To lead to an increasingly diversified economy and to give rise to institutionalchanges, manufacturing sector is a principal indicator of economic developmentof a nation. A well-developed manufacturing sector needs to provide the basicneeds of the population of a particular country. In 1951 India’s Prime MinisterJawaharlal Nehru affirmed that India had to industrialise at the earliestpossible to build a well-developed industrial sector.
We shall hence focuson the manufacturing sector.INTRODUCTION OF LIBERALISATION IN INDIAWhile the policy makers strived to improve the state of the manufacturingsector in India, however major policies that were formulated to industrialisethe country was not successful. India failed to become a manufacturingpowerhouse. In 1991, India faced a “Balance Of Payment Crisis”,putting the government to default and the central bank had refused new credit.This lead the Indian government to pledge its gold to the Foreign countries, adeal with the IMF(International Monetary Fund) in exchange for a loan to settlethe payment debts. The then Prime Minister of India realized that the countryis in need of a reform. In July 1991, new economic policies were introduced changing the economicstructure of India. The Indian government ushered in several reforms namelyLiberalization, extending Privatisation and Globalization of the economy knownas LPG(Liberalization, Privatisation, Globalization) or collectively termed asliberalisation.
These reforms initially faced significant opposition.There are two phases in the liberalisation of India:ØPre-LiberalisationEra: (Prior to 1991)Post 1980 the key strategy for improving/ developing the manufacturingsector in India was to develop large and heavy industries through centralplanning. The strategy also included features like import protection policywherein trade with rest of the world was restricted and limited to exports,price controls and on private sector through severe licensing. This frameworkmade foreign investments difficult to come to India, limiting the growth of themanufacturing sector in India. Rigid controls led to widespread incompetence inresource utilization, as reflected in the poor growth rate of the manufacturingsector.
The not-so-good state of the manufacturing sector was furtheraggravated by the agriculture supply shocks Gulf oil crisis in the late 1970s’. Fig.1 Pre-liberalisation era features ØPostliberalisation Era: (Post 1991)After 1991, thepolicies of liberalisation were introduced consisting of features like licensing of industries was abolished, openingavenues for international trade and investment, deregulation i.
e. governmentcontrols were removed to allow free and efficient marketplace, initiation ofprivatization tax reforms, inflation controlling measure and movement ofinternational capital was liberalised.However, thereare some areas which remained untouched by reforms in the 1990s, the labourmarket, small-scale reservations and agricultural reforms.
Some of these reformswere gradually undertaken in the next stage. However, the labour reforms wereremained untouched to a large extent. Fig.2 Post liberalisation reforms There has been apositive effects of these reform measures, like yearly average rate of growthof GDP per worker increased.
Previously only 40% FDI was allowed in selectivelarge and heavy industries. FDI limits for the manufacturing sector post 1991(RBI 2011) is as shown below: To immediately facilitate the inflow of capital fromforeign companies in 1991, 41% of FDI that was previously allowed in certainselective industries was revised and up to 51% .Furthermore in 1997, 100% foreign investment wasallowed in some industries whereas investment ranging from 74% to 50% wasallowed in 111 sectors of the economy. This was followed by reducing theprotection for the small scale sector by allowing foreign investment up to 24% in the small scale sector.
The limit on theshare of foreign direct investment in individual Micro, small and medium enterprises(MSMEs) was increased up to 100% in 2000s. MAJOR INDUSTRIES FROM THE MANUFACTURING SECTOR BEFORE 1991The industrial growth before 1991 can be bifurcated into threemain time periods which are: PHASE PERIOD MAJOR INDUSTRIES PHASE 1 1950- 1965 Textiles industry, sugar, vegetable oils, iron and steel smelting, chemicals, petroleum, non?metallic mineral products, basic metals, manufacturers of metal products and machinery PHASE 2 1965- 1980 Capital goods, Basic goods, high technology industries, ferrous metal, construction material and mechanical engineering industries PHASE 3 1980- 1991 Petroleum products, consumer durables, export-oriented industries, modern technology industries, non-electric machinery, F&B, intermediate goods Ø Phase- 1:The period between 1950 and 1965 witnessed an increase inindustrial production by 2.8 times, whereas the period 1965–80 saw an increaseby only 1.8 times compared to the previous phase. The public and privateinvestment was a major contributing factor of heightened industrial growth in phase-1. Also it was a period when the prices in general were stable. Fig.
