bgs project report group2

8/8/2019 BGS Project Report Group2

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Business Government and Society

Project Report

Indian Institute of Management Bangalore

Submitted by:

Group 2, Section E (PGP 2009-11)

Ajay Bhatia(0911289), Shikha Rawat(0911344), Sunidhi Gupta(0911347),

Tarun Kumar(0911349), Umang Rustagi(0911351), Vandit Bhurat(0911352)

Enhancing Indias

Manufacturing Competitiveness


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BGS Group Project Enhancing Indias Manufacturing Competitiveness

1

Acknowledgement

We take this opportunity to thankProf. Supriya Roy Chowdhuri, for guiding us and providing

an opportunity to work on this project, learn about various aspects of Business Government and

Society and apply the theoretical concepts learnt in theclassroom to practical Issues relevant in

todays situation.

We would also like to express our gratitude towards We would also like to express our gratitude

towards Mr. Mrutuyanjoy Sahu for his timely inputs and suggestions along with the time he

gave for reviewing the draft.

The discussions with ourcolleagues at IIMB were an indispensable source of information and

have spawned a lot of insight for this project. But what is even more important, our joint work

was always a pleasure, and we had a lot of fun together.


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Table of Contents

Acknowledgement ....................................................................................... ............................................ 1

INTRODUCTION ....................................................................................................................................... 4

MANUFACTURING INDUSTRY IN INDIA................................................................................................. 4

Current Scenario ..................................................................................... ............................................. 5

Performance & Problems ..................................................................................................................... 6

Future of Indian manufacturing ........................................................................................................... 6

Part- I GREEN TECHNOLOGY.................................................................................................................... 7

GREEN TECHNOLOGY- Sustainable Development ..................................................................................... 8

Current Scenario: .................................................................................... ............................................. 9Challenges: .......................................................................................................................................... 9

Relevance: ........................................................................................................................................... 9

Recommendations: ..................................................................................... ....................................... 10

Part- II Improving Factors of Production ............................................................................................... 11

DEVELOPMENT OF HUMAN CAPITAL ..................................................................................................... 12

Forecasting employment needs: ........................................................................ ................................ 12

National Skill Development Mission: .................................................................................................. 12

Development of Labor Intensive industries: ....................................................................................... 13

Creating Skill base: ............................................................................................................................. 13

INFRASTRUCTURE.................................................................................................................................. 14

Relevance .......................................................................................................................................... 14

Present situations ................................................................................... ........................................... 14

G-Generation T-Transmission D-Distribution Conclusion & Recommendations ............................ 16

CREDIT AVAILABILITY ............................................................................................................................. 16

Current Scenario ..................................................................................... ........................................... 17

Recommendations ...................................................................................... ....................................... 17

TECHNOLOGY ........................................................................................................................................ 19

Current scenario ................................................................................................................................ 19

Challenges ......................................................................................................................................... 20


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Part- III Role of Government ................................................................................................................. 22

REFORMING INDIAS ARCHAIC LABOUR LAWS ....................................................................................... 23

Need for Labour Law Reforms ............................................................................................................ 24


Part-IV Sector Specific Problems ........................................................................................................... 27

ISSUEOF SMEs ....................................................................................................................................... 27

Relevance .......................................................................................................................................... 28

Current Scenario ..................................................................................... ........................................... 28

Conclusions & Recommendations ...................................................................................................... 29

CONCLUSION ......................................................................................................................................... 32


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INTRODUCTION

Manufacturing can be defined as physical orchemical transformation of materials into products

on a large scale using machinery or capital equipment. The products may be finished

consumption good, semi-finished goods orcapital goods. 1Manufacturing industry is divided into

some well recognized categories such as chemical, food and beverages, electronics, engineering,energy, industrial design, metal-working, textiles and transportation among others.

MANUFACTURINGINDUSTRY ININDIA

India has a rich history in the field of manufacturing. Manufacturing activities in India were

present even at the time of the Harappan civilization, 5000-6000 years back. Weights and

measures and copper smelting tools were some of the products found from that time.2

Historically, India was a leader in textileexports. There was a break from this diverse history at

the time of the Industrial revolution. India was not a

participant. It lagged behind.

At the time of independence, India was primarily an agrarian

economy. The second plan and the implementation of the

Nehru-Mahalanobis strategy brought with it an emphasis on

capital intensive industrialization headed by the public

sector. A drive towards setting up of heavy industries was

accompanied by ex port pessimism and an inward-looking

strategy. These factors did not lead to a big push in the

direction of economic growth but it helped India build a

strong base for its industry.

The economic reforms made a significant change. The

manufacturing industry growth picked up. Liberalization and

increased competitiveness led to consciousness ofquality and efficiency. The mindset changed

from one predominantly bureaucratic to one focused on cost effectiveness and customer

satisfaction. Certain sectors such as the automobile sector saw drasticchanges. Moreover, the IT

boom of the 90s was also a major milestone. India became prominent on the global map.

However, growth was restricted to a few select sectors and most manufacturing activities were at

the bottom of the heap.

Growth in the manufacturing sector in India has gone through a series of ups and downs since

independence as shown in the table below.


