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India can become the next factory of the world

June 10, 2011

Emulating China’s spectacular success in emerging as the global manufacturing hub India plans to introduce the National Manufacturing Policy soon – pending final approval from the national cabinet next month. The NMP seeks to increase the share of manufacturing in the GDP to 25 percent by 2025 from the current 16 percent and create 100 million new jobs. It also aims to drastically cut down the bureaucratic interference in industrial activities. By envisaging the creation of mega industrial zones with world class infrastructure facilities the policy moots responsibility to a central participatory body of the industries within each zone which will administer most of the laws in the industrial zone. The move thereby seeks to eliminate manufacturing’s biggest ‘pain point’ laws of the country today which are its environmental, labour and tax laws.

“The Prime Minister observed that the policy measures proposed would reduce the compliance burden on industry. At the same time, these measures have to be formulated while adequately taking care of the environmental and labour welfare concerns,” a statement from the Prime Minister’s office said.

The NMP comes at an opportune time for India, when high inputs costs including rising salaries in China are seeing major industries moving their base to lower cost destinations such as India. If New Delhi is able to seek a consensus, clear the labour and land hurdles that do exist and efficiently implement this policy, India could accrue significant benefits in manufacturing and become the de facto destination for all manufactured goods in the world. This policy would also have a significant spill-over effect on India’s ambition to boost its export strategy. India’s exports surpassed all targets in 2010-11 and grew 37.5 percent to US$245.9 million. It is further expected to grow at an average of 25 percent over the next few years and easily surpass US$300 billion in 2011-12.

The proposed zones will enjoy special policy regime, tax concessions , less stringent labour and environment laws, and relaxed compliance. Currently, manufacturing provides employment to 12 percent of the workforce. The share of manufacturing in GDP is around 32 percent in China, about 35 percent in Thailand , about 30 percent in Malaysia and around 25 percent in South Korea. The low share of manufacturing is despite India enjoying significant edge over other countries. India was ranked second on manufacturing competence, by the 2010 Global Manufacturing Competitiveness Index, prepared by Deloitte and the US Council on Competitiveness.

The big challenge in activating the policy would be to secure land, which has become increasingly difficult. It will also involve an unprecedented skilling of the workers to enable them to produce world class goods. After a sharp rebound from the crisis, manufacturing output has again slowed down. In the quarter ended March 2011, the growth in output of the manufacturing sector slowed to 5.5 percent from 15.2 percent from the year ago period.

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