Indian economy at a glance

Indias GDP can be divided into three broad sectors primary sector (agriculture), industrial sector and the services sector. The table below depicts the sector composition of GDP over the years.

As is evident from the table above, the contribution of industrial sector to GDP has stagnated since 1991. Industrial sector can be further broken down into Manufacturing and Mining. Manufacturing constitutes roughly 16% of our GDP and has been stagnant at that level.

Manufacturing Industry
Definition:
The branch of manufacture and trade based on the fabrication, processing, or preparation of products from raw materials and commodities. This includes all foods, chemicals, textiles, machines, and equipment. This includes all refined metals and minerals derived from extracted ores. This includes all lumber, wood, and pulp products.

History of Manufacturing
The history of economic development followed a pattern of pulling people out of agriculture, moving them into non-farm activities such as into manufacturing and then into services. The present growth pattern led by high service sector growth and a stagnant manufacturing sector is leading to a rural-urban divide. Manufacturing is crucial to the Indian economy. The effect of improvement in manufacturing sector goes far beyond the goods provided by it. Manufacturing sells goods to other sectors and in turn buys materials and services from them for its growth and development. Manufacturing spurs demand for everything from raw materials to intermediate components. For instance, despite being hailed as the IT superpower, Indian IT sector is largely services based and not product based. This is because of lack of domestic manufacturing which essentially means that Indian IT companies dont have adequate domain knowledge to create products. Likewise, manufacturing can spur growth in other sectors like financial, health, accounting and transportation. Growth of manufacturing sector also lends greater support to Agriculture through more intensive efforts on agro-based Industries like food processing. As per the CII-Mc Kinsey Report prepared for Manufacturing Summit 2004, manufacturing can create 25-30 million jobs and possibly create two or three times this number in allied sectors (e.g. construction, education and entertainment) due to multiplier effect.

Factors ensuring Manufacturing competitiveness:

Factors which directly depends on Government and its policies:

1. Ensuring macro-economic stability: The first essentiality for ensuring manufacturing

competitiveness is macroeconomic stability. This essentially calls for keeping inflation and fiscal deficit in check, and ensuring interest rates are lower. Large fluctuations in economic
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variables like inflation and interest rates add to the uncertainty for firms, consumers and the public sector, and can reduce the economys long-term growth potential.

2. Infrastructure Development: Energy availability is critical to sustain industrial

growth and competitiveness. The average manufacturer in India loses 8.4 per cent a year in sales on account of power outages as opposed to less than 2 per cent in China and Brazil. It is estimated that power shortage alone contributed to a production loss of at least one per cent of GDP. Besides power, from the manufacturing perspective the most important infrastructure areas are ports, and roads. Improvement of these sectors has direct impact on the competitiveness of the manufacturing sector.

3. Providing right market framework & regulatory environment : Government has

a major role to play in providing the right market framework and regulatory environment as these provide invaluable impetus to the competitiveness of manufacturing sector. Sound regulatory regimes increase competition, encourage efficiency and also enhance productivity growth. A framework that ensures fair competition, better access to markets both domestic and foreign, level playing field for domestic manufacturers, review of existing regulations and reduce the burden of paperwork and inspector raj in respect of existing Laws, promote subsector wise policy on regulation can give a huge boost to the manufacturing sector.. The adverse impact of regulations on SMEs is particularly large. This is because the SMEs are less equipped to deal with the complex regulatory requirements. The inherent strength of SMEs which is flexibility would also be hampered by unnecessary and complex regulations.

4. Ensuring cost competitiveness and stimulating domestic demand : Various

studies have shown that India suffers on competitiveness due to following factors such as: Higher import duties including inverted duty structure Higher incidence of indirect taxes Sub-optimal levels of operations Lower operational efficiencies Higher transaction costs Lower labor productivity

5. Labor Laws: Despite being a country which has abundant supply of cheap labor, Indian
manufacturing has been long held back because of its archaic labor laws. Welfare provisions are an important part of labor laws, however, this has lead to unnecessary inspector raj.
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Indias archaic labor laws were last updated in the Industrial Disputes Act of 1948. They require companies with over 100 workers to get government permission to fire workers. Barring the Payment of Wages Act, all other labor laws dont prescribe any maximum period for which records and registers must be maintained. Compliance thus becomes difficult. This system also tends to hurt the small-scale sector much more than it hurts large-scale industry .

6. Land acquisition: Increasing manufacturing growth rate would require land to support
this expansion. India currently has an archaic Land acquisition law that goes back to 1894. Other Factors:

7. Availability of Skilled labor: If Indian manufacturing has to grow at around 12 percent

per annum, it will be necessary for the education and training system to produce at least 1.5 million technically skilled people every year. India would need an incremental requirement of about 20 million skilled technicians by 2015. As the country moves up the technology ladder and begins to produce more complex products in greater volumes, manufacturers will need to invest in research and require talented employees. It is important to attract the best minds to teaching and research in our institutes of higher learning especially in science and technology. The current salary structure with the upper limit set is unable to attract the best talent. At present the salaries of Assistant Professors are well below those offered to fresh B. Tech. and MBA graduates by the industry. In the long run this is detrimental to the interests of the nation. Generally there are 20,000 Post Graduate (PG) seats in engineering of which only 10,000 are filled while 4, 00,000 enter Under Graduate (UG) education every year . This is to be contrasted with the USA where there are about 60,000 seats each at the UG and PG level in engineering. At this rate there already is and there will continue to be a very severe shortage of teachers in Engineering and Technology.

8. Investing in innovations & technology: Innovation holds the key to increasing

productivity, and productivity gains are the key to both economic growth and rising the standard of living. Increasing productivity is the key to maintaining competitiveness in manufacturing. Indian firms need to invest in research and development.

9. Enabling Small & Medium Enterprises (SMEs) achieve competitiveness : The

Small and Medium Industries form the backbone of Manufacturing Sector not only in this country but even in the developed countries. SMEs are more labor intensive as compared to larger firm. In India, the Small Scale Sector contributes to 40% of Manufacturing. Among the several impediments preventing the segment from achieving its full potential, the important ones are : access to timely and adequate credit (particularly, as a sequel to the general decline of the State financial corporations), technological obsolescence, infrastructural bottlenecks, lack of R & D linkages, marketing constraints and disabling rules and regulations.
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10. Increasing the usage of Information & Communication Technology (ICT) in manufacturing sector: In todays information age, business environment requires new
capabilities in manufacturing organizations for competitive success. ICT has been fundamentally changing the way organizations conduct their business and compete in the market place and it can significantly improve the productivity of manufacturing sector.

