Looking Good


Considering that Manufacturing contributes a large part to the gdp, the government is leaving no stone unturned to ensure this sector functions like clockwork.

by Team MT

According to a report by deloitte, the global aerospace & defence industry is expected to continue its growth trajectory in 2019, led by growing commercial aircraft production and strong defence spending. In the commercial aerospace sector, aircraft order backlog remains at an all-time high as demand for next-generation, fuel-efficient aircraft continues to surge with the rise in oil prices.
With the aircraft backlog at its peak, manufacturers are expected to ramp up production rates, hence, driving growth in the sector. However, manufacturers could experience supply chain interruptions as some suppliers may struggle to increase production to keep up with the growing backlog. In the defense sector, heightened global tensions and geopolitical risks, recovery in the US defence budget, and higher defense spending by other major regional powers such as China, India, and Japan are expected to drive global defense sector growth in 2019 and beyond.
Coming to India, the economy is expected to expand 7.4% in 2018, but the growth rate will slow down to 7.3% in the next year as domestic demand tapers on higher borrowing cost due to rising interest rates, said a report by Moody’s Investors Service in early November. In its report titled ‘Global Macro Outlook 2019-20’, Moody’s said the economy grew 7.9% in the first half (January-June) of 2018, reflecting the base effect post demonetisation.
Stating that borrowing costs had already increased on higher interest rates, Moody’s said it expected the Reserve Bank of India to raise the benchmark rate through 2019, further affecting domestic demand. “These factors will limit the pace of the Indian economy’s growth over the next few years, with real GDP growth of 7.3% in 2019 and 2020, from around 7.4% in 2018.” The greatest downside risk to India’s growth prospects stemmed from concerns about its financial sector, it added.
“The impact of higher global oil prices compounded by sharp rupee depreciation raises the cost of households’ consumption basket, and will weigh on households’ capacity for other expenditures. Borrowing costs have already risen because of tightening monetary policy.

If India has to win this battle for global manufacturing supremacy, it has to focus on areas of automation, supply chain and people management.

Seeing into the future
Historically, India has had a current account deficit, mainly because the Indian growth story is largely scripted on the strength of domestic demand, which fuels both domestic production and import consumption. Over time, the composition of exports has remained unchanged, without any substantial shift toward high-tech exports. However, the composition of imports has shifted considerably from raw material to capital-intensive sectors, reflecting the needs of a consumption economy. This difference is at the heart of India’s structural challenges that need to be addressed through policy and incentives.
According to a study by Deloitte, India is expected to jump six ranks to No. 5 in the 2020 Predicted Manufacturing Competitiveness. Interestingly, India’s manufacturing labour cost in 2015 stood at $1.72/hour compared to $37.96/hour for US. Even China’s cost is almost double that of India. The Indian government has set an aggressive target of increasing the manufacturing share to 25% of GDP by 2025. What are the strategies that will get us there?
For India, this could also be a start of Industrial Revolution 4.0. The convergence has already started between digital and manufacturing. If we see some industries, it is already visible in Internet of Things, sensors, robotics, predictive analytics, etc. The cost of production can come down heavily with the help of 3D printing and automated real-time processes in manufacturing. The UK, Australia and UAE giveincentives, tax credits and grants for investing in this technology.
The government can replicate best practices from these countries to improve India’s ranking on competitiveness. Incentives for export of electronic goods will also help. The government’s phased manufacturing programme is trying to move electronics manufacturing from semi-knocked down (SKD) to completely knocked down (CKD) kits. This would mean more components getting imported than semi-assembled parts and more jobs.

If we see some industries, it is already visible in Internet of Things, sensors, robotics, predictive analytics, etc.

But moving from SKD to CKD alone is not enough. The scale of manufacturing in India needs to be increased, but that cannot happen by catering to the domestic market alone. Companies need to be able to tap global markets, for which India needs a strong policy that provides incentives for export of electronics goods. This will create the scale that will attract FDI into the country from global electronics component manufacturers and create jobs. This is what happened in auto manufacturing as well.
The ease of doing business could probably be the most important factor in making India a hub for manufacturing. India moved to the 100th spot in the World Bank’s Ease of Doing Business global rankings due to sustained business reforms. But global investors won’t put in the investments just looking at the overall ranking. They will look at each parameter and every state’s ranking on the input parameters anddo their own due diligence. The cost of logistics is also an important concern for foreign investors and for Indian companies.
As per a World Bank report, the cost of transporting 1tonne of freight over 1km works out to Rs 2.28 by road, Rs 1.41by rail and Rs 1.19 for waterways. Using ports in a big way can help India lower logistics costs substantially. The saving could be about $50 bn if logistics costs are brought down from 14% to 9% of India’s GDP, according to an Assocham report. This will make domestic goods more competitive in global markets. The other areas where the government could focus on is enforcing contracts. India ranks still ranks 164 amongst 190 countries on enforcing contracts, according to the World Bank.
If India has to win this battle for global manufacturing supremacy, it has to focus on these areas. Only then it can drive innovation and cost competitiveness and be attractive to global companies. Having large scale manufacturing plants in India where the domestic market could swallow large percentage of manufactured goods could be a double advantage for global corporations. And incentives for exports could be the icing on the cake.



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May 2019
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