Making Making Indian Manufacturing Indian Manufacturing Globally Competitive Globally Competitive

Making Indian Manufacturing Globally Competitive

Sanjay Jain, Country Managing Director Uday Bhansali, Partner & Head, Accenture, Mumbai

Project Team: Sudarshan Sampathkumar, Engagement Partner Prem Kalliath Ajit Chaturvedi Ashish Bhushan, Editor For further enquiries Please contact Marketing and Communications at: 6th Floor, DLF Centre Sansad Marg New Delhi 110 001 Tel: 91 11 3355000 Fax: 91 11 3356000 amar.wadhwa@accenture.com 17th floor, Express Towers Nariman Point Mumbai 400 021 Tel: 91 22 2814000 Fax: 91 22 2814001 ashish.bhushan@accenture.com

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Contents

Foreword

Management Summary

Relevance of the Study

13

Taking Stock

19

Key Findings

23

Recommendations

49

Impact on Indian Manufacturing

61

Managing Implementation

65

Foreword

Sanjay Jain Country Managing Director

Sudarshan Sampathkumar Engagement Partner

Making Indian Manufacturing Globally Competitive

The last few years have witnessed a slowdown in growth rates of the Indian economy. The services sector in general and software in particular has bucked this downward trend posting outstanding growth rates, leading to speculation about India transforming itself into a knowledge economy. However, given the level of education of the Indian working population, the overall contribution of services to economic growth, employment and incomes will be marginal. Measures taken to increase agricultural growth are also likely to have long lead times for success given the strong resistance such measures would face. It is against this background that we are pleased to present this study focusing on the manufacturing sector as the engine for Indias immediate economic development. The study covers the underlying issues impacting competitiveness in the manufacturing sector, sources of competitive advantage and disadvantage and provides specific findings and recommendations for individual firms and industry associations. Hence, this report presents a counter to a point of view in current thinking, which seems to be that the onus of driving growth rests entirely with the Government. In setting out the key issues and recommendations pertaining to firm behaviour, we have leveraged extensively on our internal understanding of Indian business operations. With over 2 million manhours of consulting work across the entire spectrum of Indian business, we believe we have deep understanding of the Indian business context and are uniquely positioned to comment on issues and solutions. We have also gained experience from other economies, which not too long in the past were at the crossroads as India is today and have since then made substantial progress. The study conducted over a four month period presents key learnings gleaned through interviews conducted with Government

officials and industry leaders in these other economies backed with field visits to China and extensive analysis of issues that impact competitiveness. We have also leveraged extensively on the experiences of leading industrial houses and their managements, industry associations and the global Accenture organisation. The findings of this study show clearly that there are issues that havent received requisite attention in any of the past work on this subject, which are critical to accelerating growth, employment and incomes. Further, we have specifically identified potential barriers to implementation and proposed solutions to the same. We are confident that the insights provided by this study will be valuable at this point in time in terms of building consensus both on what to do (the extent and the nature) and the how to do (the

approach to be taken) of the next round of economic reforms. Aggressively implementing these recommendations has the potential to double the manufacturing growth rate, create substantial incremental employment, and increase inflow of Foreign Direct Investment (FDI), exports and capital productivity over the next 5 years. We believe that Indian manufacturing has what it takes to become globally competitive and provide the boost that would spur the growth of the Indian economy. We encourage corporate leaders to be able to apply some of the insights that have emerged from the study to make organizations more competitive and policy makers to use some perspectives of the study to create the climate to build a resurgent Indian economy.

We would like to extend our gratitude to Mr. Sid Khanna, our erstwhile Country Managing Director, who has been the driving force behind the study. His inputs at every level have been truly invaluable.

Sanjay Jain

Sudarshan Sampathkumar

MANAGEMENT SUMMARY

A Synopsis

Management Summary

Management Summary
Background and context of the study
While the Indian economy has been on a higher growth path through the 1990s relative to the previous four decades, the initial surge in growth has tapered off in recent years. The Indian manufacturing sector, a key component of the overall economy also reflects this larger macro-economic trend, having been a major driver of higher economic growth in the mid 1990s and showing a sharp decline in performance thereafter. Hence, Accentures choice of the manufacturing sector for this report. Accenture presents the key findings and recommendations from this recently completed study, during which the team leveraged extensively on the actual project experience of Accenture India, experiences of leading industrial houses and their managements, industry associations and the global Accenture organization. In particular, the project team studied the growth of the manufacturing sector in China, where it constitutes nearly 40% of the GDP. Based on the experience of a number of western and newly industrializing economies, the evidence is overwhelmingly in favour of adopting an outward looking, international trade oriented economy as opposed to an inward looking domestic market focused one. With processed manufactures accounting for about 70% of international trade, global competitiveness in manufacturing is a national imperative. Of particular relevance to India is the fact that labour intensive exports constitute a 1.5 trillion dollar market, in which relatively high wage rate economies such as Korea and Taiwan continue to hold significant share. With 75% of Indias working population of approximately 600 million people educated only to middle school or below, it is this labour intensive manufacturing sector that can potentially generate employment in adequate numbers to absorb the labour pool. The services sector, and in particular the knowledge based industries, while extremely important, is unlikely to provide opportunities to the poorly educated sections of our society.

Analysis framework
Much of the debate through the 1990s on the way forward for sustained economic growth has centered around the role of the Government. We however, believe that there has not been enough emphasis on micro-economic issues as a driver of growth. Accenture analysis of the performance of organized firms across 12 industry sectors showcases the importance of firm behavior. The large spreads between the best performing and the average industry ROCE suggests that while all firms are impacted by common macro-economic and structural issues, where arguably the Government has a greater role to play, there are firms that are clearly able to outperform, given the same conditions. This study therefore focuses on both macro and micro economic issues and analyzes the key issues impacting competitiveness using the following framework (Figure - 1).

Figure - 1

Management Summary

Key issues impacting manufacturing productivity

The framework, adopted for this report, identifies three specific levers for driving manufacturing productivity and a fourth impacting the total manufacturing output (Figure - 2).

Figure - 2

Firm level productivity Firm behavior is impacted by management, strategy, people, process and technology matters. Notwithstanding the fact that there are some notable exceptions, Accenture experience of several hundred projects in India suggests that companies can drive up productivity levels by more than 20 50% through internal initiatives. The management issues include style (predominantly command and control style with insufficient emphasis of merit as a determinant of career progression), quality focus (lack of recognition of the need for quality and limited measurement of the cost of poor quality), customer orientation (limited investments in R&D and product innovation and continued commodity focus), change

management (limited efforts to convey the burning platform and build consensus) and lack of corporate governance (true board managed companies remain an exception with persisting issues of lack of transparency in management decision making and linkages between personal and corporate funds). The key strategic issue is related to an inadequate focus on core organizational capabilities with an absence of a documented and agreed strategy. In addition, there is absence of rigor in project evaluations including the frequent justification of projects on the basis of Government incentives. Low manufacturing technology levels and an absence of export focus are other key strategic factors that would need to be addressed.

People issues are centered around ineffective organization structures with lack of accountability, inadequate emphasis on attracting and retaining talent, lack of team building and insufficient focus on improving manpower productivity. Over-manning in many organizations could be as high as 30 - 50%. The process issues encompass all key business processes where Accenture experience suggests that the top line can be improved by 10 20% or more, while pruning marketing spends by 10 15%. In addition, with respect to the supply chain, experience suggests that a 10 30% reduction in operating costs can be brought about. Finally, in the Indian context, information technology (IT) has not been effectively leveraged to enhance productivity. Apart from the quantum of investment, the lack of ability to drive business value is evident. Firm level productivity is also impacted by the extent to which competitive factor, material and infrastructural inputs are available. Key issues include: Poor quality of transport infrastructure (where India ranks poorly in the WEF surveys) High cost of power (the power cost in India is about 50% higher than China) High cost of capital (international averages are of the order of 6 8%) Uncompetitive input materials and capital goods, including dependence on the inefficient public sector for critical raw materials, and high import tariffs Poor quality of labour with low skill levels and discipline issues.

Complexity in business transactions is another key impediment for businesses. Finally, the business environment also does not apply adequate pressure on the management to perform as there is inadequate consumer and investor protection and lack of intellectual property protection. Intra-sectoral resource allocation Historical issues that have resulted in creating a highly fragmented industry structure prevent Indias market size from being translated into scale for manufacturing. The Indian manufacturing sector is characterized by a significant presence of small scale and even unregistered manufacturing. Such unregistered manufacturing accounts for 24% of the capital employed and 84% of the workforce. 85% of Indias factories have less than Rs. 1 crore invested in plant and machinery. While we recognize the value of small and medium enterprises, the creation of a large number of such enterprises due to preferential policies and artificial market distortions has contributed to a reduction in competitiveness. In examining market distortions, the key issues are: Preferential policies for the small scale industry: the growth of the town and village enterprises (TVE) in China, which are akin to the SSIs in this country, suggests that the small scale sector can be nurtured without distorting the market through time bound fiscal incentives and technical support Other distortions including differential policies and pricing flexibility based on type of ownership (private, public etc.) and geographic distortions

Barriers to free internal trade (taxes, movement restrictions, octroi etc.) Difficulty of business closure where in many cases unviable firms remain operational causing significant financial losses to promoters or Government.

Management Summary Inter-sectoral resource allocation Indias overall economic philosophy of import substitution backed with industry protection has resulted in the creation of a diversified manufacturing base. The pattern of resource allocation across sub-sectors does not reflect Indias comparative advantages. Accenture carried out an assessment of Indian manufacturing at the sector level (Figure - 3): A key issue with respect to intersectoral resource allocation has been the lack of recognition of the opportunity in labour intensive exports. Indias share of the 1.5 trillion USD labour intensive exports is less than one percent and going by the experience of countries like China and Thailand, there is still a significant opportunity to develop this sector. Further proof of the opportunity, is provided by the market share of high wage countries like Taiwan and Korea. China has emerged as a country of choice for manufacturing labour intensive products. It is particularly relevant to note that the export profile of China includes products such as articles of wood, straw and cane including wicker work and baskets (2.2 billion USD), headgear and umbrellas, etc (1.9 billion USD). India does not have to be at the cutting edge of technology to export and has the potential to capture a large chunk of the continuing shift of manufacturing locations as they adjust for labour cost differentials.

Figure - 3

Addressing these issues will ensure that resources in the Indian economy are encouraged to move towards the consumer centric and labour intensive sectors where India has a natural comparative advantage, while there might be a reduction in investments in the capital and technology intensive sectors except where world class facilities are built. Rigidity in Indian labour laws are a key impediment to developing a robust manufacturing sector. In contrast, labour regulations in other countries allow greater flexibility in business operations while protecting worker interests. Review of labour regulations across countries suggests that typically, the nature of employment is contract based, with clear stipulations for employment termination at the discretion of the employer, provided statutory severance benefits and notice period conditions are met. This allows firms to respond to business cycles in a flexible manner. Lastly, the redirection of resources towards sectors which are more likely to sustain international competitiveness, going forward, will be dependent on Indias export promotion efforts with the active support of the Government. Factor inputs to manufacturing There are serious structural issues that hinder the greater assimilation of capital and labour inputs into manufacturing. Since India has substantially lower capital stock per worker, attracting FDI will be a prerequisite to bridging the capital gap in addition to providing a means to upgrade the level of technology and skills.