Manufacturing Industry Categories:

1 Apparel Industry :
All establishments producing clothing and fabricating products by cutting and sewing purchased woven or knit textile fabrics and related materials, such as leather, rubberized fabrics, plastics, and furs. This does not include knitting mills (see Textile Mill Products) or custom tailors and dressmakers (see Retail Trade: Apparel and Accessory Stores). (Definition Source: Standard Industrial Classification)

2 Chemical and Allied Industry:

All establishments producing basic chemicals and establishments manufacturing products by predominantly chemical processes. This does not include the mining of natural chemicals and fertilizers (see Mining and Quarrying of Nonmetallic Minerals), nor does it include establishments primarily engaged in packaging; repackaging and bottling purchased chemical products (see Wholesale or Retail Trade). (Definition Source: Standard Industrial Classification)

3 Electronic and Electrical Equipment Industry:

All establishments engaged in manufacturing machinery, apparatus, and supplies for the generation, storage, transmission, transformation, and utilization of electrical energy. This does not include industrial machinery and equipment powered by built-in or detachable electric motors (see Industrial and Commercial Machinery and Computer Equipment). (Definition Source: Standard Industrial Classification)

4 Fabricated Metal Industry:

All establishments engaged in fabricating ferrous and nonferrous metal products, such as metal cans, tin ware, hand tools, cutlery, general hardware, nonelectric heating apparatus, fabricated structural metal products, metal forgings, metal stampings, and a variety of metal and wire products not elsewhere classified. (Definition Source: Standard Industrial Classification)

5 Food and Kindred Industry:

All establishments manufacturing or processing foods and beverages for human consumption, and certain related products, such as manufactured ice, chewing gum, vegetable and animal fats and oils, and prepared feeds for animals and fowls. This does not include chemical sweeteners (see Chemicals and Allied Products). (Definition Source: Standard Industrial Classification) 6 Furniture and Fixtures Industry: All establishments engaged in manufacturing household, office, public building, and restaurant furniture; and office and store fixtures. This does not include establishments engaged in the production of millwork or wood kitchen cabinets (see Lumber and Wood Products); those manufacturing cut stone and concrete furniture (see Stone, Clay, Glass and Concrete Products); those manufacturing hospital furniture other than beds (see Measuring, Controlling and Analyzing Instruments); nor, those manufacturing beauty and barber shop furniture (see Miscellaneous Manufacturing Industries). (Definition Source: Standard Industrial Classification) 7 Industrial and Commercial Machinery Industry: All establishments engaged in manufacturing industrial and commercial machinery and equipment and computers. This includes machines powered by built-in or detachable motors, with the exception of electrical household appliances. This includes power-driven hand tools, but does not include other electrical equipment (see Electronic and Other Electrical Equipment and Components). (Definition Source: Standard Industrial Classification) 8 Leather Industry: All establishments engaged in tanning, currying, and finishing hides and skins, leather converters, and establishments manufacturing finished leather and artificial leather products and some similar products made of other materials. (Definition Source: Standard Industrial Classification) 9 Lumber and Wood Industry: All establishments engaged in cutting timber and pulpwood; mills engaged in producing lumber and wood basic materials; and establishments engaged in manufacturing finished articles made entirely or mainly of wood or related materials. This does not include furniture and office and store fixtures (see Furniture and Fixtures), musical instruments, toys and playground equipment, and caskets (see Miscellaneous Manufacturing Industries). This also does not include wood reconditioning and repair (see Nonmanufacturing Industries). (Definition Source: Standard Industrial Classification) 10 Measuring, Analyzing and Controlling Instrument Industry: All establishments engaged in manufacturing instruments for measuring, testing, analyzing, and controlling, and their associated sensors and accessories; optical instruments and lenses; surveying and drafting instruments; hydrological, hydrographic, meteorological, and
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geophysical equipment; search, detection, navigation, and guidance systems and equipment; surgical, medical, and dental instruments, equipment and supplies; ophthalmic goods; photographic equipment and supplies; and, watches and clocks. (Definition Source: Standard Industrial Classification) 11 Miscellaneous Manufacturing Industries: All establishments primarily engaged in manufacturing products not classified in any other manufacturing category. This includes establishments engaged in the production of goods such as jewelry, musical instruments, toys, sporting goods, etc. (Definition Source: Standard Industrial Classification) 12 Paper and Allied Industry: All establishments primarily engaged in the manufacture of pulps from wood and other cellulose fibers, and from rags; the manufacture of paper and paperboard; and the manufacture of paper and paperboard into converted products, such as paper bags and paper boxes. Also included are establishments primarily engaged in manufacturing bags of plastics film and sheet. This does not include abrasive paper (see Stone, Clay, Glass, and Concrete Products), carbon paper (see Miscellaneous Manufacturing Industries), nor photosensitized and blueprint paper (see Measuring, Controlling, and Analyzing Instruments). (Definition Source: Standard Industrial Classification)

13 Petroleum Refining and Related Industry: All establishments primarily engaged in petroleum refining, manufacturing paving and roofing materials, and compounding lubricating oils and greases from purchased materials. This does not include establishments manufacturing and distributing gas to consumers (see Transportation, Communications, and Utilities), nor those engaged in producing coke and byproducts (see Primary Metal Industries). (Definition Source: Standard Industrial Classification) 14 Primary Metal Industry: All establishments engaged in smelting and refining ferrous and nonferrous metals from ore, pig, or scrap; in rolling, drawing, and alloying metals; in manufacturing castings and other basic metal products; and in manufacturing nails, spikes, and insulated wire and cable. This also includes the production of coke. (Definition Source: Standard Industrial Classification) 15 Printing, Publishing, and Allied Industry: All establishments engaged in printing and those establishments which perform services in the printing trade, such as bookbinding and plate making. This also includes establishments engaged in publishing newspapers, books, and periodicals, regardless of whether they do their own printing. This does not include establishments primarily engaged in textile printing and finishing fabrics (see Textile Mill Products), nor does it include establishments
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manufacturing products that contain incidental printing, such as advertising or instruction. (Definition Source: Standard Industrial Classification) 16 Rubber and Miscellaneous Plastic Industry: All establishments not elsewhere classified manufacturing products from plastics resins and from natural, synthetic, or reclaimed rubber, gutta percha, balata, or gutta siak. Many products made from these materials are classified in other industries, such as boats, toys, Buttons, etc. This includes the manufacture of tires, but does not include recapping and retreading automobile tires. This also does not include the manufacture of synthetic rubber and synthetic plastics resins (see Chemicals and Allied Products). (Definition Source: Standard Industrial Classification) 17 Stone, Clay, Glass, and Concrete Industry: All establishments engaged in manufacturing flat glass and other glass products, cement, structural clay products, pottery, concrete and gypsum products, cut stone, abrasive and asbestos products, and other products from materials taken principally from the earth in the form of stone, clay, and sand. (Definition Source: Standard Industrial Classification) 18 Textile Mill Industry: All establishments engaged in the preparation of fiber and subsequent manufacturing of yarn, thread, braids, twine, and cordage; in manufacturing broad woven fabrics, narrow woven fabrics, knit fabrics, and carpets and rugs from yarn; in dyeing and finishing fiber, yarn, fabrics, and knit apparel; in coating, waterproofing, or otherwise treating fabrics; in the integrated manufacture of knit apparel and other finished articles from yarn; and in the manufacture of felt goods, lace goods, nonwoven fabrics, and miscellaneous textiles. (Definition Source: Standard Industrial Classification) 19 Tobacco Industry: All establishments engaged in manufacturing cigarettes, cigars, smoking and chewing tobacco, snuff, and reconstituted tobacco and in stemming and redrying tobacco. This also includes the manufacture of nontobacco cigarettes. This does not include the manufacture of insecticides from tobacco byproducts (see Chemicals and Allied Products). (Definition Source: Standard Industrial Classification) 20 Transportation Equipment Industry: All establishments engaged in manufacturing equipment for transportation of passengers and cargo by land, air and water. This includes the manufacture of products such as motor vehicles, aircraft, guided missiles and space vehicles, ships, boats, and railroad equipment. This does not include the manufacture of mobile homes (see Lumber and Wood Products), nor the manufacture of equipment used for moving materials on farms, in mines, on construction sites, in plants, etc.