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Time PeriodAverage Annual

Growth Rates

Decadal Trend

Growth Rates

Trend Growth

Rate

1952-54 5.3 7.2

5.7

1955-59 7.4

1960-64 9.35.7

1965-69 3.9

1970-74 2.84.4

1975-79 5.3

1980-84 4.87.6

1985-89 8.9

1990-94 5.17.1

1995-99 7.9

2000-01 5.3

2001-02 2.9

Profile of growth rates of Indian manufacturing sector

Current Scenario

Growth picked up in the middle of this decade, took a hit due to theeconomiccrisis in India and

the world and is now in recovery mode. A survey by CII ASCON revealed that sectors such as

fertilizers, pig iron, steel and moped recovered showing a moderate growth of up to 10% in

production with others like vanaspati moving from moderate to high growth ranging from 10%

to 20% in the fourth quarter of FY08. Sectors such as industrial gases, power transformers and

electric two-wheelers have shown excellent production growth of over 20%. Sectors likecement,

sponge iron, auto components, and auto industry including cars, two-wheelers and consumer

durables continue to see moderate growth of up to 10%.i

Some of the top manufacturing companies of India include Larsen and Toubro, Hindustan Lever

Network, Bombay Dyeing, Aditya Birla Group, Haldia Petrochemicals, Ranbaxy, Apollo Tyres,

Asian Paints and Jindal Steel among others.ii


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Performance & Problems

The performance of the Indian manufacturing industry has picked up in recent times. However,

much needs to be done. Manufacturing contributes approximately 16% to thecountrys GDP,

less than half that of China.iii Studies indicate that productivity of the Indian manufacturing

sector is one-fifth of that in USA and half of those in South Korea and Taiwan.iv There is a lack

of multinational presence of Indias manufacturing activities to date. The share of manufacturing

in ex ports further fell from81 percent in 1999-2000 to 63 percent in 2008-09 according to a

survey by ASSOCHAM.v

Several problems constrain growth. The foremost are infrastructural bottlenecks such as lack ofhigh quality ports and roads, inadequate skilled manpower, credit availability, restrictive labor

laws, nascent research and development environment, lack ofcoherent quality standards among

others. These issues need to be resolved and long term strategies adopted to ensure sustainable

growth in manufacturing, creation of wealth and opening up of moreemployment opportunities.

Future ofIndian manufacturing

The rapid growth of the Indian economy is likely to make India the fifth largest consumer market

in the world by 2025 from twelfth in 2005, according to a study by McKinsey Global Institute.

Aggregate Indian consumer spending is likewise estimated to more than quadruple to

approximately US$ 1.5 trillion by 2025, on the back of a ten-fold increase in middle class

population and a three-fold jump in household income.vi

To make sure India makes a mark in the global markets and emerges as the next manufacturing

giant certain ideas and policy measures should beconsidered. They have been described in the

next few sections.


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Part-I

G

REEN

T

ECHN

OLOG

Y

Way to go forward


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GREENTECHNOLOGY- Sustainable Development

Environmental technology or green technology is the application of theenvironmental science to

conserve the natural environment and resources, and to curb the negative impacts of human

involvement. Sustainable development is the core of environmental technologies. Economicsustainability means that the solutions need to be socially equitable and economically viable

apart from being environmentally sound.

Sustainable Development

The three main facets of green technologies can be distinguished as [1]:

1. Targets, which are the basic focus areas. These are products, processes, marketing

methods, organizations, and institutions. Green technology in products and processes

tends to rely on technological development, while in marketing, organizations and

institutions it relies more on non-technologicalchanges.

2. Mechanisms, which are how changes in the target areas are made. They can involve

modification of practices, re-design of practices, alternatives to existing practices, or thecreation of new practices.

3. Impacts,which are how this affects environmental conditions


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GreenTechnology

companies

ITC

Motorola

Frito Lay

Tata

Motors

Hero

Honda

GE

Current Scenario:

At present, green technology has penetrated to a great extent into

the developing nations and the market is growing at a nearlyexponential rate. But the conce pt needs to be picked up in the

developing nations [2].

According to the survey re ports by PWC [3], 60 percent of the

manufacturers are developing green products and services.

Current practices by companies include:

y Closed loop processes Recycling

y Green buildings using more sunlight and smart lightening systems

y Environmental remediation Removing pollutants from theeffluents and products

y Renewable sources ofenergy

Challenges:

y Information: There is not much information available about the implementations and benefits

of green technology

y Expensive: Most of the green technologies require large investments which act as a barrier to

entry

Relevance:

Green technology helps in conserving theenvironment. Also, it has the following benefits:

y Reduction in cost of the production process

y Create a positive image among customers which increases sales

y Product differentiation through use of recyclable material or closed loop production

processes

y First mover advantage


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Recommendations:

1. Creation of a framework that brings together domestic firms, venture capitalists, and

technology holders in a forum to reduce information asymmetries and transaction costs

This framework would help in easy exchange of information among the major stake holders

and reduce theentry costs to the use of green technologies.

