Manufacturing miracle: These 7 steps can put India at par with S Korea

Yesterday’s IIP numbers haven’t brought India’s data watchers much joy.

The index of industrial production (IIP) for February came in at a negative 1.9 percent, indicating factory output shrank year on year. The index also registered a decline of 0.1 percent for the period between April and February.

The manufacturing sector index, which accounts for 76 percent of the IIP, slumped 3.7 percent in February.

Given India’s ambitious growth aspirations it is surprising that not much attention is being paid to strengthening the manufacturing sector.

According to a recent report by Goldman Sachs titled ‘How India can become the next Korea’, if India were to emulate the South Korean model and grow manufacturing at thesame rate as that country did in the 1970s and 80s, it could add 1.4percentage points to its GDP growth annually for the next decade.

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But that could take a while.India is now where South Korea was over 40 years ago, in terms of growth environment and per capita income. Korea’sshare of manufacturing in GDP has accelerated to over 30 percent currently, one of the highest inthe emerging world, and the highest in Asia, while in India, the share of manufacturing has stagnated at about 15 percent. In percentage terms, it is also the lowest in Asia.

There have been several constraints to the growth of manufacturing in India - things like difficulty in land acquisition, power problems such as high industrial power tariffs and a lack of government support.

There’s also the fact that India isn’t the easiest place to do business. The IFC’s Doing Business Report2014 ranks India at 134 out of 189 countries, one of the lowest in Asia. Starting a businesstakes 27 days, and costs 47 percent of per capita income, compared to six days in Korea.

There is hope, however. Goldman Sachs suggests that following South Korea’s footprints could help India’s manufacturing sector get on the right track. It conveniently lists out seven issues for India to work on -

1. Government focus on manufacturing as primary objective
   2)Low fiscal deficit
   3)Develop effective industrial parks
   4)Reduce cost of doing business
   5)Flexible labor laws
   6)Tax policy to encourage industry
   7)Subsidize power for industry

The bottom line, as the report puts it, is this - “If the Indian government were to focus on boosting export-led manufacturing growth, it would need to reduce thedisincentives for industry in terms of land, infrastructure, power, labor policies, and taxation. These need to beviewed as a whole, if India seeks to replicate the success of Korea.”