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For any large scale manufacturer or broker the benefits of manufacturing in India are many. The foremost would definitely be access to a market which is likely to grow manifold in the near future. A society which is progressing economically by leaps and bounds every day is sure to be the next big destination for a luxury industry market. However present projections give India until about 2010 till sale of recreational vehicles pick up. Marinas are already well under construction and the affluent have started wondering what is to be done with the excess money. It is only a matter of time before the thunder strikes. Apart from the future scenario to say the very least India is well placed to be an excellent outsourcing hub for the present. The prices of machinery, equipment as well as GRP raw materials for boats like resins and glass fibers are almost the same as the rest of the world. However the composite boat industry being a labor intensive one, the cost benefits in labor is still huge (although probably not for an extended period of time). Also the prices of fabricated or casted fittings are way more competitive than in the western world. These factors alone return a huge benefit in cost and the same may be passed on to the end consumer. Detailed Cost Benefit Analysis has shown even with the added cost of transportation this saving is enormous. India has a distinct advantage with regards to geographical location. Its place right in between the Far East and the Middle East makes it a natural hub for the business of supply for the region. This is also an avenue which is probably not yet fully exploited. Overall it seems a pretty encouraging picture of things to come.

Benefits of Manufacturing in India

Meaning of IT(Information Technology)

Information technology (also referred to as IT) is the application of computers and
telecommunications equipment to store, retrieve, transmit and manipulate data, often in the context of a business or other enterprise. The term is commonly used as a synonym for computers and computer networks, but it also encompasses other information distribution technologies such as television and telephones. Several industries are associated with information technology, such as computer, software, electronics, semiconductors, internet, telecom equipment, e-commerce and services. The Information technology industry in India has gained a brand identity as a knowledge economy on the global map. . According to the National Association of Software and Service Companies
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(NASSCOM), the apex body for software services in India, the revenue of the IT sector has grown from 1.2 per cent of the gross domestic product (GDP) in FY 1997-98 to an estimated 5.5 per cent in FY 2007-08. The net value added by this sector, to the economy, is estimated to be 3.3 to 3.9 per cent for FY 2007-08. Direct employment in Indian IT-BPO crossed the 2 million mark, an increase of about 389,000 professionals over FY2007; indirect job creation is estimated at about 8-9 million.

The Advantages India Offers for IT Companies Benefits of Outsourcing to India

Skilled and inexpensive IT resources A thriving software industry, backed by government initiatives Helpful initiatives like rationalization of taxes, IT friendly budgets aimed at promoting

investment Availability of English speaking workforce Concrete steps to upgrade the IT infrastructure of India. The role played by academic institutes that promotes research and innovation A stable democracy based on the parliamentary system of governance. An independent Judiciary and a free Press. Highly developed banking network and financial services.

Apart from the above, some other advantages India offers is market driven economy, huge forex
reserves, no legal tangles, Re/dollar parity, continued economic policies, conducive business climate and good ROIs.

BPO(Business Processing Outsourcing)

BPO is subset of outsourcing that involves the contracting of the operations and responsibilities of specific business Functions to a 3rd party service provider. Originally, this was associated with manufacturing firms, such as COCA COLA that outsourced large segments of its supply chain.

Advantages / Benefits of BPO jobs:

There is no doubt that the Indian BPO's are the latest booming industry attracting lakhs of young men and women all over the country. Indians BPO workforce offers several advantages over their western counterparts both in terms of cost savings and availability of manpower. The advantages and disadvantages of Indian BPO jobs have been discussed below
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1. SALARY:

BPOs in India offer good starting salaries with regular raises every year. Typical salary of a person working in India can vary between 15000 rupees to 30,000 rupees or even higher. This is much higher than individuals working in most other traditional professions like Government jobs, teachers, clerks and armed forces. There is no doubt that money is very important these days and BPOs are a good opportunity to earn some good money. Therefore you need not be just an engineer or a doctor to earn good money.
2. QUALIFICATION:

All BPOs require you to be fluent in English, although most do expect you to have at least a bachelors degree like BSC or BA. For certain types of jobs like Medical or Tech. outsourcing, having a background or education in that field can certainly add to your advantage. Bilingual (people who speak multiple languages) individuals who are fluent in Spanish, German and French have a great advantage over others. Spanish language has nice penetration in United States due to Mexican (Spanish speaking) immigrants; similarly French has a great demand in Canada.

3. CLEAN WORK:
Well there is no running around to get your work done, most bigger BPOs will even provide you a convenient bus service from several pick-up locations in the city. This is especially convenient for girls of India because of elevated women crime in recent years. Your job requires talking over the phone after going through intensive customer support training. Most BPOs also provide free snacks and drinks to their employees.

4. GROWTH- FLEXIBILITY TO CHANGE JOBS EASILY:

People with just a few years on experience are in great demand, and will usually be able to change their jobs to a competing BPO company for a better salary and position.

5. ON JOB TRAINNING:
BPOs provide training and how to deal with customers and the best part is that they even pay you when they train you. The training typically lasts for a few weeks and often followed by a supervised practical experience.

6. MEDICAL INSURANCE:
Many call canters provide good health insurance for your family at a low cost. They may even provide counseling to deal with the stress is you happen to deal with a tough or
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abusive customer.

7. OPPORTUNITY TO WORK OVERSEAS:

Often Indian all centers have an overseas office, they will regularly send a small percentage of their employees to countries like United States, Britain etc .. so that they understand their working environment better. These trips can not only be fun but also a great opportunity to earn higher money in US dollars.

8. BPO EMPLOYEES MAY BE ABLE WORK FROM HOME NOW:

As of August 2008, The Indian government has given its go-ahead to agents working at BPOs, other service providers included, to work from home. But BPO firms are already voicing security concerns which, they say, would not allow them to make full use of the concept.

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Disadvantages/Limitations of BPOs:

1. ODD WORKING HOURS:

Most of the BPOs in India support overseas operations and majority of professionals have night shifts. Although many have day shifts as they support domestic Indian customers, or off-business support hours of the overseas company which happens to be day-time for India. In majority of cases Indian BPO jobs mostly have odd hours.