China attracts nearly half the total FDI inflow into all developing countries and over 60% of this investment has been targeted at manufacturing and over 50% in labour intensive sectors. It is important to also note that a bulk of the FDI in China has not been targeted at industries catering solely to the domestic market. Manufacturing also suffers due to differential subsidies to other sectors.

Recommendations
Addressing the issue of manufacturing competitiveness requires specific initiatives to be undertaken by the Industry and Government. Recommendations for industry Actively adopt a more performance oriented, responsive style of management to retain and leverage talent and knowledge base within the organization through valuing performance and attaching importance to innovation Substantially enhance quality focus and customer orientation to capture the value shift to the market end by researching, recognizing and communicating the need for customer focus and developing measurement systems to report customer satisfaction, quality and cost of poor quality Urgently recognize, communicate and manage the need for rapid and substantive change within the organization by benchmarking against best-in-class and communicating extensively within the organization to convey the burning platform and establishing sponsorship for change initiatives

Management Summary Transition to a more professional, accountable and transparent form of management by separating management from ownership, introducing greater professionalism in management and strengthening the role and composition of the Board of Directors Define dynamic, customer focused strategies targeted at exploiting global market opportunities by building a shared vision on business direction and purpose and enhanced rigour and objectivity in project evaluations Build nimble and accountable organizations, which fully leverage human capital through redesign of organization structures to enhance accountability and responsiveness. Labour productivity should be a key area of focus Re-engineer core processes to dramatically improve efficiency and drive business value by enhancing marketing processes and capabilities, with an emphasis on consumer understanding and product development processes. In addition, focus on improving supply chain processes Pro-actively invest in a world class information technology architecture to substantially improve productivity and quality of decision making starting with the definition of a comprehensive blue print to guide investment in IT Aggressively consolidate to buildup scale of manufacture and leverage scale to fund long term investments. Recommendations for Government Completely revamp labour laws and existing legislation to provide flexibility to managements to change manning levels based on operating conditions, while protecting employees from exploitation Eliminate major market distortions to ensure a free allIndia market which allows buildup of manufacturing scale by abolishing preferential policies/ reservations for SSIs in a time bound and phased manner, standardising rules across industry sectors irrespective of ownership, eliminating barriers to free trade across the country and reducing infrastructural barriers Enable quick business exit to facilitate efficient resource reallocation and correct market distortions created by the operation of unviable businesses. The focus should shift away from mediation and consensus at each stage to urgency and speed in industrial restructuring. This would require revamping laws restricting re-deployment of capital such as laws on sale of land etc. and increasing accountability of financial institutions Aggressively reduce tariffs and privatize core sector public enterprises to provide quality inputs at competitive prices Increase the sense of urgency and build greater consensus on the need to attract FDI by simplifying ease of business start-up and directing efforts towards targeting specific labour intensive industries

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Undertake reforms in the transport infrastructure and power sectors to reduce delays and operational costs impacting firm productivity Undertake financial sector reforms focused at increasing availability and reducing the cost of capital for industry Enhance emphasis on vocational training to improve the quality of labour resources available to manufacturing Simplify administrative processes to reduce business operating costs and transactional overheads by designing processes that cater to the 80% who follow rules rather than the 20% who dont Reform regulatory law and administration in order to ensure adequate rewards and penalties for management performance vis-vis stakeholder interests. In particular, focus on consumer protection, investor protection and intellectual property protection Shift export promotion focus towards measures aimed at correcting critical capability gaps in sectors where India has a comparative advantage by enhancing availability of information regarding international markets Reduce distortions between manufacturing and nonmanufacturing activities to ensure market determined deployment of factor resources across economic activities.

Impact on Indian manufacturing

Aggressively implementing these recommendations has the potential to double manufacturing growth rate and create substantial incremental employment. Accenture expects that: Rate of growth in manufacturing can double from 6% to 11% per annum Value added from manufacturing has the potential to increase by Rs 150,000 crores by 2006 Employment in manufacturing can increase by about 13 million although there could be some decline in employment in unregistered units. Accenture expects that there will be a greater emphasis on labour intensive manufacturing. In particular, this sector could potentially see a value add increase from 9% to 25%, increase from 3% of total manufacturing sector employment to 42% and increased contribution to exports from 12 billion USD to 57 billion USD by 2006. While we expect consumer centric and naturally protected sectors of manufacturing to grow, there is potentially a decline in scale and technology intensive sectors, except where promoters are willing to invest and set up world class facilities. The growth in the manufacturing sector will be accompanied by an increase in capital productivity by 3% and an increase in manufacturing FDI, to around 75 billion USD.

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Management Summary

Managing implementation
Three issues require the most attention: Political consensus - the single most important barrier to the implementation of structural reform. We believe this is in part due to the intrinsic conflict of interest between the change agents and the change process Divergent objectives across different Government bodies Two levels of divergence need to be understood and addressed, state-center conflicts and across Government departments Public ignorance and apathy: There is substantial lack of awareness on the urgency and need for change largely on account of illiteracy and lack of communication resulting in the masses not rewarding change initiatives through the electoral process. While there are no easy solutions, the ability to manage the change (risk minimization, aligning objectives of all constituencies and enhancing awareness) will determine the success and failure of implementation. A pilot approach can be adopted to confine change to a smaller subsection of the economy. This will allow experimentation without causing excessive disruptions to the rest of the economy. Successfully executed pilots can then be used as role models to build consensus towards the proposed changes. Undertaking reforms in Government administration is a means for aligning Government bodies towards common economic objectives. Formally defining objective measures of performance across levels of Government, articulating these performance measures in economic terms, setting aggressive targets for each measure and constituting reward-penalty mechanisms are some of the initiatives to align the administration with the achievement of the change agenda. Finally, Government needs to effectively utilize the formidable media resources at its disposal (Doordarshan and AIR) to create public awareness on the growth potential of reform, the current lack of competitiveness and create a sense of urgency for reform.

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RELEVANCE OF THE STUDY

Key Differentiators

13

Relevance of the Study Several studies covering various aspects of Indian economic growth have been carried out by Government Departments and Committees, industry associations and other agencies. In fact the substantial body of reasonably comprehensive and well thought out to-dos contrasts sharply with the lack of actual on-the-ground implementation of the same. Hence, it is natural to question the need for further analysis/ recommendations which essentially set out what is to be done and demand more urgency in getting on with the more difficult task of doing what has already been recommended. The findings of this study show clearly that there are issues that have not received requisite attention in any of the past work on this subject, which are critical to accelerating growth, employment and incomes. Further, we have specifically identified potential barriers to implementation and proposed solutions to the same. Hence, Accenture believes that the insights provided by this study will be valuable at this point in time in terms of building consensus both on what to do (the extent and the nature) and the how to do (the approach to be taken) of the next round of economic reforms.

Why Manufacturing?
The first point of departure pertains to the subject of the study itself i.e. focus on the Indian manufacturing sector. Implicit in our breadth of analysis choice is recognition of the trade-off between the degree of impact on the overall economy and the difficulty of implementation of likely recommendations. The most important imperative for focusing on manufacturing comes from the significance of world trade to economic development. The evidence is overwhelmingly in favour of adopting an outward looking, international trade oriented economy as opposed to an inward looking domestic market focused one. Even supposedly large economies such as the USSR, China, India and Brazil (which probably had a better chance of making a success out of such a strategy than smaller countries) have failed dramatically in creating vibrant economies based on self sufficiency. The process of globalisation only increases the imperative for a strong international trade oriented economy.

The evidence is overwhelmingly in favour of adopting an outward looking, international trade oriented economy as opposed to an inward looking domestic market focused one

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In this context, the pattern of international trade (where over 70% of the 7 Trillion Dollar International Trade market is in processed manufactures) points to the necessity of developing global competitiveness in the manufacturing sector (Figure - 1). From a domestic market perspective, the experience of developed countries and newly industrialized countries (NICs) in the last century categorically points to the significance of the manufacturing sector in overall economic development. The transition from agriculture to manufacturing results in substantial alternate employment possibilities for the agriculture workforce, in the process increasing domestic surpluses. Various studies have pointed towards the positive spin-off effects of increased manufacturing activity for instance on the overall skill levels (learning by doing), on social issues through drawing women into productive activity and on agricultural productivity itself.

With agriculture providing the primary means of employment to over 65% of Indias working population, it is evident that measures taken to address agricultural growth are likely to have the maximum long term impact on the overall economy. However, we believe that such measures will face resistance from interest groups across the country and the common public, and consequently will require substantial political will and consensus to be carried out to any degree of significance. Further, these measures are also likely to have a long lead time before they bear fruit. In the current scenario, where rapid proof of success is necessary to sustain the momentum for continued reform, recommendations for boosting agricultural growth are likely to remain in the necessary to do but have not been implemented list.

Figure - 1

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Relevance of the Study At the other end of the spectrum, the services sector has shown strong growth in the 1990s. With sectors such as software showing outstanding results, there is much public speculation on India transforming itself to a knowledge economy without having to transition through a manufacturing-led growth phase. This appears to be a highly improbable scenario. An analysis of Indias demographic profile highlights the stark reality that nearly 75% of Indias working age population of over 600 million is educated below middle school level. Services in general, and knowledge based service sectors more so, require a much higher level of education than either agriculture or repetitive labour intensive manufacturing (Figure - 2). Hence, Accenture believes that while certain services sectors will continue to grow impressively, their overall contribution to economic growth, employment and incomes will not be adequate in themselves to meet Indias economic growth needs. Hence our choice of focus on the manufacturing sector as the target for Indias immediate economic development implicitly recognises both the importance of this sector to overall economic growth and the likelihood of successfully carrying out specific measures within a reasonable time frame.

Figure - 2

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Macro And Micro Economic Issues

Much of the debate through the 1990s on the way forward for sustained economic growth has centered around the role of the Government whether in explicit macro-economic management through fiscal and monetary policy, or in terms of implementing specific structural changes in various sectors, in order to transition from a controlled to a market-driven economy. This thinking continues even today, with enhanced emphasis on massive public investments as a means of driving domestic demand as a response to sluggish growth. We however, believe that there has not been enough emphasis on microeconomic issues as a driver of economic growth. Firm behaviour plays an exceedingly important role not only in terms of how firms respond to signals from the environment (whether changes in international business scenario or explicit signals from the Government, for instance a change in monetary policy) but more importantly in terms of how efficiently firms deploy and utilise factor inputs labour and capital. In the final analysis, the aggregate performance of the economy is a function of the performance of individual firms. For Indian manufacturing to become globally competitive, Indian firms will have to upgrade and sustain their individual competitiveness - and this is impacted not only by structural issues, which in effect impact all firms within a specific sector, but equally (and perhaps more significantly) by how each firm behaves in terms of leveraging management, strategy, people, process and technology to enhance competitiveness. Accenture analysis of the performance of organised firms across 12 industry sectors showcases the importance of internal firm behaviour. The large spreads between the best performing and the average industry ROCE for each sector indicate that while all firms within a sector are impacted by common macro-economic and structural issues, there are firms within each sector that are clearly able to outperform, given the same conditions (Figure - 3).