2. Legislation to use renewable sources ofenergy: If the government enforces the use of green

technologies (forexample 15 kv of solar power per hectare of thecompany), it increases the

use as well sale of theenergy efficient equipment. This is being followed in Germany [5].

3. Benchmarking and setting standards- The work done by companies in the field of

environment sustainability does not get recognized to a great extent because it cannot be

quantified. If benchmarking ofefficiency and emissions is done, it gives more visibility tocompanies as well as helps to set standards for othercompanies in the industry.

4. Capital support to companies for using green technologies: Generally, in the beginning, the

cost of investment is very high which deters thecompanies from reforming their production

processes. Thus, capital support through encouraging venturecapitalists or giving incentives

can encourage more organizations to rework their production processes and improve

efficiency.


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Part- IIImproving Factors ofProduction

Human Capital Development

Infrastructure

Credit Availability

Technology


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DEVELOPMENTOF HUMAN CAPITAL

Skilled and cost-effective manpower is an essential

component of success in the manufacturing industry.

Shortage of the samecan prevent India from gaining a

competitiveedge in global markets. Measures to build astrong pool of workers equipped to meet the diverse

needs of the upcoming sectors and new technologies in

manufacturing must be taken. Development of human

capital is a dynamic process and can have a gestation

period of up to a generation.

Forecasting employment needs:

The first step must be to forecast the road that manufacturing will take. Which sectors would it

expand into and which technologies would be important in the future. Thequestion to ask wouldbe how India can leverage its strengths and resources to achieve a competitive edge in these

areas. Moreover, what weaknesses need to be dealt with and what kind of skills will be required.

An estimate of the number of jobs to becreated and the skill requirement foreach job profilecan

help direct thecourse of a human development strategy.

Some indicators of the future of manufacturing needs are available. The manufacturing sector is

estimated to have a US$ 180-billion investment opportunity over the next five years, according

to the Investment Commission of India.1 Meanwhile, the Indian manufacturing sector is

estimated to command a market capitalization of $520 billion by 2014-15, as against $272 billion

as of Sept. 30, 2007, said a study on the sector by the Confederation of Indian Industry and theBoston Consulting Group.3 Outsourcing of manufacturing jobs to India would result in the

creation of 30 million jobs by 2015.4 Sectors that will experience tremendous growth include

machine tools, automobilecomponents, pharmaceuticals and the textile sector, which alone is

expected to create between nine and 10 million new jobs over the next four years.5

National Skill Development Mission:

The Planning Commission set up a National

Skill Development Mission (NSDM) in

2007 headed by the Prime Minister Dr.Manmohan Singh. The NSDM proposes to

consist of four sub-missions industrial

training, polytechnics, vocationalisation of

secondary education, and another for the

unorganized sectoreach catering to different streams of workforceentrants to train more than


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10 million peopleevery year.3 The government has projected that 70 million jobs will becreated

during the 11th Plan (2007-12) and proposes to spend Rs31, 000 crore during that period.6

To effectively channelize resources, the future of the manufacturing industry must be looked

into. The right kind of training must be imparted to match employment needs of the industry and

the availability of skilled workforce. This would require extensive market research, study oftrends in the manufacturing sector and consultation with industry experts.

Development of LaborIntensive industries:

Manufacturing industry in India currently employs only 11% of the workforce.7 The world over,

manufacturing forms a major employer in most economies. In India however, it has lagged

behind. In fact the share of manufacturing in India has been more or less stagnant or has even

decreased in the last few decades.

India being a labor rich economy must look to the manufacturing sector for its employmentneeds especially in light of the jobless growth in the growth driver services sector. Moreover,

as the displaced workers from agriculture and related activities move to urban areas, the need for

creating employment would only increase.

Creating Skill base:

Industrial training programs, introduction of vocational training and other courses at

Polytechnics and development of a large number ofeducational and training institutions should

be prioritized. Moreover, to further develop a competitive edge in manufacture of cheap

consumer goods such as alarm clocks, decorative items, etc currently the niche of Chinese

manufacturing would require the availability of a large amount of cheap labor with basicschool education and some level of skills. A push towards expanding literacy at all levels along

with basic vocational training would be of immense help. Public-private initiatives in this

direction would help speed up the process.


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INFRASTRUCTURE

Infrastructure is most prominent area ofconcern to promote rapid economic development. Proper

infrastructure will be needed to provide the platform for faster, consistent growth and for India to

become a major world economic power. Development of world class infrastructure is must to

enhance the competitiveness of the manufacturing sector in India. Most important sectors ofinfrastructure which need to be concentrated to improve manufacturing competitiveness are

ports, roadways, railways and power.