2. FAMILY LIFE:
This is somewhat associated with odd working hours. Evenings are the best time to spend quality time with your spouse and children and those are actually your working hours. Your life as a BPO employee can be very lonely and frustrating at times.

3. HEALTH ISSUES:
Sleep disorders, heart disease, eyesight problems and depression are just a few issues surrounding the BPO jobs. People also tend to gain weight as most of the time they are sitting in their small cubicle. Health issues in Indian BPO industry is becoming a major issue. Even though you work only 5 days a week, for rest of the two days it is not easy to swap your sleep cycle the other way around.

4. ABUSIVE CLIENTS:
Many of the customers you speak with can actually get very abusive or angry. They are often able to guess from you accent that you are located in India and many customers are anyway unhappy about their work being outsourced to India. Since your call is often recorded you cannot reply them back angrily, in most cases you will transfer the call to your manager or to a BPO located in their own country or in worst case hang up. American accent and Indian English accent are quite different and takes time to overcome the difference. As a BPO employee you should try not to take things too personally.

5. AGE FACTOR:
Since BPO jobs are quite stressful, especially after a few months working in this industry many individuals quit and change their profession, often to a lower paying job. If you able to make your way up to the managerial level or the higher corporate ladder, life is much better, otherwise the daily monotonous work starts to really frustrate you.
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6. SOCIAL ISSUES / ALCOHOL CONSUMPTION / SEX ISSUES:

Most people working in BPOs are in 20's or early 30's, so it is very obvious that they often get into physical relationships. There was an article from Reuters (in 2006)"sex life of BPO workers fascinates India", this is often a shock for people who follow conservative values. Additionally the alcohol consumption is much higher in the Individuals working in BPOs. In extreme cases some individuals switch to drugs use. Condom vending machines will soon be installed in several BPOs and IT companies to deal with rising threat of HIV/AIDS because young employees are increasingly having unprotected sex with multiple partners in affairs developed during nights shifts

7. FUTURE TREND OF BPO JOBS:

BPO jobs are the easiest to be transferred from one place to another. Today India offers a great cost saving compared to other locations, but with salaries rising about 10% every year in near future they will become comparable to other low cost locations like Philippines, Vietnam, Indonesia, Mexico and Eastern Europe. In that case either the salary increments will slow down substantially or companies will start moving jobs from India to these locations. RUPEE APPRECIATION - Additionally if the rupee becomes stronger then your current salary will start to appear costly overseas.

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Difference between manufacturing and Service sector

Goods:The key difference between service firms and manufacturers is the tangibility of their output. The output of a service firm, such as consultancy, training or maintenance, for example, is intangible. Manufacturers produce physical goods that customers can see and touch.

Inventory:Service firms, unlike manufacturers, do not hold inventory; they create a service when a client requires it. Manufacturers produce goods for stock, with inventory levels aligned to forecasts of market demand. Some manufacturers maintain minimum stock levels, relying on the accuracy of demand forecasts and their production capacity to meet demand on a just-in-time basis. Inventory also represents a cost for a manufacturing organization.

Customers:Service firms do not produce a service unless a customer requires it, although they design and develop the scope and content of services in advance of any orders. Service firms generally produce a service tailored to customers' needs, such as 12 hours of consultancy, plus 14 hours of design and 10 hours of installation. Manufacturers can produce goods without a customer order or forecast of customer demand. However, producing goods that do not meet market needs is a poor strategy.

Labor:A service firm recruits people with specific knowledge and skills in the service disciplines that it offers. Service delivery is labor intensive and cannot be easily automated, although knowledge management systems enable a degree of knowledge capture and sharing. Manufacturers can automate many of their production processes to reduce their labor requirements, although some manufacturing organizations are labor intensive, particularly in countries where labor costs are low.

Location:Service firms do not require a physical production site. The people creating and delivering the service can be located anywhere. For example, global firms such as consultants Deloitte use communication networks to access the most appropriate service skills and knowledge from offices around the world. Manufacturers must have a physical location for their
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production and stock holding operations. Production does not necessarily take place on the manufacturer's own site; it can take place at any point in the supply chain

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Structure of Service Economy in India

With the development of the economy, the contribution of service sector in national income or gross domestic product GDP has been growing progressively. The sectoral disaggregation of national income shows that the service sector has been growing relatively faster than other two sectors - primary and secondary throughout the post independence period of the Indian economy (Kulshreshtha and Singh, 1998: Bhowmik, 2000). It has been contributed in GDP higher than other two sectors since 1985-86. Table1 shows the percentage share of three different sectors in GDP of the period 1993-94.

Table -1: Sectoral Distribution of Total Output (in per cent) in Indian Economy of the year 1993-94
Activity Primary Share 31.79 (83839) 26.89 (70917) 41.32 (108973) 100 (263729)
(Figures in parenthesis show the absolute value of output In Rupees in crore at 1973-74 price) From table1, it is observed that the share of service sector in total economy is 41.32% which is 9.53% and 14.43% greater than the share of primary and secondary sector respectively. This means that service sector plays an important role in the economy. In this study, there are nine service industries. Table2 shows the percentage share of nine different services industries in total services and also in total output of the period 1993-94.

Secondary

Service

Total Output

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Table -2: Contribution of different services industries in Total Services and Total Output for the year 1993-94 (in percent)
Activity Share Total Services 4.11 22.66 0.16 2.01 25.48 3.00 7.56 1.29 33.73 100 in Share in

Total Output 1.70 9.37 0.08 0.83 10.51 1.24 3.13 0.52 13.94 41.32

1. Railway transport (17) 2. Other transport (18) 3. Storage and warehousing (19) 4. Communication (20) 5. Trade (21) 6. Hotel and restaurants(22) 7. Banking (23) 8. Insurance (24) 9. Other services (25) Total services

(108973) (263729) (Figures in parenthesis show the absolute value of output

in Rupees in crore at 1973-74 price) From table2 it is seen that the share of other services (25) is 33.73% of total services and 13.94% of total output and also it is the highest contributor in nine different services industries both in total services and total output. The next higher contributors are Trade(21), Other transport(18), Banking(23), Railway transport(17), Hotel and restaurant(22), Communication (20), Insurance (24) and Storage and warehousing(19) and they contribute 25.48%, 22.66%, 7.56%, 4.11%, 3%, 2.01%, 1,29% and 0.16% in total services respectively. Their contribution in total output is 10.51%, 9.37%, 3.13%, 1.70%, 1.24%, 0.83%, 0.52% and 0.08% respectively. Gross output of goods by all different production sectors in the economy i.e. total demand is equal to the output of goods for inter-industrial requirement, i.e. intermediate demand and the output of goods

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going directly to consumer i.e. final demand. Table3 presents the share of total output of each three different sectors in intermediate demand and final demand.

