With crumbling trade barriers and duties, corporate India has been rejigging operations to remain competitive. But it still has a long way to go, suggests a recent study


On January 8, the union government reduced the peak rate of customs duty from 25 per cent to 20 per cent and removed the four per cent special additional duty. At any other time, India Inc would have denounced the intiative on the grounds that the domestic market would be flooded with imports. Instead, all industry associations and businessmen welcomed the drop. A clear sign of the improved competetiveness of corporate India.

The Indian manufacturing sector is now integrated into its global counterpart. When liberalisation started over a decade ago, fears were expressed that most Indian companies would have to down their shutters. The prophets of doom have been proved wrong. Steel from East Europe, two-wheelers and tyres from China, readymade garments from Bangladesh – none of the threats ever materialised. One industry after another has internalised efficiencies to check the onslaught of imports.

Take textiles, for instance. Though written off not so long ago to competition from Far East economies, the industry exudes a new optimism. “The business is capital and labour intensive. In both the areas, we have an advantage,” says Rajasthan Spinning & Weaving Mills’ joint managing director Riju Jhunjhunwala. 

According to him, textile companies can access funds at an 8.5 per cent rate of interest and get a five percentage points rebate thanks to the Technology Upgradation Fund. In other words, companies can raise money at as little as 3.5 per cent. Little wonder, then, that Jhunjhunwala hopes to nearly double his 2003-2004 turnover of Rs 650 crore by 2007. 

Or look at steel. After the duty cuts announced by the government, senior steel company executives told Business Standard that this would have no impact on their fortunes. Over the years, Indian steel companies have worked hard to improve their efficiencies to become low-cost producers. 

Thus, Tata Steel is amongst the lowest cost producers of steel in the world. Even the Steel Authority of India Ltd (SAIL), the public sector undertaking, has taken steps to improve its efficiency. A SAIL director says the company has drawn up plans to reduce its workforce to 90,000 from 134,000 at present.

Others are looking at ramping up capacities to become globally competitive. For instance, Jindal Stainless Ltd, a part of the $2 billion O P Jindal group, has drawn up plans for an integrated stainless steel project in Orissa’s Jajpur district. To be built in two phases, it will have a capacity of 1.2 million tonnes per annum. 
“Together with our existing 500,000 tpa capacity, this should make the company one of the top five stainless steel producers in the world with a capacity of 1.7 million tonnes,” says Ratan Jindal, vice-chairman & managing director of Jindal Stainless Ltd.

A brand new joint study by the Confederation of Indian Industry (CII) and McKinsey & Co says India should leverage its capabilities in auto components, engineering and electronic hardware to become a global leader in the manufacturing sector.

Titled ‘Building Global Champions in Indian Manufacturing’ the objective of the study is to identify export-led opportunities, understand the constraints the sector operates under and specify the potential models that will accelerate growth. 

With most manufacturing companies facing increasing profit pressure, multinationals like Ford, DaimlerChrysler, Walmart and General Electric are having to look at markets with very low labour costs. This wave of sourcing manufactured goods is expected to touch $1,000 billion by 2008, compared to $350 billion for the entire gamut of IT and ITES sourcing, and India has a chance to corner a sizeable chunk of it, says the study.

To achieve that, McKinsey suggests that Indian manufacturing companies should possess a strong export orientation coupled with front-end marketing skills, operational excellence and technical capability.
Sophisticated marketing skills would be required to displace existing suppliers with deep-seated relationships, especially in the engineering industry. 

Superior technical capability will be critical in becoming a tier I supplier and moving up the value chain. The study cites the Chinese consumer durable company Haier as a model to emulate. Haier started a refrigerator plant in 1984 and became an international brand with a turnover of $8 billion in less than 20 years.

It says that companies should rapidly adopt lean management systems to increase efficiencies manifold. According to the study, India has an edge over its competitors in skill intensive industries like automobiles, pharmaceuticals, telecom and consumer electronics. In these sectors the country has the potential to build an IT-like dominance.

The study says that there are four sources of competitiveness in India’s skill-based manufacturing – the ability to re-engineer equipment to lower capital costs by 30-40 per cent as in the case of Reliance and Hindustan Inks, innovative process re-engineering, the availability of skilled technicians, and a quality mindset, especially in discrete manufacturing areas like forging and casting.

On the other hand, India lags behind China in labour-intensive industries like readymade garments, footwear, toys and tobacco products. China has an 18 per cent share of the world trade in the labour-intensive sector, vastly higher than India’s three per cent. 

In the agriculture sector too, India’s capabilities have been identified as rather inadequate. McKinsey’s prognosis is that India should look at growing exports aggressively. In capital-intensive industries like petroleum, plastics and chemicals, the country should 
evaluate sourcing from China. That’s the only way, it believes, that India can retain its competitive edge.