Relevance

India is planning to achieve a growth rate of 8-9 % over next few years. Such a high growth rate

is only possible ifenough investment in infrastructure is undertaken. Growth in last few years

has already made visible the lack of infrastructure in India. The effects of undevelopedinfrastructure areevident in India's congested highways, airports and ports. In times of recession

improvement in infrastructural framework gains all the more importance. Proper infrastructural

facilities are also important in todays world of increasing globalization as the foreign investment

in directly linked to such facilities existing in a country. Importance of development of

infrastructure is evident from emphasis that Mr. P. Chidambaram gave when he said "To sustain

9 percent GDP growth, investment in infrastructure should be increased from 4.6 percent to

around 8 percent of GDP over theEleventh Plan period (2007/12)"

Present situations

The government has realized importance of infrastructure in development of economy and

several steps have been undertaken in the direction. A brief overview of present conditions and

governmental initiatives in various infrastructural sectors important for the manufacturing units

in India has been given below:

Ports: India has 12 major ports and 187 minor ports along 7,517 km

long Indian coastline Indian ports handle cargo of more than 519

million tonnes Cargo handled by Major Ports has increased by 9.5%

p.a. over last 3 years. Government of India dominated maritime activity

in the past. The National Maritime Development Programme is

expected to bring a total investment of over Rs.50, 000 crore in the port

infrastructure.


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Highways: For a country of India's size, an efficient road network is necessary both for national

integration as well as for socio-economic development. The National

Highways (NH), with a total length of 66,590 km, serves as the arterial

network across the country. India has an extensive road network of 3.3

million Kms - the second largest in the world. Roads carry about 61% of the

freight and 85% of the passenger traffic. According to the Planning

Commission, investment in the roads sector during the Eleventh Plan is

projected at US$ 93.11 billion.

Railways: The Indian Railways took up the most ambitious ever annual plan

for fiscal 2008-09, entailing an enormous investment of US$ 7.91 billion,

registering a 21 per cent increase over the previous year. The rapid rise in

international trade and domesticcargo has placed a great strain on some rail

routes. Government has, therefore, decided to build dedicated freight

corridors in high-d

ensity rout

es.

Power: Majority of Generation, Transmission and Distribution capacities are with either public

sector companies or with State Electricity Boards (SEBs). Private sector participation is

increasing especially in Generation and Distribution.

Major players and presence in value chain Capacity G T D

Public Sector

NTPC

National Hydro Electric Power Corporation 3,615

Nuclear Power Corporation 2,770

Domestic Private Sector

Tata Power 2,203

RPG Group CESC 1,005

RelianceEnergy 885

International Private Sector

China Light and Power (CLP) 655

Marubeni Corporation 330


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G-Generation T-Transmission D-Distribution

Conclusion & Recommendations

Although a lot of ste ps have been undertaken by the government still their proper and timely

implementation needs to beensured. At the moment, differentiation amongst different elements

of infrastructure and prioritizing of those projects that have the most far reaching fall out for the

economy need to be done. A properconnectivity of ports to various industrial regions needs to

be developed. This is possible by development of proper rail and road infrastructure. The rate of

road development in recent years has to be maintained. Implementation of railway projects

especially in areas involving large amount of goods movement should be taken up. Powercosts

need to be reduced from thecurrent high of 8-10 cents/unit by a combination of lower AT & C

losses, increased generation efficiencies and added low cost generating capacity. The SEB units

are highly inefficient and hence they need to be streamlined in their operations trough a national

monitoring agency. All these areas would require further liberalization under a strong,dependable, but enlightened regulatory regime. Private capital is the key here together with

world-class standards of governance. Public private partnerships should be encouraged as a

policy for infrastructure development. Moreover government should consider developing

industrial hubs by providing all the necessary infrastructural support based on availability of

resources. Development of SEZs is a step in right direction and such hubs need to beencouraged.

However, if building a world-class infrastructure in India is truly to be a priority of the first

order, there are two obvious conditions that must be met. One is overriding clarity of purpose.

The other is courageous political leadership dedicated to accomplishing the mission. These two

preconditions with efficient implementation is the key to development of world class

infrastructure that would support the manufacturing sector in India.

CREDITAVAILABILITY

The unavailability ofcredit facilities forces the small and medium scale industries to finance

investment with internal finance, which is very difficult in case of SMEs. And hence they are

forced to delay the investment till they have built up the required capital. As a result of poorcredit availability, thousands of small and medium scaleenterprises have shut down. Thecredit

to SMEs declined from 26 percent to 17 percent from March 1997 to March 2007.


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For sustained economic growth and development of manufacturing competencies government

policies are required which allow more participation and attract more and more foreign direct

investments in India.

Current Scenario

Today, India provides highest returns on FDI than any othercountry

in the world. India is ready for further growth in manufacturing,

infrastructure, automobiles, auto components, food processing

sectors, real estate development etc.

High interest rate is one of the main reasons which has restricted the

growth of manufacturing sectors and has not only led to increase in

the cost of production for manufacturers but also a decline in thedemands for their products. The higher interest rates have made the

manufacturing firms to reduce their profit margins. A large number of manufacturing sectors,

including both capital and labour intensive, have been adversely affected because of the increase

in interest rates.

Recommendations

1. Reduction in InterestRates A large number of manufacturing sectors have been badly hit by the increase in interest rates. As a result it affected not only the demand for

manufacturing items but also the ex pansion plans of many manufacturers. Sectors like

automobiles have been badly hit, as two-wheeler sales has witnessed continuous declining

trend in the last few months.

2. Maintain custom duty Custom duty on manufactured items should not be reduced so as

to limit the imports of manufactured items especially from China which constituted approx.

10 % of our industrial goods GDP.