Table -3: Sectoral Distribution of Total Output to Intermediate Demand and Final Demand in Indian Economy of the year 1993-94 (in per cent)
Activity Intermediate Demand 56.52 (47386) 55.38 (39274) 39.24 (42758) 49.07 (129418) Final Demand 43.48 (36453) 44.62 (31643) 60.76 (66215) 50.93 (134311) Total Output

Primary

100 (83839) 100 (70917) 100 (108973) 100 (263729)

Secondary

Services

Total Output

(Figures in parenthesis show the absolute value of output in Rupees in crore at 1973-74 price) It is found from table3 that 49.07% and 50.93% of gross output has been used for intermediate demand and final demand respectively. It is observed from table3 that 56.52% of the output of primary sector has been used as intermediate demand and its output as intermediate demand is 1.14% and 17.28% higher than that of secondary and tertiary sector respectively. Table3 also shows that the output of service sector used as final demand is highest in economy and it is 60.76% of output of service sector which is 17.28% and16.14% greater than that of primary sector and secondary sector respectively. It is remarkable to note that the consumption of output of service sector as final use is more than that of intermediate use. The demand for services output as final use is highest in that of other two sectors of the economy.

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Activity

Share in Intermediate Demand 6.50 28.96 0.61 3.35 29.28 1.20 15.10 2.91 12.09 100 (42758)

Share in Final Demand 2.10 18.66 0.00 1.14 23.32 4.13 2.73 0.10 47.82 100 (66215)

1. Railway transport (17) 2. Other transport (18) 3. Storage and warehousing (19) 4. Communication (20) 5. Trade (21) 6. Hotel and restaurants(22) 7. Banking (23) 8. Insurance (24) 9. Other services (25) Total services

Table -4: Contribution in Intermediate Demand and Final Demand of different services industries in Total Services for the year 1993-94 (in percent)

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It is exhibited from table4 that 29.28% of trade(21) is used as intermediate goods in the service economy and. the output of it contributes highest as intermediate demand in total services. The next higher contributors in intermediate demand are Other transport(18), Banking (23), Other services(25), Railway transport (17), Communication (20), Insurance (24), Hotel and restaurant (22), and Storage and warehousing (19) and they contribute 28.96%, 15.10%, 12.09%, 6.50%, 3.35%, 2.91%, 1,20% and 0.61% respectively. In case of final demand, Other services(25) is the highest contributor of the services economy. 47.82% of its output has been used for final demand. The next higher contributors in final demand are Trade(21), Other transport(18), Hotel and restaurant(22), Banking (23), Railway transport (17), Communication (20) and Insurance (24) and they contribute 23.32%, 18.66%, 4.13%, 2.73%, 2.1%, 1.14%, and 0.1% respectively. The contribution of output of Storage and warehousing(19) in final demand is negligible.

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Reasons for the growth of the Service sector contribution to India GDP
The contribution of the Services Sector has increased very rapidly in the India GDP for many foreign consumers have shown interest in the country's service exports. This is due to the fact that India has a large pool of highly skilled, low cost, and educated workers in the country. This has made sure that the services that are available in the country are of the best quality. The foreign companies seeing this have started outsourcing their work to India specially in the area of business services which includes business process outsourcing and information technology services. This has given a major boost to the Services Sector in India, which in its turn has made the sector contribute more to the India GDP.

Indian IT-BPO performance

The sector is estimated to aggregate revenues of USD 88.1 billion in FY2011, with the IT software and services sector (excluding hardware) accounting for USD 76.1 billion of revenues. During this period, direct employment is expected to reach nearly 2.5 million, an addition of 240,000 employees, while indirect job creation is estimated at 8.3 million. As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 6.4 per cent in FY 2011. Its share of total Indian exports (merchandise plus services) increased from less than 4 per cent in FY1998 to 26 per cent in FY2011.

Exports market:
Export revenues are estimated to gross USD 59 billion in FY2011 accounting for a 2 million workforce.

Geographic focus:
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The year was characterized by a consistent demand from the US, which increased its share to 61.5 per cent. Emerging markets of Asia Pacific and Rest of the world also contributed significantly to overall growth.

Vertical Markets:
While the sectors vertical market mix is well balanced across several mature and emerging sectors, FY2011 was characterized by broad based demand across traditional segments such as Banking, Financial Services and Insurance (BFSI), but also new emerging verticals of retail, Healthcare, Media and Utilities.

Service Lines:
Within exports, IT Services segment was the fastest growing segment, growing by 22.7 per cent over FY2010, and aggregating export revenues of USD 33.5 billion, accounting for 57 per cent of total exports. Indian IT service off rings have evolved from application development and maintenance, to emerge as full service players providing testing services, infrastructure services, consulting and system integration. The coming of a new decade heralds a strategic shift for IT services organizations, from a one factory, one customer model to a one factory, all customers model. Central to this strategy is the growing customer acceptance of Cloud-based solutions which offer best in class services at reduced capital expenditure levels. The BPO segment grew by 14 per cent to reach USD 14.1 billion in FY2011. The year also witnessed the next phase of BPO sector evolution - BPO 3.0 - characterized by greater breadth and depth of services, process reengineering across the value chain, increased delivery of analytics and knowledge based services through platforms, strong domestic market focus and SMB centric delivery models. During the year, the BPO sector growth was aff ected by delayed decision making and deal restructuring in the first half of the year, though it picked up momentum in the second half. Changing demand patterns led to revamp of operations for service providers - high focus on client relationships, mining existing clients and restructured operations to provide focused vertical solutions. Further, the industry focused on achieving excellence in business process management, and delivering strong transformational benefits creating revenue impact for clients. The engineering design and products development segments generated revenues of USD 9 billion in FY2011; growing by 13.6 per cent, driven by increasing use of electronics, fuel efficiency norms, convergence of local markets, and localized products. Increasing confidence in relationships between customers and service providers successfully executing a variety of activities across lowmedium-high complexity projects has led to increasingly larger sizes of projects being sourced from India.

Domestic market:
Domestic IT-BPO revenues excluding hardware are expected to grow at almost 16 per cent to reach ` 787 billion in FY2011. Strong economic growth, rapid advancement in
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technology infrastructure, increasingly competitive Indian organisations, enhanced focus by the government and emergence of business models that help provide IT to new customer segments are the key drivers for increased technology adoption in India IT services is one of the fastest growing segment in the Indian domestic market, rising by 16.8 per cent to reach ` 501 billion, driven by localised strategies designed by service providers. Domestic BPO segment is expected to grow by 16.9 per cent in FY2011, to reach ` 127 billion, driven by demand from voice based services, in addition to adoption from emerging verticals, new customer segments, and value based transformational outsourcing platforms Indian software product segment is estimated to grow by 14 per cent to reach ` 157 billion, fueled by replacement of in-house software applications to standardised products from large organisations and innovative start-ups Government sector is a key catalyst for increased IT adoption- through sectors reforms that encourage IT acceptance, National eGovernance Programmes (NeGP) , and the Unique Identifi cation Development Authority of India (UIDAI) programme that creates large scale IT infrastructure and promotes corporate participation.