Figure - 3
17

Relevance of the Study This study focuses equally on both macro and micro economic issues. While we recognise the importance of structural modifications in the economy and the need for sound macro-economic management, we believe that individual firms and industry associations can do much towards enhancing competitiveness and driving growth. In effect the clear message from this study is that while Government has important obligations, companies, groups and industry associations also need to introspect on internal, controllable factors and implement changes quickly. This report therefore bridges a gap in current thinking which seems to be that the onus of driving growth rests largely with the Government. In setting out the key issues and recommendations pertaining to firm behaviour, we have leveraged extensively on our internal understanding of Indian business operations. Based on over 2 million man-hours of experience in over 200 large public and private sector Indian companies in recent years, we believe we have deep understanding of the Indian business context.

Comprehensiveness
We have attempted to be comprehensive in our coverage of issues impacting competitiveness in this study. In the past, specific measures taken to enhance Indias competitive position have not been successful due to the failure to undertake multiple measures that impact the same underlying problem. Our framework for analysis allows comprehensive identification of the issues (both macro-economic and micro-economic) that need to be addressed. Our analysis suggest a somewhat different priority for both Government and Industry from current thinking. Through this study, we provide a different perspective on what needs to be done. In specific areas where detailed recommendations have already been made by various agencies (for instance in infrastructure, privatisation, financial market reforms etc.), we highlight the need for urgency in implementation, rather than retrace familiar ground.

While Government has important obligations, companies, groups and industry associations also need to introspect on internal, controllable factors and implement changes

Barriers To Implementation
While reviewing the failure of implementation programmes undertaken in the past, it became evident that there were specific common issues that acted as barriers irrespective of the nature of the recommendation being implemented. Tackling these underlying issues would be critical towards ensuring success of implementation efforts in future. Accenture has attempted to leverage its experience in implementing large scale business change while proposing solutions for addressing these barriers to change. While the scale of change is much larger (i.e economy-wide, as opposed to within a commercial business operation), we believe that the fundamentals of change management still apply. The study concludes with a discussion on the key approaches towards understanding and tackling change management issues at a country level. We believe that proper appreciation of change management issues will significantly improve the success rate of implementation programmes.

quickly

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TAKING STOCK

Keeping Pace

19

Taking Stock Comparing the competitiveness of Indian manufacturing vis--vis other developing countries on various measures, the lack of competitiveness in Indian manufacturing today is apparent. The implications of globalisation in this situation are twofold while globalisation substantially increases the competitive intensity and will threaten inefficient industry sectors, it also affords opportunities to make manufacturing an engine for overall economic growth.

Measures of Competitiveness
Total Factor Productivity as a measure of competitiveness
The most comprehensive indicator of competitiveness (whether at an economy-wide level or at a sector level) is Total Factor Productivity (TFP). TFP measures the value of output generated per unit of capital and labour deployed. In effect, TFP as a measure adjusts for differences in capital intensity across countries for instance, it is widely recognised that labour productivity in India is much lower than in developed and other developing countries. However, at least part of this difference can be attributed to the difference in capital stock per worker available. TFP levels indicate the difference in labour productivity across countries that is not on account of differences in capital intensity. Economic growth accounting attempts to quantify the contribution of growth in TFP - Overall GDP growth can be disaggregated into growth on account of changes in the quantum of factor inputs (labour, capital) and growth due to productivity increases (TFP Growth) (Figure - 1).

Surrogate measures of competitiveness

Since the measurement of TFP and growth in TFP is complex, involving cross-country adjustments for exchange rates, relative price levels/ inflation adjustments (both in factor and product markets) and capital stock series, data on TFP (both absolute and relative) tends to be available with a lag. Hence TFP can be used as a measure of competitiveness over a long term timeframe. Surrogate measures such as export performance (growth in share of world exports) and extent of tariff/ nontariff protection can be used for a more current assessment of the degree of competitiveness in addition to TFP.

Figure - 1
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Current Competitiveness Of Indian Manufacturing

TFP comparisons establish that the productivity of Indian manufacturing is about one-fifth of US levels and about half of levels in Taiwan and South Korea with negligible change in relative productivity levels over the last two decades. The result of low catch-up in TFP is that current labour productivity levels are 3 - 5 times lower in India despite starting at a higher level of capital intensity compared to Korea and Taiwan in the 60s (Figure - 2). While labour productivity in Indian manufacturing has increased marginally (relative to the US) during the last three decades, labour productivity in Taiwanese and Korean manufacturing has increased more rapidly. Since labour productivity is directly linked to economic well-being, the implication of lack of productivity growth on income levels is significant (Figure - 3).

Figure - 2

Figure - 3

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Taking Stock Considering that manufacturing exports account for over 75% of total world exports of goods and services, Indias export performance also reflects lack of competitiveness in manufacturing. Indias share of world exports has grown marginally from a low base (0.5 - 0.7%) during the period 1980 - 2000, while in the same period other developing countries notably China, Thailand, South Korea and Malaysia have more than doubled their share of world exports (Figure - 4). The lack of competitiveness is further demonstrated by the fact that despite tariff reductions through the 1990s, India continues to be amongst the worlds more protected economies. India has the second-highest average tariff rate in 2000 and continued to have a higher percentage of products covered under non-tariff barriers in 2000 than most other developing countries had in 1990. Finally, when viewed on a sector-wise basis, it is observed that five sectors account for over 75% of exports, suggesting that several sectors are not globally competitive. Hence, cross-country comparisons on direct and surrogate measures of competitiveness point towards a significant lack of competitiveness in Indian manufacturing today. Global competitiveness survey rankings such as those in the WEFs Global Competitiveness Report provide corroborative results, where India has been ranked 37th and 49th (out of 59 countries surveyed) in terms of current and growth competitiveness respectively (Figure - 5).

Figure - 4

Figure - 5
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KEY FINDINGS

Our Observations

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Key Findings The specific opportunities for Indian manufacturing and key issues that need to be resolved in order to address each opportunity are set out in this section. The structure of this section follows the analysis framework presented. Some of the issues highlighted will have an impact across the drivers of productivity identified. In order to avoid repetitiveness, each issue has been highlighted against the driver that we believe is most significantly impacted.

Study Approach
The study approach combines a sound economic framework with observation and insights based on significant Accenture experience in the Indian and global business environment. Specifically, we have extensively leveraged the experiences of leading industrial houses and their managements, industry associations and the Accenture organisation worldwide (Figure -1).

Figure -1
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The following elements were specifically built-in to bring in the manufacturing experiences of various economies, in particular the South East Asian countries and practical experiences of managing business in the Indian environment: Review of the overall economic development path of key South East Asian countries, including specifically strategies adopted in the manufacturing sector First hand experience of the manufacturing sector in China through visits by the project team and interactions with

multinationals and Indian organisations who have set up manufacturing facilities in China, Chinese Government/ Administrative officials and Chinese entrepreneurs Discussions with project sponsors (Leading industrialists and industry groups who account for over 30% of the total organised sector manufacturing output in India), Industry associations, practicing managers and policy makers.

Analysis Framework
The framework for analysis identifies three specific levers for driving manufacturing productivity and a fourth impacting the total manufacturing output. Driving manufacturing output growth requires specific initiatives to be undertaken for each productivity lever combined with increased allocation of resources to manufacturing. The imperatives from the framework are set out below: Firm level productivity needs to be increased through internal measures taken by firms and identification and resolution of external factors impacting firm productivity Competitiveness at a sector level needs to be enhanced through optimal resource allocation across firms within each sector Overall productivity of Indian manufacturing (across all sectors) needs to be enhanced by correcting historical resource over/ under allocation across sectors
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Labour and capital resource deployment in the manufacturing sector needs to be increased from current levels through productivity enhancement in manufacturing (a combination of the first three levers) and correction of distortions across manufacturing and other economic activities (Figure - 2).

Key Findings

Figure - 2

Firm Level Productivity

Indian manufacturing has made significant improvements during the 1990s across all aspects of business. Some leading firms in specific sectors have upgraded their capabilities and scale of manufacture to world-class standards. Based on our recent experience of working with a large number of manufacturing organisations in India and overseas, we believe however, that there is substantial scope for enhancing firm productivity through internal initiatives. The significant differences in performance between leading and average organisations corroborates our viewpoint. Improving productivity through firm behaviour changes implies addressing issues with respect to management, strategy, process, people and technology. We have highlighted issues that are relevant across the spectrum of Indian manufacturing organisations while recognising that each issue identified will not apply to every organisation. In addition to the behaviour of firms, there are issues pertaining to the enviroment that impact firm productivity (Figure - 3). Firms are dependent on the efficiency of markets outside their scope of operations for instance for factor, material and infrastructure inputs. Issues preventing firms from accessing international quality inputs at internationally competitive prices have been identified. The environment itself needs to be conducive to business operations and adequately reward and penalise superior/ inferior firm performance. The characteristics of the business environment also determine the extent of dynamic firm productivity improvements.

Figure - 3
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Firm behaviour
Firm behaviour encompasses management, strategy, people, process and technology issues. We believe based on Accenture experience of several hundred projects that Indian companies can drive up productivity levels by 20 - 50% through internal initiatives (Figure - 4). Management issues

Inadequate quality focus - lack of recognition of the need for quality in business processes as well as product quality, inadequate recognition and measurement of cost of poor quality and insufficient international benchmarking for quality standards Inadequate customer orientation limited investments in R&D and product innovation and continued commodity focus with limited efforts to drive product differentiation Inadequate change management capabilities inadequate recognition of the need for change, limited ownership of change initiatives and limited efforts to build consensus for change Lack of corporate governance true Board Managed companies remain the exception, persisting issues of lack of transparency in management decision making and linkages between personal and corporate funds.

Apart from a few leading organisations, short term orientation in management outlook has limited improvements in firm strategies and operational efficiencies. Management style issues predominantly Command and Control style, insufficient emphasis on merit as a determinant of career progression and lack of emphasis on data and objectivity in decision making

Figure - 4

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Key Findings Strategy issues Indian organisations have historically tended to have relatively limited strategic focus on leveraging core capabilities, project evaluations, technology selection and expanding product-markets. Inadequate focus on core organisational capabilities continued focus on controlling all elements of the product value chains (vertical integration), inadequate recognition and leveraging of core capabilities and limited focus on continuously evaluating the need to manage non-core resources. In many cases, there is an absence of documented and agreed strategy, with ownership at the highest levels Insufficient rigour in project evaluations issues of insufficient strategic fit with core capabilities in new project identification, frequent justification for projects on the basis of specific Government incentives, inadequate rigour and objectivity of the project evaluation process and insufficient rigour in assessing impact of business cycles across many industries. The indiscriminate capacity expansion in the Chlor-Alkali industry during the early 90s illustrated below is indicative of the key issues with project evaluation (Figure - 5) Low manufacturing technology levels - inadequate emphasis on building world class manufacturing facilities, insufficient attention towards factoring in dependencies like quality of inputs and Indian operating conditions in technology choice and limited attention to technology upgradation, particularly in processes supporting the core process flow Absence of export focus exports rarely defined as a key business thrust area, limited attempts at understanding and exploiting international markets and lack of vision to dominate global markets in select sectors.