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Sector-wise FDIInflows ( From April 2000 to January 2009)

SECTOR

AMOUNTOFFDIINFLOWSPERCENT OF

TOTAL FDI

INFLOWS (In

terms of Rs)In Rs Million In US$ Million

Services Sector 787420.81 18118.40 22.39

Computer Software & hardware 391109.74 8876.43 11.12

Telecommunications 275441.38 6215.55 7.83

Construction Activities 213595.12 5029.01 6.07

Automobile 146799.41 3310.23 4.17

Housing & Real estate 217936.02 5118.85 6.20

Power 137089.37 3129.66 3.90

Chemicals (Other than Fertilizers) 87008.07 1964.06 2.47

Metallurgical industries 109563.20 2612.85 3.11

Electrical Equipments 57379.63 1324.92 1.63

Cement & Gypsum Products 70781.19 1621.03 2.01

Petroleum & Natural Gas 94417.17 2244.17 2.68

SOURCE: DIPP, Federal Ministry of Commerce and Industry,Government ofIndia

3. Focus on selected manufacturing technologies & products Promote technology -based

FDI partnerships between foreign and local enterprises especially in medium scale SMEs.


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TECHNOLOGY

Sustained increase in thecompetitiveness is a representative of the

economic strength and stability of theeconomy. Technology has a

great impact on the economic growth and development of the

country, which is a result of interaction between national andinternational bodies including governments, businesses, and

academia. There is a need for generation, application, transfer and

diffusion of technology to the developing countries for improving

competitiveness of their manufacturing sectors. Technology also

results in value addition in manufacturing.

In 1990, India and China had almost the same GDP percapita. Since then China has experienced

higher growth rates due to its growing manufacturing sector and as a result, today Chinas GDP

percapita is more than 95% of Indias GDP percapita. Hence manufacturing sector plays an

important role in economic growth and India needs to strengthen it in order to achieve highergrowth rates.

Indias manufacturing sectors growth depends on the

investment policies and the economic reforms.

However for the long term competitiveness of Indian

manufacturing sector, improvement in production

efficiency is required which in turn depends on the

ability to develop, import and adapt new technologies

apart from other factors. India through its continuous

efforts has made significant developments intechnology over the years and now has strong trained

manpower and an innovative knowledge base.

Current scenario

A measure ofcompetitiveness is the ability of manufacturers to respond quickly and effectively

to thechanging demands of the market.


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Technological capabilities of Indian manufacturing sector

can beclassified as:

1. Basic Level - ability to operate and maintain a new

production plant based on imported technology

2. Intermediate Level - ability to duplicate and adapt the

design for an imported plant and techniqueelsewhere in

thecountry

3. Advanced Level - capability to undertake new designs

and to develop new production systems and

components.

Challenges

The main reason for Indian manufacturing sector not being

competitiveenough are:

a)Significant presence of small-scale unregistered manufacturing units even in capital-

intensive segments.

b)Poor logistics & transport infrastructure across all sectors

c)High cost ofPower 50% moreexpensive than in China

d)High cost of capital - 10-12 % against international average of 6-8 %

Recommendations

1) Research AgenciesIndia has a network of scientific and academic institutions engaged in wide spectrum of research

with 250 research laboratories and institutions; 1500 private industries with R&D centres and

264 universities.

Sector Technology

Capability

Food Processing Basic

Metal Forming Basic

Steel Intermediate

Machine Tools Basic

Pharmaceuticals Intermediate

Chemical Basic

Electronics Basic

Automotive Intermediate

IT Advanced

Telecommunications Advanced

Petrochemicals Intermediate


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Favourable investment environment in terms of better infrastructure support, institutional

finance, fiscal policies concentrating on growth of manufacturing sector. Manufacturing firms

should concentrate on internal changes aimed at improving efficiency and reducing costs

through:

y Upgrading manufacturing technology levelsy Enhanced emphasis on attracting and retaining talent

y Enhancing quality focus and customer orientation

2) Developing R&DThere is a need to develop our domestic R&D expertise and for that

government support is required. The Government of India allocates

a budget for scientific and technological (S&T) activity under an

R&D fund. The 2008-09 budget supports a 20.5% increase in

funding for the Ministry of Science and Technology, Rs 3630.00crores

Private sector has failed to make significant contribution to Indias R&D activities which are

primarily driven by government. There is a poor industry-academia interaction which resulted in

low orientation of India research and lack of technology inputs to industry.

Although the spending on R&D has improved (2-3% of GNP), there is still a long way to go to

catch up with the developed nations.

3) Manufacturing InfrastructureFor ensuring consistent growth and sustained competencies, heavy

investments are required in Indian manufacturing sector. This can be

achieved through encouraging Public Private Partnership in establishing

technology parks and developing R&D centres where manufacturing

clusters are active.

4) Develop & restructure technology infrastructure to support firms striving to improve

their technological capabilities and competitiveness:

y Provide technology infrastructure to support industries that are striving to improve their

technological capabilities and competitiveness.

y Create Centres of Excellence by consolidating institutions that are working in similar

areas. Promote joint public-private sector R&D activities for better monitoring.

y Emphasis on international cooperation between R&D institutes and build linkages for

technology development and transfer.


