Is India Loosening Its Bureaucracy?

Will India's National Manufacturing policy boost sector's percentage of GDP?

When India announced on its new National Manufactuirng Policy in October the main objective was to create 100 million jobs. As people are migrating from the countryside to the city, the government needs to find jobs and manufacturing is a likely place.

While noting that the plan is quite ambitious, M.S. Krishnan, Faculty Director, India Initiatives at the Ross School of Business at the University of Michigan, says the main reason for the policy is to reduce bureaucracy. "It is difficult to both open and close manufacturing plants in India," explains Krishnan. "This creates a lot of friction."

This friction is getting in the way of necessary growth for India via the manufacturing sector. Krishnan points out that in India manufacturing is only 16% of GDP which is below other nations such as China which is around 34% and South Korea where manufacturing is close to 25%.

"Loosening the bureaucracy will create opportunities for other companies to look at India," explains Krishnan.

One particular aspect that hinders business is the labor laws which are quite strict and makes it both difficult to hire and fire personnel, Krishnan points out. Additionally there are infrastructure issues. Transport infrastructure is not adequare and much of the country suffers from electricity black-outs and water supply problems. Part of this new policy is to create special manufacturing enterprise zones to address these issues.

In fact the government plans to increase infrastructure spending to 8.4% of GDP in F2012 from 7.5% in F2009, according to an article in the Irish Finance News. Power, roads and telecommunications will all see increased spending.

Krishnan is optimistic and explains that there are pockets of manufacturing excellence in India, such as in the auto sector. While these changes will take time, he feels that the "intentions and aspirations are good."

Further Krishnan notes that India, along with China, will be a major contributor to global growth in the next 20 years. "All global companies must look at their strategies and capacity in order to be part of this growth," said Krishnan

The question businesses need to ask themselves is how to "create capabilities so that they can cater to the market price that India will demand. And how to do this in a manner that maintains quality levels and is sustainable."

To view the specifics of the National Manufacturing Policy click here.

Note: M.S. Krishnan is also co-author with C.K. Prahalad of "The New Age of Innovation: Driving Cocreated Value Through Global Networks."

TAGS: Regulations
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