Indian IT sector has witnessed huge success in the last two decade. At present, India is the topmost offshoring destination for IT companies across the world.
Support of government for the development of IT sector along with other factors is the major reason for its success. The government should replicate the same thing for the development of the manufacturing sector which is lagging behind.
Reasons for the growth of IT sector
- High-speed internet connectivity: The government creates high-speed internet connectivity of global standards for the IT software parks. This enabled seamless integration of the Indian IT industry into the US market.This was done years ahead of telecom modernisation in India. Creating islands of high-speed connectivity for a nascent industry independent of the telecom system was a bold move.
- Relax export-import: Government allowed the IT industry to import duty-free both hardware and software and also gave it all the incentives that were being provided to exporters of goods. This reduced the cost of hardware and software and make it competitive globally.
- Relaxed labour norms: IT industry was able to function under the Shops and Establishment Act. This made IT industry to surpass obsolete labour laws and regulatory burden imposed by these laws
- Investment in scientific and technical education: IT sector had the benefit of low-cost high-value human capital created by the investments made a generation earlier in higher scientific and technical education
Reason for the underdevelopment of the manufacturing sector
- Low Investment: Government spending on Infrastructure is very low. Low investment on infrastructure and power creates a bottleneck and makes Indian good less competitive.
- Over-reliance on the private sector: In SEZ government assume that it will provide only a favourable regulatory regime and rely on the private sector for the development of necessary infrastructure. But the Indian private sector did not have the scale to create such globally competitive physical and social infrastructure. This excessive faith in the potential of private investment ails the manufacturing sector most.
- Faulty industrial policy: Workers’ housing, the key to productivity, is yet to become an integral part of industrial area development. China created world-class infrastructure, including housing for workers, in its Special Zones along the coast. It supported them in getting foreign and domestic investment in manufacturing.
- Land: Land acquisition is a major hurdle in the development of the manufacturing sector.
- Low growth of agriculture: Low growth of agriculture sector led to low growth of industrial sector due to the shortage of raw material.
- The growth of the export-import sector: After LPG reforms, the Indian market is flooded with foreign products especially Chinese. This hinders the growth of domestic firms.
- Complex government regulations and taxation laws: Government policy is less conducive for the manufacturing sector as compared to the IT sector. For the manufacturing sector, the complex labour laws increased the cost and make it less competitive. Firms find it easier to reduce the tax burden if they remain small.
The labour cost in China is increasing continuously and this may lead to the increased cost of the goods manufactured. This will open a way to India to increase the manufacturing capabilities to serve the cheap manufactured goods to the world.
To make India next manufacturing hub government must replicate the factors responsible for the development of the IT sector. The government should increase its investment and make the necessary regulatory change. The few steps that need to be taken by the government along with recent initiative of Make in India to revive ailing manufacturing sector are
- Integrated Logistics and Manufacturing Zones: Development of Integrated Logistics and Manufacturing Zones (ILMZs) are a perfect model which allows manufacturers and logistics players to co-exist and complement each other’s business
- Focus on innovation and R&D: For future competitiveness, innovation is necessary. The government must link education curriculum with Industry to provide necessary innovation along with skilled workforce
- Simplified tax and regulatory regime: steps to be taken to moderate tax and simplify tax and labour laws
- Large manufacturing area: India needs to build new and large world-class manufacturing areas speedily, especially in the industrial corridors and along the ports. These are critical for the competitiveness needed for being part of the global manufacturing supply chain.