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Part- III Role ofGovernment

Reforming Indias Labor Laws


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Role ofTrade Unions- Though the role of trade unions is to protect labour rights and be the face

of the worker to the management, often it has misused its position to black mail owners and

hinder the smooth functioning of business. The most potent weapon it uses it is strikes and

lockouts. Though this trend has decreased over the years, still, the annual loss of worker days is

second highest in the world.

Social Security Concerns- The present situation of social security is dismal in India. Currently,

social security covers on 6% of work force (belonging to organized sector) and it ignores the

remaining 94% in the unorganized sector. Hence, a small percentage in organized sector is in

a privileged position having access to various privileges. Moreover, the workers in unorganized

sector are not given any such benefits e.g. in apparel Ex ports Park in Gundlapochampally,

women workers areexempt from labour laws. They work for three shifts at less than minimum

wages. Such exploitation should not beencouraged.

Need for Labour Law Reforms

1. Missing Middle-The skewed labour laws towards workers in organized sector have

created a peculiar situation in thecountry. Either the workers are organized in small scale

unorganized sector or large scale sector.

.

2. High Labour Cost- As compared to other countries, anti- market labour laws havesignificantly increased the cost of production, making indigenous businesses

uncompetitive in global context.


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Figure: Manpower Average Cost forTextiles andGarment Industry, 2007

3. Difficulty in Entry/ Exiting a business- The rigid labour laws make entry/exiting a

business difficult. To fireemployees, you need approval of labourcommission. Also, in

order to change job profile there are many regulatory hurdles to pass.

Figure: ManpowerIndex of Competing Countries in 2008

Clearly, all these discourage FDI investments in India.

Recommendations

Extension of Working Hours: The government needs to amend the Factory Act, 1948 by

extending the working hours limit from 48 to 60 hours per week and the daily working hours

limit from 8 to 10 hours, subject to adequatecompensation. This will allow industries to fulfill

peak season demand and increase production in the short run.

Allow Adjustments in Workforce: The government should relax the provisions of Chapter V of

Industrial Disputes Act by allowing up to 100 people outside its purview from present number of

100. The government can also employer to adjust workforce in case of restructuring (in line with


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ILO convention on Termination ofEmployment). Also, the government can modify Industrial

Employment Act to ease job transfers and fixed term employment.

Permit Contract Labour: The government should consider amending the Contract Labour Act,

exampleexcluding certain industries e.g. textiles industry, provided they giveemployment for a

fixed tenure of 150 days as well as other benefits like health, safety etc.

Formation of Uniform Labour Code- The government should unify all definitions that are

present in court literature to form a uniform labour code. This will eliminate the possibility of

confusion and incorrect interpretation.

Formation ofa Social SecurityNet to cover Unorganized Sector- The government should

work towards the formation of a social benefit schemes for both organized and unorganized

sector. This will eliminate the possibility ofexploitation in the unorganized sector. Moreover, the

benefits available in the organized sector should be managed properly to benefit largeremployeebase.


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Part-IV Sector Specific Problems

Improving SMEs Productivity

Making Public Sector more competitive

ISSUE OF SMEs

In any developing economy, development of industries / industrial sectors is driven by the

availability of natural resources and the socio-economic priorities of the nation. For a country


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like India, small and medium enterprises form a very important part of manufacturing sector. The

spread of SMEs in India is over a number of industrial sectors such as Chemical, Pharmaceutical,

Engineering, Food Processing, Foundry, Textiles and Electrical. From the start of era of

economic planning in 1951, and subsequent policy changes small-scale industries and medium

scale industries have been earmarked special role in Indian economy. Due protection was

accorded to both sectors, and particularly for small-scale industries from 1951 to 1991, till the

nation adopted a policy of liberalization and globalization.

Relevance

There has been gradual change in face of the sectoral differentiation done by the government.

The emphasis on small-scale industries (SSIs) for a long time was replaced by the small and

medium enterprises (SMEs) and right now, micro, small and medium enterprises (MSMEs) have

emerged prominently in the policy documents and pronouncements. Indias huge potential lies in

the SMEs to expand employment opportunities further develop the industry and boost the

exports. But, there is no broad-based market information network to coordinate and develop the

SME sector. There is an urgent need to develop more industrial clusters to facilitate better

information network among the SMEs. Unavailability of information on the reliability of

potential buyers and sellers tends to increase transaction costs. There is significant scope for

improving productivity levels in different manufacturing industries through cluster approach.

Current Scenario

SMEs in India have always represented the model of socio-economic policies of the government.

Judicious use of foreign exchange for import ofcapital goods and inputs; labour intensive mode

of production; employment generation; no concentration of diffusion ofeconomic power in the

hands of few (as in thecase of big houses); discouraging monopolistic practices of production

and marketing; and finally effectivecontribution to foreign exchangeearning of the nation with

low import-intensive operations has been long emphasized. Policy of de-concentration of

industrial activities in few geographical centers has been coupled with development of SMEs.

At present, about 114 commodities are reserved forexclusive manufacturing by the SSI sector.