Why manufacturing?
It is often alleged that the reforms initiated in 1991 has not really benefited the poor as inequality has increased. Unfortunately, it ignores the stagnant state of manufacturing. So why is manufacturing important for inclusive growth? The answer to this question is because it cannot just be the other two sectors agriculture or services. In the next 15 years, around 250 million more people would join the workforce we need create adequate jobs for them. Agricultural growth, though has improved from 2% earlier to now 3.5%, it still cannot accommodate this humongous number. Area of cultivated land per cultivator has declined from 0.43 hectares in 1901 o 0.23 hectare in 1981 and current. Availability of cultivable land is not increasing any further and current figures of area of land per cultivator would be even lower. There are far too many people involved in agriculture. (Source) Services There are some countries like Singapore and Switzerland that have become rich through services, like finance, tourism and trading; does it not show the viability of servicebased prosperity? The answer is no. Firstly, because Indias population is 1.2 billion and cannot be compared to much smaller countries. India is too large to survive on a services led economy and needs a more diverse economy. Within the services sector, knowledge based sectors like IT or Financial services provide jobs only to highly skilled and educated labor.
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The two sub-sectors in services that are mass employment creators are tourism and retailing. While there is tremendous scope for developing tourism in India, the latter is again not applicable in case of India. India has highest number of retail outlets per 1000 population (Source). This essentially means any growth in retail sector through reforms such as FDI is unlikely to produce too many incremental jobs as many more existing ones may be destroyed. FDI in retail must therefore happen once manufacturing reforms are in place.

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India's GDP growth slumps to 6.5 per cent in 2011-12

India's economic growth rate slipped to 5.3 per cent in the fourth quarter of 2011-12, lowest in nearly 9 years due to poor performance of the manufacturing and farm sectors. The Gross domestic product (GDP) growth in the January-March quarter of 2010-11 was 9.2 per cent, according to the government data released on Thursday. GDP in 2011-12 also moderated to 6.5 per cent from 8.4 per cent in the 2010-11. During the quarter ending March 31, growth in the manufacturing sector contracted to 0.3 per cent, from 7.3 per cent in the corresponding period of 2010-11. Farm output also exhibited a similar trend and expanded by just 1.7 per cent during the quarter, compared to 7.5 per cent in the Q4, 2010-11. However, mining and quarrying production growth stood at 4.3 cent during the quarter under review, as against a growth of meagre 0.6 per cent in Q4 of in 2010-11. Growth in the construction sector slowed to 4.8 per cent during the January-March quarter of 2011-12, from 8.9 per cent in the year-ago period. The trade, hotels, transport and communications segment grew by 7 per cent during in the quarter under review, as against 11.6 per cent expansion in the year-ago period. However, electricity, gas and water supply grew by 4.9 per cent in the January-March period, compared to 5.1 per cent growth in the corresponding period last fiscal. The growth of the services sector, including insurance and real estate remained unchanged at 10 per cent in the fourth quarter ended March.

The share of manufacturing in Indias GDP can go up to 30% if India does labor reforms and relaxes regulations, according to Nick Bloom, professor, Stanford University.

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Steps taken by Government in Budget 2012-13

Agriculture:1.Average annual growth rate of agriculture and allied sector was 3.6% during XIPlan
against 2.5% and 2.4% in IX and X plans respectively.

2.In 2012-13, total food-grain production will be over 250 million tonnes. Minimum
support price for every agricultural produce has increased significantly under the UPA Government.

3.27,049 crore allocated to Ministry of Agriculture, an increase of 22 per cenover the

RE of current year.

4.Agricultural research provided ` 3,415 crore. Agricultural Credit:1.For 2013-14, target of agricultural credit kept at ` 7 lakh crore. 2.Interest subvention scheme for short-term crop loans to be continued
schemeextended for crop loans borrowed from private sector scheduled commercial banks.

Oil and Gas:1.A policy to encourage exploration and production of shale gas will be announced. 2.The 5 MMTPA LNG terminal in Dabhol, Maharashtra will be fully operational
in 2013-14.

Coal:1.In the medium to long term need to reduce our dependence on imported coal. One
way forward is to devise a PPP policy framework with Coal India Limited as one of the partners.

2.Ministry of Coal to announce Governments policies in due course. Power:1.Guidelines regarding financial restructuring of DISCOMS have been announced.
State Government urged to prepare the financial restructuring plan, quickly sign MoU and take advantage of the scheme.

Micro, Small and Medium Enterprises:1.Benefits or preferences enjoyed by MSME to continue upto three years after they
grow out of this category.

2.Refinancing capacity of SIDBI raised to ` 10,000 crore.

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3.Another sum of ` 100 crore provided to India Microfinance Equity Fund. 4.A corpus of ` 500 crore to SIDBI to set up a Credit Guarantee Fund for factoring. 5.A sum of ` 2,200 crore during the 12th Plan period to set up 15 additional Tool
Rooms and Technology Development Centres with World Bank assistance.

6.Ministry of Corporate Affairs to notify that funds provided to technology incubators

located within academic Institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.

Textiles:1.Technology Upgradation Fund Scheme (TUFS) to continue in 12th Plan with an

investment target of ` 1,51,000 crore.

2.Allocation of ` 50 crore to Ministry of Textile to incentivise setting up Apparel

Parks within the SITPs to house apparel manufacturing units.

3.A new scheme called the Integrated Processing Development Scheme will be
implemented in the 12th Plan to address the environmental concerns of the textile industry.

4.Working capital and term loans at a concessional interest of 6 per cent to handloom
sector.

5.Scheme of Fund for Regeneration of Traditional Industries (SFURTI) extended to

800 clusters during the 12th Plan.

Foreign Trade:1.Support to measures to be taken to boost exports of goods and services.