3: Pattern of growth of manufacturing sector inIndia (PHASE I) Ø Phase-2:Here the Indian industrial growth was stagnant reasonsbeing the strict governmental controls, political instability and wars of 1965and 1971. Similarly the infrastructural development was neglected which in turndeclined the infrastructural constraints for the manufacturing sector. Fig.
4: Pattern of growth of manufacturing sector inIndia (PHASE II) Ø Phase- 3:Finally, the period from 1980-90 saw a growth of themanufacturing sector in India as 7.4%. Growth in this period was not only dueto loosening of the controls but also because of the increased public, privateand foreign investment in the manufacturing sector in India. A key event wasthe formation of Maruti Suzuki as government’s 50:50 joint venture with Japan’sSuzuki motors. Fig.5: Pattern of growth of manufacturing sector inIndia (PHASE III) Ø Phase- 4:Since early1990’s the industry was further liberalised, the scope of licensing wassignificantly reduced, Custom dutieswere slashed and FDI opened up in various sectors. Ø Phase- 5:Companiesbegan to reap the rewards of the various phases of development learning. ManyIndian business enterprises became quite competitive and looked at taking onglobal players.
INDUSTRIES THATTOOK BIRTH FROM THE LIBERALISATION OF 1991The key objective of theIndustrial Policy Statement of 1991 was to elevate the industrial growth and productivity,provide employment and optimally utilize the human resources to achieveinternational competitiveness and recognition. The policy statement includedthe abolition of industrial controls except in some industries like the atomicenergy, railways and defence. Major manufacturing industries post 1991 canbe identified as: the Automotive industry, Computer hardware industry, Textileindustry, Machine tools and parts industry, Pharmaceuticals industry, Lightengineering industry, Iron and steel, Petroleum and refined product industryamongst the others. Fig.6: Value added by themanufacturing Sector (% of GDP) 1992-2013 In the 1990s’, due to the openingup of the Indian economy, the manufacturing sector underwent complete painfulrestructuring. Some drastic measures included plant closures, sell-offs andrelocation and unmatched lay-offs and retrenchments.
However, it has improvedproduction efficiency to face global competition, especially from China. Thesereforms introduced changed India’s economic strategy completely making it aglobalized one. Technological advancements transformed manufacturing processesand made mass production possible, which led to the industrial revolution. GDP CONTIRBUTION INMANUFACTURING SECTOR POST LIBERALISATIONTheeconomic liberalization in India started in 1991 which was mainly aimed atexpanding the economic policy through introduction of FDI in many sectors,reduction of import duties, income taxes & corporate taxes and custom duties. MajorManufacturing Industries which were considered after 1991 reforms were theautomotive industry, computer hardware industry, textile industry, machinetools ,pharmaceuticals industry, iron and steel industry. In1950-51, the manufacturing sector in India contributed only 8.98% to theGDP.
It had increased to 14.23%, at the start of 1980 which further increasedto 16.18% but it remained constant in that decade until 1990-91. During thefiscal year 2014 -15 the manufacturing sector contributed about 16% to the GDP. Fig.7: Manufacturing sector GDP contribution CHALLENGES ANDOPPORTUNITIES IN MANUFACTURINGINTRODUCTIONManufacturing is one of the most important sectorsin both developing and advanced nations. In developing countries, it provides avital source of income as well as a way to raise the standard of living of thepeople. In advanced nations on the other hand, the manufacturing sectorprovides a basis for innovation and rise in the competitive edge of thecountry.
