad instead of dealing with the plethora of problems within the country.

(G) The first detailed chapter of the policy deals with the rationalization and simplification of business regulations . The solution proposed is not to simplify, but to propose exemptions for the units set-up within NIMZs. The corollary appears to be that it is fine for the existing manufacturers to be regulated heavily, while new units are freed up through exemptions.

(H) Putting the onus of finding such a locale on the State, with the given riders , at a time when the union Government has not got the proposed land Acquisition and Rehabilitation Bill passed in Parliament would make the birth of NIMZs an intractable one. This coupled with the candid admission in the policy that the infrastructure development of the zones will in a large number of cases be made by private developers there is a need to provide appropriate financial support / incentives to the developer raises the spectre of how many a developer in the SEZs had cried foul over withdrawal of several spurs or cited other disabilities after roll-out of the SEZ Act 2005. Till date, the SEZs with formal approval are 585, the notified ones being only 143 , even as 33 developers exited after duly refunding the duty benefits derived.

Comparisons between the SEZ and NIMZs may be odious but the fact remains that any policy support to a select few is a flawed approach. Such a state of policy-induced aberration is not only discriminatory but also profoundly unsound, promoting pockets of a few growth centres with the rest reeling under unconscionable burden and stagnancy.

(I) What the country need is a coherent plan for planned urbanisation, to house ever-growing numbers of industrial and service sector enterprises and migrant from villages who man these enterprises . The NMP is a weak substitute as it merely envisages the creation of seven new town and, that too, in select states. What manufacturing growth calls for is a ration policy for planned urbanisation, efficient infrastructure and sensible labour laws. Let us work for these , and shun hollow policies.

Conclusion

The government should provide infrastructure and leave the rest to markets . Critics are not wrong in stating that the National Investment and Manufacturing Zones(NIMZs) are nothing more than SEZs in a new garb. Create the required skills and human capabilities among rural migrant and urban poor so as to make the growth process more inclusive ; increase domestic value addition and technological ‘depth’ in manufacturing enhance the global competitiveness of Indian manufacturing through appropriate policy support; and, finally make the industrialization process more environment – friendly encouraging energy efficiency, optimal utilization of natural resources and restoration of damaged degraded ecosystems.

Be it SEZs, PCPIRs or NIMZs there are all desperate attempts by policy makers seeking to increase the share of manufacturing in India’s national income without having to deal with the political economy of a backward-looking trade unionism and the populism of left-of –centre parties. If every state government can offer an environment as conductive to business as the one Gujarat one does are really need these zones. However , since India’s competitive populism is going to come in the way of a sensible national industrial and labour policy, which would in fact benefit labour and business , politically constrained governments will have no option but to offer these escape route for industrial development. India needs manufacturing sector growth for a variety o reasons ranging from job creation, enterprise and technology development to the needs of defence and national security. Any policy that helps deserves a try.

Change in necessary in many areas for India’s manufacturing sector to reach its goals: industrial relations, land acquisition, the regularly framework and so on. These improvement must happen widely around the country, not only within the proposed New Manufacturing and Investment Zones , for the country to realize its ambitious overall growth and employment targets. Action will have to be taken in the states, where local laws and conditions must change. For changes in the industrial relations’ climate and labour laws the involvement of unions is essential. Fr change in land acquisition and environmental laws, concerned civil society organisations must be involved. So, the implementation, involving producers, stakeholders and many ministries of government , in the central and the states is required to accelerate manufacturing growth. Ratan tata has observed that the government would face several hurdles in its implementation of the National Manufacturing Policy (NMP). Various ministries that are involved in successfully making the policy work are the ministries of labour, environment and finance . The first phase of the national Investment and manufacturing Zone has been planned to be set-up along the Delhi Mumbai Industrial Corridor , seven NIMZ have been notified along the DMIC.

Source: Kurukshetra

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