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POLICY STATEMENT
1.1 In the last two decades, Indian economy has witnessed a transformational change and has emerged as one of the fastest growing economies of the world. Industrial development in Independent India was catalyzed by three major industrial policy resolutions of Government of India in 1948, 1956 and 1991, which provided a strong industrial base. Economic reforms unveiled in 1991, have brought about a structural shift enabling the private sector to assume a much larger role in all sectors of economy. However, the growth of GDP in India has largely been enabled by a dynamic growth in the services sector. 1.2 Though in the recent past, the growth of the manufacturing sector has generally outpaced the overall growth rate of the economy, at just over 16 percent of GDP, the contribution of the manufacturing sector in India is much below its potential. 1.3 This situation is a cause of concern especially when seen in the context of transformation registered in this sector by other Asian countries in similar stages of development. The increasing gap in the sectoral share and the productivity of the manufacturing sector, between India and these economies, indicates that we have not been able to fully leverage the opportunities provided by the dynamics of globalization. 1.4 This also has attendant socio economic manifestations in terms of over dependence of a large section of the population on agriculture for its livelihood, disguised unemployment and urban unemployment. India has a favorable demographic profile with over 60% of population in the working age group of 15-59 years. For a country with the largest young population in the world, this creates a challenge of significant magnitude. Over the next decade, India has to create gainful employment opportunities for a large section of its population, with varying degrees of skills and qualifications. This will entail creation of 220 million jobs by 2025 in order to reap the demographic dividend. The manufacturing sector would have to be the bulwark of this employment creation initiative. Every job created in manufacturing has a multiplier effect of creating two to three additional jobs in related activities. Therefore, a thrust on manufacturing is integral to the inclusive growth agenda of the government. 1.5 Besides the employment imperative, the development of the manufacturing sector is critical from the point of view of ensuring that the growth model of India is sustainable by providing value addition to our natural and agricultural resources, addressing our strategic needs, and developing new technologies for the welfare of our citizens. 1.6 The relatively low level of value-addition in the products manufactured in the country, and the growing imports of capital equipment the building blocks of a countrys manufacturing competitiveness also needs to be addressed urgently. Acquiring depth in manufacturing is crucial from the stand point of long-term competitiveness in strategic areas of economy such as defense and tele-communication. It is important to
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have a strong indigenous value chain addition element from the stand point of national security. 1.7 Finally, the growth of the manufacturing sector has to be made sustainable, particularly ensuring environmental sustainability through green technologies, energy efficiency, and optimal utilization of natural resources and restoration of damaged / degraded eco-systems. 1.8 Developments of Indian manufacturing sector calls for deepening and recalibrating of economic reforms that would strengthen the sector and make it grow faster and become an engine of inclusive growth. 1.9 Government of India decided to bring out the National Manufacturing Policy to bring about a quantitative and qualitative change with the following six objectives: i. Increase manufacturing sector growth to 12-14% over the medium term to make it the engine of growth for the economy. The 2 to 4 % differential over the medium term growth rate of the overall economy will enable manufacturing to contribute at least 25% of the National GDP by 2022. ii. Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2022. iii. Creation of appropriate skill sets among the rural migrant and urban poor to make growth inclusive. iv. Increase domestic value addition and technological depth in manufacturing. v. Enhance global competitiveness of Indian manufacturing through appropriate policy support. vi. Ensure sustainability of growth, particularly with regard to the environment including energy efficiency, optimal utilization of natural resources and restoration of damaged/ degraded eco-systems. 1.10 In

order to achieve these goals:-

i. Foreign investments and technologies will be welcomed while leveraging the country's expanding market for manufactured goods to induce the building of more manufacturing capabilities and technologies within the country; ii. Competitiveness of enterprises in the country will be the guiding principle in the design and implementation of policies and programmes iii. Compliance burden on industry arising out of procedural and regulatory formalities will be reduced through rationalization of business regulations. iv. Innovation will be encouraged for augmenting productivity, quality, and growth of enterprises; and v. Effective consultative mechanism with all stake holders will be instituted to ensure mid-course corrections. 1.11 The following industry verticals will be given special attention:
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i. Employment intensive industries: Adequate support will be given to promote and strengthen employment intensive industries to ensure job creation. Special attention will be given in respect of textiles and garments; leather and footwear; gems and jewellery; and food processing industries. ii. Capital Goods: A robust economic growth would necessitate a strong demand for capital goods. Such growth would create a strong and continuing demand for capital goods. The capital goods industry, which is the mother industry for manufacturing has not grown at the desired pace. A special focus will be given to machine tools; heavy electrical equipments; heavy transport, earth moving and mining equipments. Time bound programmes will be initiated for building strong capacities with R&D facilities and also to encourage growth and development of these capacities in the private sector while strategically strengthening the public sector to complement the private initiatives where essential. iii. Industries with strategic significance: A strategic requirement of the country would warrant the launch of programmes to build national capabilities to make India a major force in sectors like aerospace; shipping; IT hardware and electronics; telecommunication equipment; defence equipment; and solar energy. Mission mode projects will be conceptualized in each of these sectors, recognizing the fact that a mission on solar energy has already been launched under the National Action Plan on Climate Change. iv. Industries where India enjoys a competitive advantage: Indias large domestic market coupled with a strong engineering base has created indigenous expertise and cost effective manufacturing in automobiles; pharmaceuticals; and medical equipment. The concerned ministries will be formulating special programmes to consolidate strong industry base to retain the global leadership position. v. Small and Medium Enterprises : The SME sector contributes about 45% to the manufacturing output, 40% of the total exports, and offers employment opportunities both for self-employment and jobs, across diverse geographies. A healthy rate of growth shall be ensured for the overall growth of the manufacturing sector as also the national economy by policy interventions in areas like manufacturing management, including accelerated adoption of Information technology; skill development; access to capital; marketing; procedural simplification and governance reform. The National Manufacturing Competitiveness Programme, being implemented by M/o MSME will be strengthened, and the recommendations of Task Force on MSME for creation of a separate fund with SIDBI, strengthening of NSIC, modification of lending norms and inclusion of lending to MSMEs under priority sector lending will be given due regard in taking appropriate measures.
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vi. Public Sector Enterprises: Public Sector Undertakings, especially those in Defence and Energy sectors, continue to play a major role in the growth of manufacturing as well as of the national economy. A suitable policy framework will be formulated in this regard to make PSUs competitive while ensuring functional autonomy.

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Words of White collars after budget 2013-14

Partha Iyengar, Country Manager - Research, India:
"The big overarching focus on growth by the FM is the fundamental 'feel good' factor in this budget. Given the fact that one can argue that a lot of the weakness in the Indian economy is what I call a 'sentimental recession', his strong statement that there is no grounds for 'doom and gloom' heading into the new year. The big specific positives of the budget are that he has focused both in terms of the letter and spirit of the budget on the key planks of growth for India and health of every industry, including IT, which is Infrastructure, Education, Skills Development, and incentives for the growth of domestic manufacturing. Some of the other positive areas are support for entrepreneurship, the MSME sector, both in terms of financial and overall support. The recognition that the overseas 'trust deficit' in terms of a comfort level on India's investment climate has to be addressed is also welcome. "However, the budget is only a directional statement, and the challenge for India historically and even currently is in the execution of the statement of intent outlined in the budget. This has been India's Achilles' heel, in that bold pronouncements in the budget never see the light of day or are not implemented as effectively as they can or should be. So it was disappointing to not see any statements on what the government would do to ensure mechanisms/oversight to ensure speedy and efficient implementation of these programs."

S. Sandilya, President, Society of Indian Automobile Manufacturers and chairman of Eicher Motors:
"Overall tax rates not having gone up ... is very good. "However, on the SUVs, he increased excise duty, saying they occupy more parking spaces, which is totally surprising. We need to find out how it affects the overall sales. It was one area where growth was significant and yes, this will have an impact. "Also on imported vehicles, he increased the customs duty which was expected."

P. Balendran, Vice President, General Motors India:

"The hike in excise duty is not on expected lines, specially when automobile industry continues to remain sluggish. "Unless you see the fine print, you may not be able to know how much is going to be the
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impact. In auto industry, for the commercial vehicles, good (budget). From GM India perspective, the budget doesn't get more than out of 10 points."