It also gives rise to increasing focus on research and development,exports and productivity in general. In the recent past, this sector has seen manifold changesand has paved way for various opportunities in the global scenario. It is alsofacing several challenges to keep abreast with the changes that are takingplace in the market. These opportunities and challenges shall be discussedfurther. OPPORTUNITIESWhen Manufacturing companies enter the globalmarket, they are exposed to various opportunities that help them to grow morein terms of sales and profits.
These opportunities are discussed in thefollowing section:1. Global Consumers: Many companies maintain vast manufacturing units inthe global market to derive increased sales and income. The internationalmarket increases the customer base of companies, thereby giving them increasedopportunities of earning. Consumer product companies like Nestle, P andCoca-Cola are reaping the benefits of increased sales through theirmanufacturing and service units outside their home country. 2. Cost Minimization: The manufacturing units have an opportunity tominimise costs by setting up units in lower cost production sites such as HongKong, Taiwan and Ireland.
As a result,it can stay cost effective in both, home market and abroad. Companies likeIntel, Texas Instruments of the electronics industry are the leading benefactorsof reduced costs by having manufacturing units abroad. Companies develop aglobal scanning capability to seek cost effective sites abroad for productionpurposes.3.
Increased Knowledge: Somemanufacturing units are set in the foreign sector to get new information andexperience that might be useful in the future. Due to the rapid growth oftechnology and innovation, it is imperative to track developments in the globalmarket. Manufacturing sectors have the prospect of gaining knowledge forimproving the product quality.
Foremost in this issue are the Japanesecompanies that systematically study foreign information, improve it with theirown research and development and thereby improve the productivity and sales.4. Market Imperfections: Manufacturing units can reduce risks by exploitingthe imperfections in various different markets. The majority of systematic orgeneral risks affecting companies are prevalent due to the cyclical nature ofthe economies. An effect of diversification is created by operating incountries whose economic cycles are not in sync with each other.
This reducesthe variability in earnings of such companies and result in reduction of risks.5. Greater commitment to local market: When companies start producing abroad, they get theadvantage of added sales and greater supply stability.
This stability isimportant for firms manufacturing intermediate goods for selling to othercompanies. The goods thus produced will be available in the local market forimmediate consumption and as per the requirements.Basically, by setting up manufacturing units abroad,firms avail the opportunities that would have been lost if they had confinedthemselves to just export of their products. CHALLENGESAlthough the International Market provides a stringof opportunities, it also poses numerous challenges for the companies wishingto expand globally. The challenges are evaluated in the following section:1.
Need for new approaches and capabilities: As companies go to a different country, they facean increased need to develop a systematic understanding of the specific marketsand consumers. They will also need to be responsive to the changes in theglobal economies and develop strategies and policies accordingly. They willneed to use advanced development strategies such as scenario planning to keepup with the international market.2. Currency Differences: While operating in the international market, themanufacturing firms have to take into consideration, various issues of exchangerate fluctuations, inflation, interest rates and also the impact on theirbusiness activities. This is because the firms have to deal with countrieshaving different currency denominations.
3. Relevant skills and personnel: In order to be successful in the globalmanufacturing sector, the firms must have access to appropriate personnelhaving all the skills necessary to operate in the international sector. Theseskills include the abilities to take important decisions regarding theoperations as well as another significant issue which is raising adequatecapital from the right sources.4. Financial management: Firms thatoperate in different countries face the challenge of handling differencesbrought about by economic and legal structures of the nations. The issue ofdocumentation of financial records has to be addressed properly, by taking intoconsideration the reporting requirements of the country in which it isoperating. This challenge has been considerably reduced by the introduction ofthe International Financial Reporting Standards, however diligence is stillnecessary.
5. Language and cultural differences: Culture in the business sense implies the systemthrough which the employees share their values and beliefs in the organisation.An international manufacturing unit will have to deal with the local cultureand behavioural norms, thereby adjusting its policies as suited to the same.