Indiscriminate capacity expansion in the early 1990s in the Chlor Alkali industry
A shift in technology allowed domestic manufacturers to reasses demand, supply and industry profitability Demand is based on a broad range of end user industries, growth is fairly predictable (was projected to be around 5 - 6% in 1995) Capacity added was almost double the amount of projected demand growth (CAGR of capacity growth at 12.5%) with existing players expanding capacities and end users backward integrating to set up fresh capacity.

In the project evaluation, each player appeared to assume that capacity addition would not adversely impact market prices and that each individual firm alone would capitalise on the projected market growth.

Figure - 5
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People issues While leading companies have been able to substantially leverage human resources, other firms have put in limited efforts to harness human capital to drive superior performance. Ineffective organisation structures - largely centralised profit accountability and decision making, absence of business result ownership except at the highest levels, excessive layers of middle management, functional organisation structures and inadequate role clarity across levels Low emphasis on attracting and retaining talent - cost driven recruitment criteria, performance management systems not geared to identify superior performance, inadequate differentiation between the best and average performers, continued tolerance of non-performance and inadequate organisational focus on employee training Inadequate focus on team building - ineffective working of cross-functional teams (planning, new product development etc.) and limited team Key Performance Indicators

Inadequate emphasis on enhancing labour productivity - excess manpower in both white collar and blue collar levels (an issue largely abdicated by management as being too difficult to address), inadequate emphasis on setting up and adhering to Standard Operating Procedures (SOPs) and inadequate attention to plant layout/ ergonomics to ensure optimal utilisation of labour. Although there is a barrier in terms of labour regulations, Indian companies have not done enough to reduce excess manpower. In our experience, the extent of overmanning is at least 30 - 50% across levels. Process issues Ineffective marketing processes improper value choice in terms of target customer definitions and value priority choices for targets, inefficiencies in definition of value proposition and ineffective communication processes. Accenture experience indicates that sophisticated understanding of customer needs and robust marketing processes can potentially improve the topline by about 10 - 20 % and prune marketing spends by 10 - 15 % (Figure - 6)

Figure - 6
29

Key Findings Inefficiencies in supply chain processes across procurement, conversion, supply chain planning, logistics/ distribution and sales force effectiveness. Accenture experience indicates that there is potential for 10 30% reduction in operating costs through improving supply chain processes (Figure - 7) Inadequacies in project management processes inadequate focus on detailed cost estimates, inadequate definition of project milestones, time and cost overruns in project schedules and weak capital budgeting processes Sub-optimal management information systems - budgets and annual plans largely focused on financial metrics without clearly identifying and articulating drivers of performance, weak review mechanisms and processes, inadequate information capture in costing systems for sophisticated decision making, issues with timeliness of information and suspect data integrity.

Figure - 7

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Technology Issues Across the world, Information Technology (IT) has been effectively leveraged to enhance employee productivity this has been possible through radical changes in business process enabled by technology. However, IT in the Indian manufacturing context has not been leveraged adequately both due to inadequate investments and limited ability to leverage business value. Information Technology investments in many Indian companies continue to remain focused on automating existing processes and hence limits the ability to extract business value. Insufficient emphasis on investments in Information Technology - lower priority attached to investments in IT relative to other investments, inadequate recognition of the need for world class IT and inadequate emphasis on creation, measurement and updation of business cases for IT Information Technology inadequately leveraged towards driving business value - largely transaction automation focus on IT rather than as an enabler of superior decision making, multiplicity of information systems of different vintage limiting the ability to integrate systems and derive full value and custom development for standard functionalities (Figure - 8).

Figure - 8

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Key Findings

Competitiveness of inputs
Firm level productivity is impacted by the extent to which competitive factor, material and infrastructural inputs are available. Inefficiencies in supply markets and tariff protections prevent firms from accessing international quality inputs at internationally competitive costs. We believe this is a major area needing urgent attention from Government. Key issues in this regard are: Poor quality of transport infrastructure - across all sectors including port facilities (where productivity is amongst the lowest in the world), surface

roads, railways, airports and waterways (Figure - 9) High cost of power - industrial power continues to be amongst the most expensive in the world. While firms have attempted to circumvent high costs and low quality of power supply by installing captive facilities, this has resulted in increased capital requirements, thereby distorting cost structures (Figure - 10) High cost of capital continues to be 10 - 12% against international averages of 6 - 8%.

(2000)

Figure - 9

Figure - 10
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Uncompetitive input materials and capital goods dependence on inefficient Public Sector Enterprises (PSEs) for critical raw material inputs, high import tariffs for various raw materials ensuring that local prices are substantially higher than for international competitors and tariffs on capital goods. A particular problem that Indian industry faces is that of dependence on upstream sector efficiencies. Each sector is in effect constrained by the inefficiencies of the upstream sector. This takes the form of higher prices for input materials and in quite a few cases lower quality of raw materials. For instance the international competitiveness of a garment manufacturer is limited by the efficiency of the upstream weaving/ finishing industry the manufacturer cannot depend on international markets for procurement of international quality fabric at international prices, due to tariff protection for the local upstream industry Low quality of labour low skill levels, with an overall shortage of technically skilled manpower and work ethic/ discipline issues. Low levels of education and literacy and the poor quality of technical training institutes are the key factors responsible for this situation. China has been far more proactive in deploying women in the manufacturing workforce. More than 50% of the working age female population is employed in China, whereas women account

for less than 15% of employment in India. In China, women are believed to be superior for specific types of repetitive manufacturing work through superior skill at specific tasks, attitude and commitment and ability to focus on work without getting distracted.

Inadequate pressure on management performance The business environment does not impose adequate pressure on management performance. The impetus for firms to drive internal change and enhance competitiveness through an environment that adequately differentiates superior and poor performers has hitherto been missing. Specific issues that need to be addressed are: Inadequate consumer protection - limited awareness of rights of consumers, long drawnout process for addressing consumer complaints despite the setting up of various consumer protection forums and limited penalties for non- compliance Inadequate investor protection - limited financial disclosures and transparency of company information, resulting in the inability to differentiate across firms based on performance and preventing firms with superior performance from raising lower cost funds Inadequate intellectual property protection - rampant counterfeiting and duplication which diverts management attention and limits the ability to derive value from superior brand building.

Business environment
The final set of issues directly impacting firm productivity is the overall business environment itself. The business environment impacts firms in two ways the first is the direct impact on business transaction costs and the second is more dynamic impact in terms of adequate rewards for superior performing firms and penalties for sub-optimal performance. Complexity in business transactions Administrative procedures impacting day to day business operations are complex and overlapping and lead to significant diversion of management attention from core business issues. Issues such as large number of clearances/ permissions for business start-up and changes in business operation and multiple agencies regulating operations functioning independently impose additional costs and delays in business transactions. Overall there is unambiguous agreement across Indian industry that administrative procedures are not geared to being supportive of projects and business operations.

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Key Findings

Intra-sectoral Resource Allocation

Issues that are pertinent to the aggregate productivity of firms at a sectoral level are discussed in this section, specifically the implications of lack of scale on Indian manufacturing. The effect of scale on unit variable costs is well understood in the case of typically capital and scale intensive sectors. Even in labour intensive sectors where the scale of a single location manufacturing facility is not as relevant, operational scale enables investments in R&D, product innovation, process improvements and marketing. The size of the Indian domestic market is substantial and should be leveraged. However, issues that have historically resulted in a highly fragmented industry structure prevent Indias market size from being translated into scale for manufacturing. Accenture believes that significant productivity gains can accrue at an aggregate sectoral level through industry consolidation.

The fragmentation of Indian industry

When contrasting the development experience of countries such as South Korea, Taiwan, Singapore and Hong Kong with India, an important differentiator to be recognised is the initial size of the domestic market. India being a significantly large domestic market (the skew in purchasing power notwithstanding) actually had a significant advantage vis--vis these countries, in terms of offering a local market that could allow significant scale build-up. However, extreme fragmentation in Indian industry has resulted in the potential of a large domestic market not being translated into scale advantages for manufacturing. There is significant presence of smallscale unregistered manufacturing in India, which is prevalent across the entire spectrum, even in classically scale and capital intensive sectors. Such unregistered manufacturing accounts for 23% of capital employed and 84% of the workforce. Even within the registered manufacturing sector, there is a huge skew towards low scale of manufacture with the result that 85% of Indias factories have less than Rs. 1 crore invested in plant and machinery (Figure - 11).

Figure - 11
34

While we recognise the value that small and medium sized enterprises add to every economy, the creation of a large number of such enterprises due to artificial market distortions has been detrimental to competitiveness, in Indias case. In several sectors historical Industrial Policies have actively encouraged the set-up of small-scale capacities. These units add to domestic supply in product categories which have secular demand growth, depress realisations and impact industry profitability. The limited scale and financial strength of such units precludes the diversion of supply into international export markets, since they are neither cost competitive in commodity grades, nor able to match quality specifications and invest in product innovation in specialty grades (Figure - 12).

Market distortions
As long as consumer interests are protected (through suitable anti-trust regulation and enforcement), scale build-up in every industry is desirable in order to enhance overall global competitiveness of the sector. In many scale intensive sectors, the current size of the domestic market may at best allow one or two competitors to operate with global scale capacities (for instance in petrochemicals) in these sectors, global scale of operations is a prerequisite for being globally competitive. In this context, there are several structural market distortions that continue to exist, which in effect serve to carve-up the domestic market and preclude industry consolidation/ buildup of operational scale. Common markets such as the EU can be taken as a reverse analogy while in Europe, several disparate countries are dismantling trade barriers in order to derive scale advantages and promote specialisation within member countries, the situation in India is the

Figure - 12

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Key Findings reverse despite the country being a single political unit, trade within the country is subject to various distortions. Preferential policies for small scale industry Small scale industry has received significant preferential treatment both in terms of specific sectors being reserved exclusively for small scale industry and in terms of preferential excise and other fiscal concessions. Since the preferential treatment is contingent on these units remaining small, there is no incentive for these units to expand. The Chinese experience with Town and Village Enterprises (TVEs) contrasts sharply, whereby the Chinese Government has provided significant support in terms of fiscal incentives for an initial time period (and not based on size) and additional technical support (training, technology development etc.), without instituting market distortions (Figure - 13). Market distorting rules based on other criteria Differentiation across firms based on ownership or geography results in changing industry cost structures and effectively subdividing the all-India market. Differential pricing flexibility, freedom of entry, excise duties and taxes based on type of ownership i.e., public sector, private, co-operative etc. Geographical distortions Differential state level fiscal incentives, backward-area benefits etc. Barriers to free internal trade Barriers to intra-country trade facilitate setting up of similar/ parallel units across states (often with sub-optimal unit capacities). Both explicit barriers such as movement restrictions/ distortionary taxes and natural barriers such as high transportation costs prevent specialisation of states along specific industries and corresponding scale build-up commensurate with operation on an All-India level. Instead, we witness duplicate capacities, operating at a state/ regional level. Restrictions on movement of goods across states, entry permits etc. Distortionary taxes applied selectively based on point of origin of material taxes applicable to cross state sales, local taxes such as Octroi etc. Natural barriers to trade high cost and lead times in transportation, due to poor quality of surface infrastructure.