Joginder Singh, President and Managing Director, Ford India

"We welcome the focus on infrastructure development, social benefits for inclusive and sustainable growth in the country. The investment allowance to boost the manufacturing sector is a positive move. The automobile industry is a significant contributor to India's economy and future growth potential. We are disappointed that there is very little in the budget that will help boost consumer confidence and revive growth. It is a missed opportunity to introduce measures that would have revived industrial growth significantly. As we all know the automotive industry has been going through very challenging times, we are disappointed with the increase in the excise duty for SUVs."

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Future global IT-BPO(A New Paradigm Shift)

In the future, the global IT-BPO industry is likely to go through a paradigm shift across five parameters-

Markets:Growth will be driven by new markets - SMBs, Asia, public sector and governmentinfluenced entities which will become a priority customer base.

Customers:Customers will demand transformative value propositions, that go beyond lower-cost replication; as technology creates virtual supply chains, customers will require a seamless experience across time zones and geographies; increasing demand for innovation and end-to-end transformation.

Service Offerings:Offerings that are high-end deeply embedded in customer value chains will emerge. Services and delivery will become location-agnostic leading to new opportunities such as design services in manufacturing, Remote Infrastructure Management (RIM), etc. Solutions for the domestic market will be a key focus area.

Talent:Government pressures to create local jobs and the need for local knowledge will alter the employee mix - a higher proportion of non-Indians with multilingual and localized capabilities. There will be a much greater focus on ongoing development of specialized skills and capabilities

Business models:Driven by a focus on expertise and intellectual property, offerings will shift from piecemeal, technology-centric applications to a range of integrated solutions and higherend services, spanning new service lines (e.g., green IT)

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Current Situation of Indian Manufacturing Industry

ndias growing trade deficit and its impact on the rupee is getting too much media attention these days. As per the data released on September 3, 2012, Indias exports in July 2012 fell by 14.8
percent to $22.4 billion, while the imports too declined by 7.6 percent to $37.9 billion, widening the trade deficit to $15.49 billion.

This is truly an alarming situation as a growing trade deficit causes a decline in the value of the domestic currency which has a wide spectrum of undesirable effects on the economy. A declining rupee leads to increased rupee cost of import and adds to the subsidy burden. Increasing subsidy adversely affects Indias ability to achieve its fiscal targets and poses serious impediments to tackling inflation. The trends and current situation Over the last two decades of liberalisation, the share of merchandise exports in Indias GDP has increased from 6.3% in 1990-91 to 16% in 2010-11. In the same period, import as a proportion of Indias GDP has increased from 8.5% to 23.5%. Consequently, the gap between exports and imports of merchandise has increased from 2.2% to 7.5% of the GDP. This gap has somewhat been made up by inflows of foreign capital and net export of services. Of late, however, capital inflow has come under pressure primarily because of Indias poor macroeconomic management and slowing economic growth. Exports of services, in particular the IT services and IT-enabled services are hit by economic slowdown in the US and the sovereign-debt crisis in the Euro Zone. Any sensible strategy to address Indias growing trade deficit cannot ignore merchandise exports and among merchandise, export of manufactured goods.

What ails the Indian manufacturing sector?

Three factors are keeping Indias manufacturing sector from becoming competitive in domestic as well as overseas markets: policy impediments, poor supporting infrastructure and autonomous factors. Policy impediments Economic reforms in India have primarily relied upon opening up the domestic market for imports to infuse competition, expecting that it would improve cost (and quality) competitiveness of indigenous manufacturers and ultimately increase exports. There is nothing wrong with this logic, and it did help initially in increasing Indias exports to $303 billion in 2011-12, from $18.5 billion in 1990-91. However, in the absence of manufacturing-friendly policies and supporting infrastructure, Indias economic reforms and the way they have been implemented so far, are increasingly revealing their limitations. While reforms in India have mainly focused on opening up of domestic markets, factors 38

constraining domestic production (in manufacturing as well as agriculture) remain unattended. For instance, policies such as allowing duty-free import of garments from Bangladesh without the country reducing its import duty on Indian fabrics are hurting Indias textile and clothing sector, the largest employer after agriculture. Poor regulation, by increasing the cost of doing business, has become the main stumbling block in the growth of indigenous manufacturing. Clearances for land acquisitions and shipping manufactured goods overseas are constrained by cumbersome and expensive regulations. These lie at the root of Indias high-cost manufacturing model. Not only manufacturing, agriculture too is suffering from a series of market-distorting policies in particular, those related to restriction on sale, inter-state movement, export and price control of farm produce. Poor performance of agriculture puts limits on growth of the manufacturing sector as it is a key source of raw material. Increased farm income generates demand for industrial goods and acts as a bulwark when other sectors of the economy are in trouble. Lower agricultural production leads to food inflation, which in turn leads to demand for hike in the industrial wages. This increases the cost of production in the manufacturing sector. Supporting infrastructure The condition of roads, ports and power supply in India is less than desirable. The supply and costs of these essential factors of production is a problem when compared with what prevails in other economies. Measured by the ratio of the price of one million kWh to per capita GDP, the cost of electricity in India is roughly 20 times as high as that in the US. Imposition of green energy norms in an increasingly climate-conscious world will further affect the cost competitiveness of Indias manufacturing sector. This production-unfriendly environment is driving Indian capital out of the national boundaries. This outflow of capital will not be good for Indias balance of payments when current account deficit is already crossing 4% of GDP and foreign investors are nervous about the India story. Autonomous factors The manufacturing sector is being hit by the following: Increased proportion of import content in Indias manufacturing processes on account of emphasis on capital-intensive production technologies (in the absence of labour reforms); change in consumer preferences, which often requires use of imported inputs; and the depreciating rupee. The growing import/GDP ratio on account of increased import eats into the demand for Indias manufacturing sector, already suffering from global slowdown and high capital cost. Indias high-cost manufacturing model can also be explained by relatively faster growth in salaries and wages than (labour) productivity as compared with that in countries such as China. For instance, in some of key manufacturing sectors such as textiles, wages have grown by 10 times in the last two decades. 39

What can be done?

What the manufacturing sector needs is a level playing field that is lacking when one considers the prohibitive cost of capital, business-unfriendly regulations and influx of cheap imports on account of trade liberalisation. To make its manufacturing sector internationally competitive, India needs a multi-pronged approach. Transforming Indias regulatory regime into an industry-friendly regime will require, among others, over-hauling of regulations related to documentation, land acquisition, environmental clearance and taxation. Removal of restrictions on inter-State movement of goods and services to ensure their seamless movement will provide resilience to the economy up against the global economic slowdown. Further reduction or removal of import duties on key industrial raw materials will reduce working capital requirement in a high-interest regime. When it comes to fully realising Indias manufacturing export potential, improvement in transport and logistics infrastructure can bring the maximum gain in improving our export competitiveness.

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