Production of some of these items requires modernization and technology upgradation to achieve

economies of scale and de-reservation alone would help enhance competitiveness of theseproducts. With theend of theera of protection and import substitution by government of India

after forty years (1951 to 1991), when encouraged SMEs to develop indigenous technologies,

ended these units found themselves amidst high competition. It is important to study the growth

of the small and medium scale sector since the dawn of liberalization and globalization.


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Following table collates come of the important variables related to this sector for 17 years

starting 1990-091.

Year

Total

SMEs

Units

(Millions)

%

change

Employment

(million)%Change

Production

(Rs. At 93-

94 price)

%change

199091 Units 15.83 -- 0.68 --

199192 (Million) 16.6 4.86 0.79 16.18

199293 7.35 4.07 17.48 5.3 0.94 18.99

199394 7.65 4.07 18.26 4.46 0.99 5.32

199495 7.96 4.07 19.14 4.82 1.09 10.1

199596 8.28 4.07 19.79 3.4 1.22 11.93

199697 8.62 4.07 20.59 4.04 1.35 10.66

199798 8.97 4.07 21.32 3.55 1.48 9.63

199899 9.34 4.07 22.06 3.47 1.59 7.43

19992000 9.72 4.07 22.91 3.85 1.71 7.55

200001 10.11 4.07 23.91 4.36 1.84 7.6

200102 10.52 4.07 24.93 4.27 1.96 6.52

200203 10.95 4.07 26.02 4.37 2.11 7.65

200304 11.34 4.07 27.14 4.3 2.31 9.48

200405 11.86 4.07 28.26 4.13 2.56 10.82

200506 12.34 4.07 29.49 4.35 2.88 12.5

200607 12.84 4.07 31.25 5.97 3.24 12.5

As part ofenhancing thecompetitiveness of Indian small firms, the strategy has essentially been

to raise thecapital intensity of production. However, given the preponderance of smaller or tiny

units in this sector, it is likely that a few relatively larger units haveemerged competitive by

being able to invest in expensive plant and machinery. And this is the reason that although the

sector has increased gradually there has been no increase in employment figures. Credit is one of

the most important constraint for small scale firms. Lack of transparency in operations and

financial statements is one of the major reasons for this.

Conclusions & Recommendations

Although the common belief that the small scale sector would gradually give way to capital

intensive large scale sector, a labour-surplus and vast domestic-market based economy the

MSEs continue to dominate the industrial sector. Recognition of theircapability in generating

largeemployment and smoothening regional disparities is spreading gradually.

However government needs to bring about changes in the perspective of policymaking related to

this sector. Many of the traditional small firms are in clusters, and a cluster oriented approach


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would be important for their success. Prioritization ofcredit availability should be an immediate

concern. Removal of all restrictions on investment in labour-intensive small-scale industries

needs to be done. Attempts should be made to bring in transparency in financial condition of

firms in these sectors. Financial institutions could usefully develop strong venturecapital arms to

finance innovative small firms that have a good potential to emerge in the near future in many

industries. Arrangements of power and water to small and medium scale industries should be

ensured. There is a need for improving appropriate linkages with education, infrastructure,

human and natural resources and environment for long-term sustainable development and

facilitating value-addition and self-reliance approach towards manufacturing.

ENABLING COMPETITIVE PUBLIC SECTOR ENTERPRISES

The public SectorEnterprises (PSE) were set up in Independent India for the purpose of self

reliance and fast growth of Indian economy. The major objectives of PSE, when they were set upwere:

y Develop core sectors ofeconomy

y Cater to strategically important sectors like Power, Steel, Coal, Defence,

Telecommunications and Railways etc.

y Provide self sufficiency to thecountry in critical areas and help spring board theeconomy

The sector has been largely able to meet these objectives and was responsible for initiating the

manufacturing movement in thecountry. However, since the 1991 policy reforms, there have

been a dramatic shifts in thecountrys economic policies and this also had a bearing on the

policy towards public sectorenterprises. Still, the public sectorcontributes to about 25% of

Indias GDP greater than 10% (in 1960s). Hence, increasing its competitiveness has to be a

major focus area of the government.


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Current Scenario

There are a number of important issues that haveemerged in thecurrent scenario:

y Dismal Operating Efficiencies- With economic liberalization, the public sector has

faced intensecompetition from private sector in terms ofquality manpower, market andresources. All this is supported by the fact that public sector is not able to compete with

private sector due to low operating efficiencies. The reasons for this are notably, over

manning, multi- regulatory authorities, low productivity of manpoweretc.

y Setting up NavratnaPSEs- In order to encourage profit making PSEs and also give

them more autonomy, the government has recently setup Navratnas and Mini Ratnas

which are given power to take their own decisions and promise by the government of

minimum interference. They are also free to form alliances, enter into joint ventures and

form subsidiaries in India and abroad. Originally 9 in number, currently, it stands at 18.y National Manufacturing Competitiveness Council- The government has setup various

agencies to delve into the problems of PSEs such as National Manufacturing

Competitiveness Council etc. This agency will streamline various guidelines and

procedures with respect to procurement, marketing and sales, pricing decisions,

manpower, compensation, technology transfer, outsourcing of support functions etc.