Figure - 13

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Difficulty of business closure

The difficulty of business closure perpetuates the fragmented industry structure, impacting both resource redeployment and aggregate sectoral productivity. Business exit is near impossible within a meaningful timeframe with the process for closure of sick/ unviable units being difficult and time consuming. Existing labour laws are geared towards protecting worker interests and there is a lack of

urgency in the functioning of the BIFR and the financial institutions. In this situation, continued operation of unviable firms results in distortion of industry price structures. Faced with no other alternative, unviable firms remain operational and in some sectors are taken over by the Government. Such firms use marginal cost pricing strategies effectively spoiling the market for viable firms by driving prices down to variable cost levels. This results in lowering of aggregate sectoral productivity levels.

Inter-sectoral Resource Allocation

Indias overall economic philosophy of import substitution backed with industry protection has resulted in the creation of an extremely diversified manufacturing base. The pattern of resource allocation across sub-sectors within manufacturing does not reflect Indias comparative advantages in a global context. Market-led redeployment of capital and labour across sectors (either based on demand shifts or based on productivity differences) has been limited. Hence, the diversified manufacturing base is however not a globally competitive one, with inefficient operations in various sectors largely being allowed to remain. This is particularly true in the case of several large, core-sector PSEs. By facilitating resource movement across sectors, the overall productivity of Indian manufacturing will increase since resources will move dynamically towards sectors that are fundamentally more competitive. In this section, we examine Indias competitive advantages and disadvantages and identify specific classes of manufacturing which are likely to be more competitive in the globalised business environment. In effect we examine the future pattern of resource movement, given flexibility and removal of market distortions. Specifically we draw attention to our inherent competitive advantages in labour intensive manufacturing, where there is significant scope for leveraging our human resource base in this subsector.

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Key Findings

Sector level assessment of competitive advantages

An assessment of the competitive advantage of Indian manufacturing was carried out at a sector level factoring in parameters such as factor intensity, current degree of competitiveness (scale, cost efficiency and level of sophistication), expected postintegration scenario both in terms of opportunities and threats from globalisation and the nature of the domestic/ international markets. Our conclusion from this assessment is that sectors accounting for approximately 60% of manufacturing output from the registered sector are likely to sustain domestic market competitiveness under a globalised environment (Figure - 14). Consumer Centric Product Sectors Key Product Categories: Processed foods, beverages, tobacco, apparel, consumer end products based on various materials (wood, paper, leather, metals, plastic, rubber etc.), footwear, consumer electronics and household appliances. Consumer centric product sectors are likely to be less threatened in the domestic market compared to industrial product sectors under a globalised environment, since factors other than pure cost competitiveness are involved. The domestic market is characterized by significant diversity in consumer behaviour, regional preferences, substantial differences in purchasing power, complexity of distribution with over 6 million retail outlets, geographical spread and substantial regional competition with diversity in product variants across price points. The complexities inherent in the Indian market are likely to pose barriers to international competition. Indian firms in consumer product sectors can focus on building marketing assets to enhance barriers to competition and remain competitive in the domestic market. However, they will be constrained by financial resources, limited understanding of international consumer preferences and lack of marketing expertise in extending their reach to international markets. Industrial product sectors labour / skill intensive Key Product Categories: Cotton textiles, wool silk and other fibers, leather processing, metal products and parts etc. Labour and skill intensive industrial product sectors are characterised by relatively lower capital intensity and significant impact of labour productivity on operating costs. These industry sectors are likely to have significant competitive advantage in both international and domestic markets, provided labour productivity is substantially increased and scale, technology levels and management/ operational skills are upgraded to back productive labour.

Figure - 14

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Industrial product sectors naturally protected industries Key Product Categories: Non metallic mineral products (glass, ceramics, cement etc), basic metals. These product categories are typically scale and capital intensive where cost competitiveness is likely to be critical. The lack of scale and technology disadvantages in these sectors is offset to some extent by natural barriers such as freight costs (in the case of products such as glass, cement, ceramics and stoneware) and by availability of low cost input materials such as iron-ore and bauxite (in the case of metal manufacturing). Hence these sectors are likely to remain competitive in the domestic market, while being largely uncompetitive in international markets. Industrial product sectors capital / scale intensive Key product categories: Commodity chemicals, synthetic rubber, plastics, synthetic fibres, paper/ paperboard, petroleum products. In these sectors, cost competitiveness is critical and is largely driven by manufacturing scale and technology levels. The ability to manage capital costs in terms of access to low cost funds and ability to manage project execution significantly impacts overall product costs.

Indian manufacturing has significant scale disadvantages compared to international competition and is unlikely to be competitive in both domestic and export markets, in the absence of tariff barriers. Industrial product sectors technology intensive Key product categories: Capital equipment, scientific equipment, transport equipment, specialty chemicals. These product categories are driven more by product performance and reliability, rather than purely on costs. Manufacturing processes are usually highly capital intensive and product manufacture requires significant technological know-how, investments in R&D and product development. Indian manufacturers in these categories are at a significant technological disadvantage and are unlikely to remain competitive.

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Key Findings

The opportunity in labour intensive exports

International trade in labour intensive manufactures is significant with exports of labour intensive products valued at approximately 1550 Billion USD. Despite availability of low cost labour, Indias share of world exports in labour intensive products is currently minimal (less than 1%) (Figure - 15).

The opportunity for India arises from the fact that labour intensive manufacturing tends to relocate across countries driven by labour wage rate differentials. While countries such as China, Thailand and Indonesia have gained significantly in the last two decades, Korea and Taiwan continue to hold share despite significantly higher wage rates (Figure - 16).

Figure - 15

Figure - 16
40

China has emerged as the location of choice for labour intensive manufacturing (Figure - 17). Key features contributing to their success are: Collaborative efforts by Government and industry to identify employment-generating product sectors Town-level specialisation in specific products clustering effects Building and leveraging scale in labour intensive manufacturing Focus on product design and development Workforce training, excellence in work breakdown into repetitive activities (SOPs for production)

Ergonomic shopfloor design and worker facilities (staying arrangements, sanitation etc.) Women in the workforce. Given the high probability of labour intensive manufacturing relocating away from Taiwan and Korea in future, this could translate into a significant opportunity for India, provided issues pertaining to labour productivity, infrastructure, FDI involvement etc. are addressed.

Figure - 17

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Key Findings

Preferred redirection of resources

Based on the above assessment of Indian manufacturings competitive strengths and weaknesses in the post-integration scenario, we believe that capital and labour resources should be redirected towards specific sectors, which will result in a positive impact on aggregate manufacturing productivity (Figure -18).

Figure -18

Rigidity in labour regulations

Rigidity in labour regulations is the predominant issue that impacts Indias ability to reallocate resources towards more competitive sectors. Accenture believes that restrictive labour regulations significantly impede Indian manufacturings ability and intention to build scale in labour intensive manufacturing sectors. In many cases, a large operational scale requirement has been broken up into smaller units in order to be outside the purview of labour legislation, resulting in a proliferation of small scale units. As a consequence, over 85% of Indias factories employing less than 100 people. Currently, there are severe restrictions impeding operational flexibility:

Termination Requirement of government approval prior to down sizing as per law Provision allowing frequent Government interventions Long procedures for settlement with typical time taken between 3-15 years. Restructuring and closure Notice of change required prior to virtually any change in work conditions and compensation 21 day wait in practice for any reaction to the notice given Requirement of prior approval from Government for business closure.
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Contract Labour Powers with the State Governments to enforce regularisation of contract employees In contrast, labour regulations in other countries allow greater flexibility to business operations while protecting worker interests. As can be seen from the cross-country comparison of labour regulations below (Figure - 19), in many competing developing economies the nature of employment is contract based, with clear stipulations for employment termination at the discretion of the employer, provided statutory severance benefits and notice period conditions are met. This allows firms to respond to business cycles in a flexible manner.

* Recent proposal to change to 1000

Figure -19
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Key Findings

Export promotion
The redirection of resources towards sectors which are likely to sustain international competitiveness going forward will enable the transition towards a more outward-looking, international trade-oriented economy. In this context the nature of export promotion needs a significant change in direction.

Measures such as creation of a Made in India brand image which are unlikely to have any impact until Indian manufacturing reaches international cost and quality competitiveness first The above measures do not address issues fundamental to improving export competitiveness. The main issue facing current and potential exporters are specific capability gaps that need to be addressed. Market information gaps Potential exporters are not fully aware of activities/ procedures required to enter international markets. Current exporters have largely succeeded through a trial and error process, that involves significant learning costs Market information is urgently required along several dimensions including market sizes and trends, processes of registration and market entry, consumer behaviour and demand patterns, distribution alternatives and channels, product specifications, patent filing and other intellectual property protection measures, legal issues and prospective trade partners. Limited market access in negotiated trade environments Market access is a serious issue in countries where trade quotas are negotiated bilaterally or multilaterally. The seriousness of the unfavourable terms of trade for Indian products is not adequately recognised and needs urgent attention.

Market access is a serious issue in countries where trade quotas are negotiated bilaterally or multilaterally. The seriousness of the unfavourable terms of trade for Indian products is not adequately recognised and needs urgent attention

South East Asian countries have in the past adopted various export promotion mechanisms successfully, including measures which artificially increase export competitiveness, such as explicit and hidden subsidies. However, under the WTO such schemes are likely to get reduced substantially. Historically, Indias export promotion efforts have primarily been of the following nature: Correcting imbalances created by protectionist trade barriers, such as duty drawback schemes for raw material imports, exemptions on capital goods imports and favourable export credits Attempting to artificially inflate the extent of export competitiveness (or at best correct for similar actions taken by other countries) such as tax exemptions and other fiscal incentives Measures such as setting up SEZs/ EPZs and export target setting which are in the right direction, but unlikely to succeed unless backed with concerted action on a number of fundamental issues

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The Quantum of Factor Inputs

There are serious structural issues that hinder greater assimilation of capital and labour inputs into manufacturing and into productive usage in general. India is seriously capital deficient relative to other developing countries and the gap is widening. Manufacturing, being a relatively more capital intensive mode of economic activity tends to be impacted the most by scarcity of capital. In this context we review the issues pertaining to our inability to aggressively attract FDI into the country, specifically in the manufacturing sector. FDI can play a significant role in bridging the capital gap, in addition to upgrading the level of technology and skills. On the labour front, the stagnating trend in employment generation and decline in the proportion of working population in the 90s should be the single most important national concern. While most of the NICs and China have managed to assimilate a larger proportion of their population into the productive workforce, India seems to be heading the other way. In the manufacturing context, the issues causing a skewed allocation of resources towards more capital intensive manufacturing are directly responsible for stagnation in employment. Finally, policies creating distortions across manufacturing and other modes of economic activity (for instance differential taxes and tariffs for manufacturing and agriculture) are specific barriers to flow of resources into the manufacturing sector.

