Towards a Global Industrial Stature
Pothen Paul,Ex-Chairman, Aker Power Gas

A number of forecasts and opinion of exper ts suggests that India will see a tremendous investment chemical, petrochemical and oil and gas sector in future. However, as the fact remain, the overall environment for investments in the country remains unpredictable as a number of problems and issues are pending to be addressed. Pothen Paul shares his perspec tive on Indian Industrial Sector and the issues affecting Indian economy.

For a nation that had lost much of its swagger in the past three years because of a steady flow of negative news, Moody's classification of India’s sovereign credit rating, "stable" was undoubtedly a breath of fresh air. Moody's rating and Goldman Sachs's upgrade of Indian equities however cannot hide the fact that there are many interrelated problems, afflicting the Indian economy.Among them:
  • Unsustainably high budget and foreign trade deficits of 5.5 per cent and 4.2 per cent of GDP.
  • Persistently high inflation in excess of 7 percent.
  • High interest rates.
  • A tumbling Rupee which has lost 20 percent and 30 percent of its value against USD and the Chinese Yuan.
  • Dismal growth of the industry sector in general and within it, a near nil growth of manufacturing sub sector.
  • Low GDP growth of 5.5 percent.
  • Consequently, a low rate of employment generation.
These problems are compounded further by political and bureaucratic inertia, corruption and crony capitalism, making India one of a few nations that lost out on competitiveness; in India's case its ranking slipped by three slots to 59th place well behind China's 29th. Obviously investment sentiments have taken a beating, and even cash rich private sector companies and PSU's are adopting a wait and watch attitude. Reliance is a rare exception, spending USD 12 billion for expanding its petrochemical complex. Foreign direct investments (FDIs) too have tanked from a high of USD 42.5 billion in 2008 to USD 31.5 billion in 2011 and the trend this year seems much worse .

Because, India blessed with a relatively young population, has to create 12 to 15 million productive jobs a year, the present situation is truly untenable. Currently, the agriculture sector which produces just 17 per cent of India's GDP is forced to carry the burden of engaging 50 per cent of its employable population, making it grossly inefficient. For all practical purposes the services sector remains the sole employment generator. In short , the industry sector and more specifically the manufacturing sub-sector are not carrying their weight. The latter in fact accounts for a mere 14 percent of the national economy as against 33 per cent of China, 28 percent of South Korea, 20 percent each of Japan and Germany and 25 per cent of even Indonesia.

Put another way, India which has 1/6th of world's population, accounts for just 2 per cent of global manufacturing output whereas USA produces 20 percent, China 18 per cent and Japan 11 percent or so. Not a happy situation for nation aspiring for a global leadership role. It hurts even more when one recalls that in the early seventies, both India and China were at the same level; in fact China just emerging from relative isolation had nothing more than inefficient and highly polluting early Soviet era factories.

Now let us look at India's foreign trade. Not being a strong manufacturing economy; India has had a patchy export trade record. Fortunately trade deficits were more or less getting evened out by remittances from Indians working abroad, FDIs and portfolio investment inflows. But of late the situation has become quite alarming because the growth of imports is significantly outpacing the sedate growth of exports. For instance, while exports fetched USD 290 billion last fiscal, imports were miles ahead at USD 470 billion, leaving a big gap of USD 180 billion to fill. Unfortunately, the flow of FDIs after hitting a peak of USD 42.5 billion has dropped as much as 65 percent, thus reducing its potential for bridging the trade gap. The net outcome is an uncomfortably high current account deficit, the Re on a downward spiral and a looming threat of credit rating downgrade. Unfortunately, scope for pruning the import bill is limited because crude oil (80 percent of our needs are met through imports) and gold (nearly a 1000 tonnes) alone account for as much as 40 per cent of India's annual import bill and coal, fertilisers and edible oil, another 10 percent. So at a national level we need to introspect as to why India is able to capture only 1.6 per cent of export trade for manufactured products, as against 15 percent of China (worth USD 1772 billion). In fact, when India's exports were floundering in recent months, China’s went up, largely because of the strengths of its manufacturing sector and a strategic shift towards innovation-driven high end technologies where competition is limited. China has already become a world leader in mobile telephone switching systems and solar panels and is well on its way to making its presence felt in high speed trains, ship building and aircraft manufacture.

What China did to leapfrog from a very modest and outdated industrial base of the seventies was to acknowledge its weaknesses and decide that the simplest way to upgrade its manufacturing base, speed up the generation of employment and raise the living standards was to create an enabling environment and wholeheartedly welcome foreign direct investments, preferably through joint ventures. This philosophy enabled China to attract FDIs year after year at a rate unheard of in modern times. Since acquisition of product and manufacturing technologies was accorded high priority, all major purchases from abroad were invariably linked to know how transfers.

For instance, as China's airlines placed major orders for aircraft, tied to each of them were knowhow transfers for domestic manufacture of different parts. Not surprisingly, having consciously built the skillsets and ecosystem, they now assemble Airbus 320 aircrafts in totality and will most probably launch a home grown airliner in less than three years. Regretfully India has little to show as evidence of any such strategic thinking. It is also an unfortunate fact that when countries, both developed and developing, are actively courting foreign firms for investments, we continue to be suspicious of them and their intentions. The recent debate on FDI in retail tells it all.

Post the industrial revolution, no country has become wealthy and attained global leadership stature without a strong manufacturing base. It is also true that manufacturing muscle power is not sustainable without a strong culture of innovation. Unfortunately India with an annual R & D spend of USD 40 billion or just 2.9 per cent of the global outlay of USD 1350 billion fares very poorly in this area. Even within this meagre sum, private sector's contribution is less than 25 percent. On the other hand USA and Europe together account for 55 percent of the global outlay and China is creditably placed with a 14 per cent share, which explains the latter's successes of late in the cutting edge technology space.

In India too we are starting to see few innovation driven success stories and Bajaj Auto is one such. But it may take at least five to ten more years for the Indian manufacturing sector to showcase a strong, innovative and export worthy product pipeline. Till then, it will do India much good to go out of its way to persuade overseas enterprises attracted by its large domestic market, to set up factories and make India one of their export hubs . It is wise to remember that but for the likes of Hyundai, Renault-Nissan and Ford making their Indian operations, export hubs, India's trade deficit would have been much worse. It is even wiser to accept that being business enterprises, their first priority will be to do what is good for them. But as long as India toogains, it is a win-win formula.