Recommendations

The following recommendations can make Public SectorEnterprises morecompetitive:

y Autonomy- For a competitive Public Sector, devolution of autonomy and power to take

its own decisions is a pre requisite. Thecompany boards should be given more

autonomy; however, it needs to becoupled with proper governance and accountability.

y Review Mechanisms- Currently, there are multiple regulations and regulatory authorities

governing public sectorenterprises. This creates a lot of regulatory hurdles and slows

down decision making. Thus, rationalization and optimization of multiple regulations

needs to be done on priority basis.

y Delegation ofPower- The PSU boards in order to becompetitive should be given power

to form joint ventures, international alliances and incubate subsidiaries. This is very

important in todays dynamicenvironment.

y Optimizing Labour cost and productivity-A major problem with public sector

currently is dismal productivity of labour. In order to optimize both cost and productivity,


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a percentage of theirincome should be performance based and regular performance

evaluation and appraisals should be done to improveemployee morale.

CONCLUSION

The resurgence of India's manufacturing sector has been quite magical. Not only are profitssoaring, the sector is fast spreading its tentacles abroad as many Indian manufacturing firms inchclose to becoming true blue multinationals. The future is potentially exciting for Indianmanufacturing. While there has been progress on some reforms, much remains to be done. Indiais fast developing into a manufacturing hub for world corporations wanting to leverage thesector's proven skills in product design, re-configuration and customization with creativity,assured quality and value addition.

The key points mentioned in the report revolve around the basic goal and that is to create theclimate for India Inc to achieve global competitiveness and evolve into an international hub for

manufactured products. We have talked about the priorities of Indian manufacturing firms, theprogrammes that they undertake to reach their objectives, and the outcome or the performance ofthese firms. The recommendations would help in formation of a robust manufacturing strategy indeveloping world class operations in thecountry.

Emphasis would be required on the efficient implementation of the recommendations. Thisincludes proper laws, guidelines and creating more awareness among the masses. This awarenessis in terms of the knowledge about the new technologies and methods adopted by theorganizations outside as well as within the country. Also, the awareness in terms of theresponsibility towards the growth and development of the nation needs more impetus in futuretimes. Human beings are the greatest asset of the nation and India being a nation with almost

50% of the youth population, much needs to be done in this field. The recommendations need tobe adapted to the variations in theculture, work as well as theconditions of the regions so thatthey can be as effective as they appear as solutions. Moreover, we need to keep updating thesesolutions according to the market scenario and the response of the industries so that Indiabecomes a leader one day in this field of work as well. The vicious circle of slow work ,ineffective implementation and slow progress needs to be broken. Only then can wecitizens seeour nation as the most progressive nation in the future.

References

1. http://www.ibef.org/economy/manufacturing.aspx, dated- September 5 2009

2. http://www.automationworld.com/webonly-3807, dated- September 1 2009


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3. http://www.allbusiness.com/labor-employment/labor-sector-performance/6257213-1.html, dated-

September 3 2009

4. http://www.allbusiness.com/manufacturing/computer-electronic-product-manufacturing/1182849-

1.html, dated- September 3 2009

5. http://www.indianexpress.com/news/pm-unveils-manpower-training-mission/210653/, dated-

September 3 2009

6. http://www.livemint.com/2008/02/04000156/Budget-821709-Rs31000-cr.html, dated- September

3 2009

7. http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/82932.pdf, dated- September 3 2009

8. http://www.deccanchronicle.com/business/poor-credit-availability-affects-msme-growth-161

9. http://www.indianmba.com/Faculty_Column/FC819/fc819.html,dated- September 3 2009

10.http://129.3.20.41/eps/mac/papers/0411/0411002.pdf, dated- September 2 2009

11.http://www.fibre2fashion.com/news/images/newspdf/ficci_suggests_growth_package_for_manufacturing_sector_50602_38022.pdf?PDFPTOKEN=96cb530d9cf0fdee0df0ce63a56387162828be2

0|1252048516#PDFP,dated- September 3 2009

12.http://www.fibre2fashion.com/news/textile-news/newsdetails.aspx?News_id=50602

13.http://www.indiaonestop.com/FDI/FDI2.htm-dated- September 3 2009

14. Infrastructure: "http://www.ibef.org/economy/infrastructure.aspx" dated- Sept 1 2009

15.Official Govt. portal: "http://infrastructure.gov.in' dated- September 3 2009

16. 'We need more infrastructure spending: PC' Financial Express dated-Sept 7 2006

17.A study on SMEs in Maharashtra: "http://www.dsir.gov.in/reports/mitcon/chap2.pdf" dated-

September 4 2009

18."http://www.managementparadise.com/forums/premium-project-reports/4669-small-medium-

enterprise-india-overcoming-policy-constraints-achieving-rap.html" dated- September 3 2009

19."Micro, Small and Medium Enterprises in India: Unfair Fare" By Keshab Das

20."Competitiveness of India's Manufacturing Sector: An Assessment of Related Issues" By L.

Lakshmanan, S. Chinngaihlian and Raj Rajesh


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