Capital deficiency
India has substantially lower capital available per worker. Despite increases in the rate of capital formation in the 90s, the gap is rising. Indias gross savings rate in the range of 22 24% of GDP (Net Capital Formation of 16 18% of GDP) results in an annual growth rate of 6 7% to the existing capital stock in the country. Other developing countries have managed to sustain a much higher rate of growth in capital investment, through increases in rate of domestic savings and external capital inflows in the form of Foreign Direct Investment (FDI) (Figure - 20).

Figure - 20
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Key Findings Foreign direct investment The limited success of Indias efforts at attracting FDI in the last decade is well known and commented. Various issues such as lack of political consensus, delays in start-up of approved projects, co-ordination issues between different Government departments and between State and Central Government bodies, poor infrastructure etc. have been highlighted by different agencies as being responsible for limited FDI inflows. In contrast, China has been remarkably successful in attracting FDI with nearly half of total FDI inflow into all developing countries going to China. FDI in China has been successfully targeted at labour intensive manufacturing exports (over 60% of total FDI in China has been in the manufacturing sector and over 50% in labour intensive manufacturing). In 1999, Foreign Owned Enterprises accounted for more than 50% of Chinese exports. The Non-Resident Chinese (NRC) community has played a critical role, accounting for more than 65% of FDI inflow and helping resolve the problem of market access for Chinese exports (Figure - 21). We believe that FDI should be a vital component of Indias plan for economic growth on two accounts first, considering the substantial capital deficiency in India, accelerating capital accumulation should be a key imperative and FDI inflows will certainly contribute towards this objective; equally importantly FDI in target export sectors (such as labour intensive manufacturing) can bridge key capability gaps (such as technology, work practices/ skills and market access issues) and upgrade the competitiveness of Indian manufacturing.

Figure - 21

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Employment generation
Assimilation of additional labour inputs into productive activity has been a feature of development of all developing countries. In every case, the manufacturing sector has played a key role in providing employment avenues for the rural/ agrarian population. Indias proportion of working population is significantly lower than other developing countries and is influenced by various socio-economic factors including low literacy/ education rates, attitudes towards female employment and absence of adequate avenues for employment (Figure - 22). Employment generation in absolute terms has been nearly stagnant in the last 5 years, with the total labour force estimated at 394 million workers in 1999 - 2000 against 374 million in 1993 - 94 (a growth rate of merely 0.8%). As a consequence, the Worker to Population ratio (WPR) has actually declined from 418 per thousand in 1993 - 94 to 396 per thousand in 1999 - 2000 as per the results of the 55th Round of the NSS. WPR has declines across all segments (Male/ Female, Urban/ Rural etc.). We cannot overemphasise the importance of this issue. Accenture believes that employment generation should be the single largest issue of national concern and that a vibrant manufacturing sector can play a major role in assimilation of additional labour inputs into the economy. In this context, the identification of labour intensive manufacturing as a means of rejuvenating the Indian manufacturing sector could serve as one of the most important initiatives towards creating additional employment.

Distortions across manufacturing and other economic activities

The current lack of productivity in manufacturing clearly impairs the ability of the manufacturing sector to draw additional factor inputs (both capital and labour). In addition, specific policies distort the relative attractiveness of manufacturing vis-vis other forms of economic activity Differential taxes and subsidies across manufacturing and other economic activities Differentials in power tariffs for industrial usage Differentials in cost and availability of capital for manufacturing.

Figure- 22

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Key Findings

Summary of Issues Impacting Manufacturing Competitiveness

To recap, the analysis framework identified three specific levers for driving manufacturing productivity and a fourth impacting the total manufacturing output at a given productivity level (Figure - 23).

Figure - 23

The key issues impacting each of these drivers of manufacturing productivity and the total

manufacturing output are summarised (Figure - 24).

Figure - 24

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RECOMMENDATIONS

Way Forward

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Recommendations

Recommendations For Industry

Even if the external environment does not change in the near term, there is enormous potential for firms to improve productivity by focusing on internally controllable issues. Indian industry needs to show greater urgency on addressing these internal issues, while awaiting environmental changes.

Substantially enhance quality focus and customer orientation to capture the value shift to the market end.
Enhance quality focus Recognise the need for quality in products as well as processes Replace subjective measures for quality with absolute, quantifiable and world class metrics Build a culture of quality and explicitly measure performance on quality parameters Explicitly measure and emphasise reporting of Cost of Poor Quality in MIS. Enhance customer orientation Recognise the need for customer orientation Define customer satisfaction as a key leading indicator of organisational performance Increase investments in market research and customer understanding Increase investments in R&D to generate world class products and processes Institute formal and structured mechanisms for innovation management Invest in customer service.

Actively adopt a more performance oriented, responsive style of management to retain and leverage talent/ knowledge base within the organisation.
Value performance over other attributes such as loyalty Adopt a more participatory and inclusive management style Visibly establish clear linkages between performance and rewards Systematically build an environment that attaches significant importance to innovation and idea generation; create an environment of experimentation and reward the successful innovators Substantially increase focus on objectivity and data based decision making Focus human resource management towards attracting and retaining the best talent.

Indian industry needs to show greater urgency on addressing internal issues, while awaiting environmental changes

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Urgently recognise, communicate and manage the need for rapid and substantive change within the organisation.
Recognise the need for change by benchmarking against global players/ best in class, rather than on historical performance or against local competitors Increase sense of urgency for change initiatives; make change a priority on the corporate agenda Communicate extensively within the organisation and establish sponsorship for change initiatives Build an environment where issues and concerns are surfaced and effectively addressed Celebrate change initiative successes and discuss failures openly Involve employees in identifying reasons for failures and solution generation.

Recognise shareholder value creation as the overall organisational objective and measure management performance against this objective Ensure transparency in dealings and key corporate decisions Improve financial disclosures Develop and publish corporate Governance framework.

Recognise shareholder value creation as the overall organisational objective and measure management performance against this objective

Define dynamic, customer focused strategies targeted at exploiting global market opportunities.
Leverage core organisational capabilities Refine the basis for definition of core capabilities; build a shared vision on business direction and purpose Dynamically evaluate business decisions to explicitly factor in market place changes Be ruthless about divesting investments that may have been justified in a different era, but are unviable in the current business environment Focus management attention on core activities; continuously evaluate business value generated by all activities Redirect resources (managerial and financial) from non-core functions through actively leveraging out-sourcing.

Transition to a more professional, accountable and transparent form of management.

Separate management from ownership; introduce greater professionalism in management Critically evaluate the role of the Board of Directors and where appropriate, strengthen with professionals who can add value Establish appropriate, controls in terms of checks and balances by independent entities (Board Audit Committees etc.)

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Recommendations

Enhance project evaluation capabilities Ensure strategic fit of projects, under evaluation with core organisational capabilities Publish formal project evaluation guidelines Enhance rigour and objectivity in project evaluations Explicitly factor in sensitivities with respect to business cycle changes. Upgrade manufacturing technology levels Enhance emphasis on world-class technology levels in critical stages of the manufacturing process Ensure technology selection factors in appropriate labourcapital tradeoffs and operating conditions in the Indian context Ensure adequate emphasis on upgrading technology levels for supporting processes (instrumentation, maintenance etc.). Enhance product-market strategies, explicitly factoring in opportunities in export markets Enhance emphasis on exports Enhance understanding of international market operations end consumer preferences, product specifications, quality standards, packaging requirements, aesthetics, marketing and distribution channels, demand patterns and key supplier choice influencers.

Build nimble and accountable organisations which fully leverage human capital.
Redesign organisation structures to enhance accountability and responsiveness Decentralise profit accountability and empower middle management De-layer organisation structures Ensure responsibility for end to end business process performance Elevate responsibility for key management functions such as corporate planning, IT and product development Enhance role clarity and delegate operational decision making to operating managers. Enhance emphasis on attracting and retaining talent Recognise value attached to skills Compensate high performing employees adequately Enhance emphasis on employee training. Enhance team behaviour Establish enabling processes and encourage cross-functional decision making, for example in various planning and product development processes Set cross function performance metrics Reward achievement of crossfunctional objectives.

Elevate responsibility for key management functions such as corporate planning, IT and product development

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Enhance emphasis on management of labour productivity Aggressively streamline operations to reduce excess manpower, particularly in white-collar jobs Implement best practices in production process work breakdown Revise measurement parameters to reflect drivers of stagewise productivity Invest in ergonomic plant layouts/ shopfloor design.

Enhance project management processes Institute formal mechanisms for project planning (PERT/ CPM, time and cost estimates etc.) Define clear milestones and institute a process of periodic management review Leverage IT tools which enable sophisticated project planning, identification of dependencies, contingency planning etc. Strengthen capital budgeting processes Ensure zero-based preparation of capital budgets, with adequate bottom-up estimation Increase rigour in evaluation of capital expenditure proposals Increase attention on performance monitoring post deployment of capital. Enhance corporate MIS processes Strengthen review mechanisms and processes Ensure adequate emphasis on financial and non-financial indicators Balanced Scorecard Revamp costing systems to facilitate more sophisticated decision making Ensure adequacy and integrity of information Ensure timeliness.

Re-engineer core processes to dramatically improve efficiency and drive business value.
Enhance marketing processes and capabilities Deepen understanding of consumer behaviour Improve product development and innovation processes, focusing on hit rates as well as time to market Increase focus on effectiveness and cost of communication. Enhance supply chain processes Improve effectiveness of distribution, sales promotion and sales force management Increase operational efficiencies across the supply chain Focus attention on capital productivity and asset utilisation Improve integration of supply chain planning processes.

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Recommendations

Pro-actively invest in world class Information Technology architecture to substantially improve productivity and quality of decision making.
Enhance management attention towards IT Recognise the potential for productivity improvement through effective IT usage Actively propagate a culture that maximises IT effectiveness Aggressively evaluate potential for improving IT quality/ service levels through outsourcing. Increase investments in IT

Consolidate to build up scale of manufacture and leverage to fund long term investments.
Build up scale of manufacture Consolidate fragmented units to create operational scale in labour intensive sectors Standardise inputs, processes and work conditions across disaggregated units Invest to upgrade scale to the appropriate regional, national or global levels in scale intensive sectors. (The minimum scale to be targeted will be different for different sectors depending on technologies available, corresponding minimum economic plant sizes and degree of freight intensity). Leverage scale to fund long-term investments Invest in R&D/ Product development, international marketing operations, technology/ process upgradation and world class IT infrastructure.