These cultural barriers also have to be taken into consideration with respectto the consumer base. For example, McDonalds diversifies its menu to suit thecountry and the culture in which it is situated.6. Build R Capabilities: To stay competitive in the global scenario,companies have to build strong and upgraded research and developmentcapabilities. They also need to acquire expertise in data analytics and productdesign to be in line with other firms in the same industry. Additional skillswill be required to manage the global supply chain. 7. Creation or acquisition decision: One of the major decisions a firm has to take is todecide whether to create its own affiliates or acquire already going concerns.
Both options have their own set of advantages and disadvantages. Themanufacturing concern has to analyse all the available options and take adecision which would ensure ease in setting up as well as increase in benefitsto the organisation. CONCLUSIONThisyear marks 27 years since the so-called “economic reforms” were launched inJuly 1991. By now, broad contours of the policies and practices like radicalderegulation, marketization and privatisation of the industrial, technologicaland financial sectors, and an across-the-board induction of foreign directinvestment and foreign institutional investment, and so on are well known. Alreadyshowing tremendous progress in the service sector, now India’s manufacturingsector is also slowly gathering pace.
The long waited GST bill had been passedby the government of India which would enable an easy and a cost cutting flowof goods across different states of the country. This is a wonderfulopportunity for the manufacturing sector to re-establish the logistic sector. Astrong infrastructure is an absolute essential ingredient for any manufacturingsector to grow. Hence, the government of India is investing a lot of funds inbuilding a strong network of roads, rails and transport to elevate the growthof the manufacturing sector. India’smanufacturing sector has evolved through several phases – from the initialindustrialisation and the license raj to liberalisation and the current phaseof global competitiveness. Today, Indian manufacturing companies in severalsectors are targeting global markets and are becoming global competitors.
Prime Minister Narendra Modi’s plan of a new manufacturing policy couldtransform India into aninternational manufacturing hub, giving tough competition to China. However, torealise this goal, reforms in labourlaws, special economic zone policy, foreign direct investment rules, taxationpolicy, and land acquisition policyis very important. The whole sector has gone bad, as today our manufacturingcontributes less than 17% of GDP , whilein China, it is 50%, and in Malaysia, it is 40%. And that Chinese labours are50 to 60% more productive than Indians, but the wages are also higher by almost70% and have high incentive structure.The Chinese and Indian economy were almostsimilar during the 1980s. But China took a bold step by making itsmanufacturing sector the main engine of its economy.
Our Honourable Prime Minister, India offers the 3’Ds’ for business to thrive— democracy, demography and demand. This by addingand changing many things in the country, few of them being a tech-savvy andeducated population, skilled labour, robust legal and IPR regime, and a strongcommitment to calibrated liberalization. Withthe ‘Make in India’ campaign India plans to be the leader of the manufacturingsector in the world. States like Gujarat have laid the foundation for otherstates to follow in its footsteps in order to become a manufacturing hub.Andhra Pradesh has made a steady rise as a leading electronics manufacturer inthe country with many foreign investors making huge investments. With the helpof good facilities and world class infrastructure by the state and thegovernment, most of the backward states are also contributing to the GDP.
Newpolicies would be formed and the face of the logistic sector is going to. The governmenthas successfully initiated many projects which will improve the road and railnetwork of the country. With good connectivity between the major cities,dedicated industrial corridors are also coming up which will be beneficial inimproving the manufacturing sector of the country.
Amendments in old labour andland laws will bring a sea change to the Indian manufacturing sector and also witheasy licensing to lands and flexible labour laws. Finally after a long wait,the GST bill had been cleared by the government which will abolish thecompound/ layered tax system existing in the country and replacing it withsingle tax throughout the country which shall prove as a boon for the Indianlogistics and transportation sector. With so many positive changes takingplace, Indian manufacturing sector is set to welcome its glory days. References:· Agrawal, P., 2009. The Impact OfEconomic Reforms On Indian Manufacturers?.
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