Consolidate fragmented units to create operational scale in labour intensive sectors

Define a comprehensive mediumlong term blue print for investments in IT Develop and continuously update comprehensive business cases for IT spends Upgrade quality of IT and invest in world class ERP systems Assess applicability of the Internet for improving business processes efficiency. Leverage investments in IT Increase focus on integrating information islands Shift focus from transaction automation to decision support Evaluate existing investments against original business cases Increase emphasis on rapid deployment of systems packaged solutions vs custom development.

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Recommendations For Government

Many of the Government recommendations are well rehearsed and we recognise that some of these recommendations are difficult to implement in a democratic environment. However, reforms are currently taking an inordinate amount of time and there is a serious risk of further losing our global competitive position. A huge sense of urgency is required in implementation in order to avoid further erosion in our weak competitive position. Create mechanisms whereby rights of employees remain protected from exploitation Move towards contract based employment with contracts setting out rights of employers and employees Provide recourse to workers to appeal against violation of rights as conferred by contracts Enhance awareness amongst workers with respect to avenues for appeal Ensure that stringent and exemplary action is taken against labour exploitation by employers such as violation of standard conditions, attempts to exploit information/ education asymmetry in drawing up contracts and violation of provisions stipulated in contracts Review efficiency of the judicial mechanism currently in place to settle labour related disputes take measures aimed at speed and objectivity in dispute resolution. Establish a social security mechanism to provide insurance against unemployment Provide for worker compensation, retraining and redeployment through a fund similar to the NRF Develop markets to provide for institutional investment for the mechanism. Develop mechanism to efficiently exchange labour between surplus and deficit labour areas Review working of employment exchanges Tie in with the social security/ redevelopment mechanism.
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Reforms are currently taking an inordinate amount of time and there is a serious risk of further losing our global competitive position

Completely revamp labour laws and implement measures to create flexibility in the labour markets.
Revamp Industrial Disputes Act and Trade Unions Act Define/ review standard conditions in terms of compensation for work termination, minimum wage and permissible work environment conditions Confer non-disputable rights to employers for termination of employment/ retrenchment and changes in work conditions or compensations subject to standard conditions Define changes in work conditions to include all aspects such as work hours (including issues related to shift working), privileges, recruitment decisions, employee promotions, transfers, allocation of duties and dismissals for misconduct Specifically avoid Government intervention and eliminate clauses that stipulate prior approval of the Government for worker lay-offs.

Recommendations

Eliminate major market distortions to ensure a free all-India market which allows build up of manufacturing/ operating scale.
Abolish preferential policies/ reservations for Small Scale Industries (SSIs) in a time-bound and phased manner (The recent policy decision indicated by the Government regarding elimination of SSI reservation/ preferential treatment is a major step in the right direction) Standardise rules across in dustry sectors irrespective of ownership (Public, Private, Joint, Co-operative sectors), registration (organised and unorganised industry) or geography (differential state level fiscal incentives, backward-area benefits etc.) Eliminate other barriers to trade across the country such as restrictions on goods movement across states under Essential Commodities Act and other state regulations such as entry permits applicable to goods inflow Reduce natural barriers to trade by upgrading quality of transport infrastructure Abolish distorting taxes applied selectively based on point of origin of material. (The initiative for moving to a common VAT system undertaken by several State governments is a positive step in this direction) Reduce incidence of distorting taxes such as cross-state sales tax, octroi etc. Move towards taxes based on point of sale/ expenditure.

Enable quick business exit to facilitate efficient resource reallocation and correct market distortions created by operation of unviable businesses.
Undertake labour law reforms to eliminate the right of workers/ unions to oppose business closure, subject to standard compensations for termination of employment (covered under earlier recommendation) Shift focus away from mediation and consensus at each stage to urgency and speed in industrial restructuring and resource reallocation. Address issues that prevented effective functioning of the BIFR and hold the agency accountable for resolution within specific deadlines. (The recent move to replace the BIFR with an independent Company Law Tribunal is a major positive move in this direction) Increase accountability of Financial Institutions for performance, in order to ensure their interest in facilitating industrial restructuring within a reasonable timeframe Revamp laws restricting redeployment of capital such as laws restricting sale of land in major cities.

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Aggressively reduce tariffs and privatise core sector public enterprises to provide quality inputs at competitive prices and de-link sectoral efficiencies to upstream performance.
Continue aggressive tariff reduction Eliminate duties and non-tariff restrictions on imports of capital goods and technology Reduce tariffs on other materials in line with bound rates under WTO Eliminate import duties on materials in sectors where India is likely to have a competitive advantage, including all labour intensive manufacturing sectors Resolve the problem of unabsorbed taxes by moving to a common VAT system that takes into account all taxes and duties levied. Urgently increase the pace of PSE privatisation The current process is taking far too long and is seriously impacting Indias ability to unshackle the economy Focus on privatisation rather than disinvestment Recognise need for urgency Ensure adequate attention given to privatisation of state level Public Enterprises.

Increase the sense of urgency and build greater consensus on the need to attract FDI as a major source of additional capital investment.
Simplify ease of business start-up Defocus on issues such as extent of foreign ownership, requirement for no-objection certificates from existing domestic partners etc. Implement single-window clearance concept in practice, on the ground. Devolve authority to state level IPBs, who should coordinate with all other concerned entities Set investment limits for state level approvals and monitor performance of state and local officials against targets for FDI investments Reduce the number of clearances/ permissions required, reduce uncertainty and provide clear timeframes for each step in the process. Conform to key milestones. Direct efforts towards specific targets for attracting FDI Target labour intensive manufacturing currently located in high wage-rate countries (such as Korea, Taiwan, Singapore etc.) Target the Non Resident Indian community.

Eliminate import duties on materials in sectors where India is likely to have a competitive advantage, including all labour intensive manufacturing sectors

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Recommendations

Urgently undertake reforms in the transport infrastructure and power sectors in order to reduce delays and operational costs impacting firm productivity.
Enhance attractiveness of infrastructure investments with initiatives such as forcing public entities to borrow directly from the market subject to credit rating, unbundling services as far as possible prior to privatisation and developing investor friendly regulatory framework Activate sources of long term funds to finance infrastructure investments by providing fiscal incentives for investment in infrastructure and encouraging insurance, provident and pension funds to invest in infrastructure Prioritise infrastructure spending based on estimated impact on industry and ease of commercialisation Upgrade infrastructure needed for exports on a priority basis, such as ports and access roads Urgently carry out specific power sector reforms such as eliminating cross-subsidies (across agricultural, residential and industrial power usage) and supplement privatisation efforts with stringent enforcement of the law to prevent theft and misappropriation.

sector and actively monitor achievement against plan Increase efficiency of banking operations by implementing initiatives such as operational efficiency improvements through additional investments in IT and re-engineering processes, closure of unviable branches/ units which are a legacy of earlier expansionist priorities and aggressive privatisation Reduce distortions in norms such as priority sector lending Encourage greater financial integration of domestic markets across money, forex and capital markets. Aim for increasing depth and liquidity of the Government securities market and widening/ deepening the foreign exchange market Increase pressure on Financial Institutions to actively influence decisions to maximise shareholder value.

Encourage creation of private vocational training centers (A model based on the success in the IT industry can be followed in this regard) Enhance quality of Vocational Training Institutes - urgently upgrade course curricula, equipment, quality of teaching staff and teaching methods Encourage industry participation in quality upgradation.

Enhance emphasis on vocational training to improve the quality of labour resources available to manufacturing.
Signal an overall increased emphasis on vocational training Review the basis for financing of public universities/ vocational training institutes Take specific measures aimed at increasing collaboration across industries and academic/ training institutes such as providing specific incentives to encourage industry funding for research programmes and support for training institutes

Undertake financial sector reforms focused at increasing availability and reducing the cost of capital for industry.
Develop a time-bound plan to reduce NPAs in the banking

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Simplify administrative processes to reduce business operating costs and transactional overheads.
Design procedures keeping in mind the 80% who follow the rules, rather than the 20% who dont Separate the process/ method of catching the guilty from day-today administration of business transactions and impose swift and strict penal action on violators, to ensure compliance Undertake administrative simplification on a priority basis for specific areas - simplify Export and Import Transactions (Port clearance procedures, Administrative procedures for claiming export benefits) and Tax Administration (Excise administration and documentation, Sales tax administration and documentation and tax rebate claim procedures).

Reduce roadblocks which prevent hostile takeovers, such as management discretion on transferring shares Encourage nominees of FIs to actively pressurise management for business performance. Intellectual property protection Modify regulations to explicitly recognise all forms of intellectual property (product, brand, packaging etc.) Strengthen the administrative machinery to provide stringent penalties to offenders.

Enhance market access for Indian exporters Urgently and aggressively resolve issues pertaining to tariff and non-tariff barriers working against Indian exports through bilateral and multilateral forums Negotiate aggressively for greater market access in return for providing access to Indias domestic market. Maintain existing export promotion measures aimed at correcting imbalances Duty drawback schemes for raw material imports, duty exemptions on capital goods imports, favourable export credits and tax exemptions/ other fiscal incentives to equalise for export subsidies given by other developing countries.

Shift export promotion focus towards measures aimed at correcting critical capability gaps in sectors where India has a comparative advantage .
Enhance information availability regarding international market conditions Ensure that industrywise export targets translate into meaningful support for potential and current exporters during the process of market entry Enhance information dissemination to exporters regarding international market conditions and regulations, through active role of concerned Government departments and industry bodies.

Reform regulatory law and administration in order to ensure adequate rewards and penalties for management performance vis--vis stakeholder interests.
Consumer protection Substantially increase awareness of the rights of customers with respect to the quality of products and services purchased Provide expeditious resolution of disputes and and substantive penalties for non-compliance. Investor protection Improve transparency of communication to shareholders

Reduce distortions between manufacturing and nonmanufacturing activities to ensure market determined deployment of factor resources across economic activities.
Reduce disparities in taxation of output (across excise, service tax and an equivalent tax based on agricultural produce) Move towards common income taxes, irrespective of nature of economic activity Equalise power tariffs across Industrial, Domestic and Agricultural Usage Reduce the extent of preferential credit for priority sectors.

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Recommendations

Summary Of Recommendations

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IMPACT ON INDIAN MANUFACTURING

Scaling New Heights

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Impact on Indian Manufacturing

Aggressively implementing these recommendations has the potential to double the manufacturing growth rate and create substantial incremental employment over the next 5 years. We expect the following outcomes, based on detailed modeling of the manufacturing sector.

Overall Impact
Rate of growth in manufacturing has the potential to double from 6% to 11% per annum Value Added from manufacturing should increase by Rs. 150,000 crores over the next five years (over the current base of Rs. 210,000 crores) Net employment in manufacturing can be increased by about 13 million (30% increase from the current) (Figure - 1).

Figure - 1

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Shift In Sectoral Profile

We expect a substantial shift in the sectoral profile. Key shifts are from unregistered to registered manufacturing, and towards labour intensive, consumer-centric and naturally protected sectors.

Other sectors
Increases in consumer centric and naturally protected categories Decline in scale intensive and technology intensive sectors except where promoters are willing to invest to set-up world class scale features Significant decline in unregistered sector.

Labour intensive manufacturing

Output increase from 9% of total value added in 2001 to 25% in 2006 Employment increase from 3% of total manufacturing sector employment to 42% Increase in exports from 12 Billion USD in 2001 to 57 Billion USD in 2006 (Figure - 2).

Figure - 2

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Impact on Indian Manufacturing

Drivers of Output Growth

The growth should be driven by productivity increases within each sector, substantial redeployment of capital and labour and inflows of FDI into Indian manufacturing over the next 5 years. Increase of 3% in capital productivity across aggregate manufacturing (Figure - 3) Expected inflow of FDI of 75 Billion USD into the manufacturing sector Redeployment of 25% of current capital stock from unregistered manufacturing, technology and scale intensive sectors towards labour intensive, consumer centric and naturally protected sectors.

Figure - 3

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MANAGING IMPLEMENTATION

Making It Happen

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Managing Implementation

The lack of aggressive, on-the-ground implementation of various recommendations made in the past is an evident problem in India. Understanding the reasons for failure of historical implementation programmes is necessary to ensure successful implementation of our recommendations. In some cases, we believe that implementation failure resulted from inadequate recognition of the base problem and lack of clarity on the need to simultaneously impact multiple changes addressing the same. For instance, SEZs/ EPZs in India based on the South East Asian model have largely failed since there was no attempt to get all the parameters right in one location superior infrastructure, labour flexibility, decentralised decision making, exit criteria, co-ordination across concerned agencies etc. The failure can therefore be attributed towards the absence of a co-ordinated, concerted plan to implement multiple initiatives simultaneously. In many other instances, the thinking on base problems and solutions is fairly comprehensive for instance in the areas of infrastructure, financial sector reforms, PSE privatisation etc., substantial detailed recommendations are available. We believe that in a democratic country like India, there are specific socio-political issues which have acted as barriers irrespective of the nature of the recommendation being implemented. Tackling these underlying issues would be critical towards ensuring success of implementation efforts in future.

Accenture has attempted to leverage its experience in implementing large scale business change while proposing solutions for addressing these barriers to change. We believe that the fundamentals of change management apply irrespective of the large scale of change (i.e. economy-wide, as opposed to within a commercial business operation). In this section, we detail out the most important common barriers to implementation and discuss the key approaches towards understanding and tackling change management issues at a country level. We believe that proper appreciation of change management issues will significantly improve the success rate of implementation programmes.

In a democratic country like India, there are specific sociopolitical issues which have acted as barriers irrespective of the nature of the recommendation being implemented

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Key Barriers To Implementation

While there are many potential roadblocks for implementation of each recommendation, we believe that three common issues need the most attention. that divergent objectives across different Government bodies pose a significant barrier to successful implementation. There are two specific levels of divergence that need to be understood and addressed: State-Center conflicts due to the federal nature of our polity and our cultural diversity Conflicts across Government levels and across departments.

Political consensus
In any substantial change agenda, the onus of driving the change process starts right at the top. In a countrywide reform process, the primary change driver is the Government itself. Due to the current political fragmentation, the absence of common ground across various political parties results in inadequate political consensus and will for driving change. Lack of ownership translates into the following observable symptoms: Inadequate recognition of the need for change

Public ignorance and apathy

There is substantial lack of awareness in the public regarding the extent of the problem and the urgency of the need for change partly due to illiteracy levels and lack of education. This results in the masses not backing/ rewarding change initiatives through the electoral process, thereby perpetuating the fundamental political consensus problem. We believe that for the public to back the reform process, there needs to be visible, physical signs of progress, in addition to more subtle, intangible changes that will be recognised and appreciated over a longer term. In this context, absence of tangible reassurances through major successes in high-visibility initiatives such as infrastructure upgradation is a serious issue.

In a countrywide reform process, the primary change driver is the Government itself

Inadequate sense of urgency Lack of recognition of the crippling cost of delays and indecision. We believe this issue to be the single biggest barrier to implementation of any structural reforms.

Divergent objectives
Ultimately, execution determines success or failure. The execution aspect of implementation demands concerted action by different bodies. In order to achieve such co-ordination action, it is critical that the objectives of various entities are aligned towards the overall national objective and systems such as performance measures and rewards are in-line with achievement of results against these objectives. In this context, we believe

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Managing Implementation

Managing Change
There are no easy solutions to any of these barriers to implementation. The key elements of change management that we propose (risk management, alignment of objectives and enhancing public awareness) are not revolutionary concepts they have been used with effect in other developing countries and have been discussed in Indias context as well. However, in the final analysis the success or failure of implementation will depend on how effectively India is able to manage these basics. Reduces the extent of the task at hand Eases the process of obtaining political buy-in Mitigates risks arising out of the drastic change in conditions in the pilot area Allows undiluted focus of all Government entities towards making the experiment successful Provides proof of concept that can be used in communication and enhancement of public awareness, which will be required for more widespread implementation of changes Creates role models which will drive the economy towards changes that are proposed.

Managing risks
We clearly recognise that Governmental decision making will continue to be a process based on building consensus across coalition partners with differing ideologies. Risks associated with drastic change amplify the difficulty of getting political consensus. Hence immediate implementation of recommendations on a country-wide basis is likely to pose problems. In this situation, Government can adopt a risk-minimisation strategy to obtain necessary political backing for key changes to be undertaken in an accelerated time frame. The pilot approach A pilot approach can be adopted in order to confine the change to a smaller sub-section of the economy (either on a geographic or a sectoral basis). This will allow experimentation without causing disruptions to the rest of the country.

A pilot approach can be adopted in order to confine the change to a smaller sub-section of the economy (either on a geographic or a sectoral basis). This will allow experimentation without causing disruptions to the rest of the country

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Planning pilots Adequate emphasis must be placed on ensuring success of each pilot. Success will depend critically on planning inputs prior to piloting. Various elements that need to be planned out are: Clarity and consistency in objectives set for each pilot Appropriate selection of geography or sector for piloting Definition of performance metrics for measuring success of pilot Aggressive time-frames for completion of pilot activities and result monitoring Creation of appropriate review mechanisms for monitoring pilot performance. Need for high level involvement in review Adequate empowerment and ownership for each pilot at the appropriate levels Communication of pilot results.

Pilot designs Pilots can be designed for each specific recommendation or for a combination of recommendations. Some examples are indicated. SEZs/ Industrial Parks operating under significantly different conditions (including world class infrastructure, labour law reforms to allow contract-based employment, simplified business entry and exit, simplified Government administration and FDI involvement) Involving pro-reform States that are aligned with the Centre for piloting initiatives that require close co-ordination (for instance implementation of user charges for agricultural infrastructure, agricultural taxation and key infrastructural projects) Creation of regional free markets (Eliminating state specific distortions such as taxes, incentives, and entry restrictions across a group of states) Pilots at a sectoral level or for groups of interlinked sectors (Recommendations such as SSI dereservation and elimination of preferential policies based on ownership or scale, emphasising vocational training/ changes in public funding of institutes, attracting FDI into manufacturing, export promotion focused at bridging capability gaps and reforms in exit policy can be implemented for specific sectors first).

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Managing Implementation

Alignment of objectives
Undertaking reforms in Government administration is a means of aligning Government bodies towards common economic objectives. This should be started in parallel with various pilot implementations in order to prepare the administrative mechanism prior to national level roll out of successful reforms. Redefine performance measures along economic goals Emphasize per capita GDP growth (at each geographic level) as the main objective Define performance in terms of output growth (value added), employment growth, investment growth and overall productivity growth Align objectives along each level of Government towards achievement of the above overall objectives Define single point responsibility for issues that need involvement across Government departments. Empower concerned Government personnel Set aggressive targets for each objective Establish strong incentives and disincentives for performance against targets, through appropriate revision in procedures for rewards (compensation, career progression) and penalties Enhance quality of data capture in terms of frequency and timeliness.

Enhancing public awareness

Government needs to enhance public awareness in order to build support and understanding for the tough decisions that are required. This should take two forms - explicit communication through effective use of media and implicit communication through dramatic successes in visibly public projects such as infrastructure upgradation. Adequate communication of the rationale for reforms The importance of economic growth as the overriding national objective- While various social objectives such as poverty alleviation, education/ literacy improvement, population control and reduction in income disparities are extremely desirable and will be acted upon in parallel, economic growth is a necessary condition for the country to fulfill any of these objectives. A strong message to the public along these lines will be required in order to explain the need for drastic changes The need for drastic reforms in labour laws- Communication that existing labour laws act as guarantors of job security to less than 2% of the working population (and impact employment generation that would affect the rest of the population), that labour inflexibility acts against the long term interests of those protected and very importantly that measures will be taken to protect workers from exploitation The rationale for other measures- such as the need for a functioning exit mechanism for businesses, the need for FDI, the need for removing market distortions, the need for privatisation, and the increased emphasis on vocational training. Communication planning

A detailed communication plan covering the following elements should be prepared which aggressively leverages the media reach of Doordarshan and AIR. The specific messages that need to be communicated Mix of channels/ media that should be utilised Suitable content creation, emphasising effectiveness of communication. Specific attention should be placed on ensuring consistency of communication across various official sources, to avoid conflicting messages.

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Accenture is the worlds leading management and technology services organisation. Through its network of businesses approach in which the company enhances its consulting and outsourcing expertise through alliances, affiliated companies and other capabilities Accenture delivers innovations that help clients across all industries quickly realise their visions. With more than 75,000 people in 47 countries, the company generated net revenues of $11.44 billion for the fiscal year ended August 31, 2001. Accenture, India is one of the largest consulting organisation in the country with over 2 million manhours of consulting experience across the entire spectrum of Indian business. It has offices in Delhi, Mumbai and Chennai and employs over 300 professionals, each of whom have extremely strong academic and work credentials. It is fully integrated with the Accenture global

organisation and provides the full range of services offered globally. Accenture follows a focused and targeted strategy in India, which is responsive to the structure of the economy and the needs of the marketplace. The current strategic focus is on increasing shareholder value by assisting Indian corporates in developing and implementing strategic initiatives, managing costs, driving top line growth, increasing customer service levels, improving efficiencies in operations and supply chains, using IT as an enabler and becoming globally competitive. Furthermore, Accenture is helping local clients create value by outsourcing their non-core functions. Accenture has also extended its solution center network to India by setting up a solution center facility at Mumbai. This facility will address technology issues faced by both global and local clients and will provide Accenture value at new price points.

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Making Indian Manufacturing Globally Competitive 2002, Accenture