CEO Policy Recommendations for Emerging Economy Nations
A Rising Star
Over the last quarter century, India has moved away from its traditional socialist system and accelerated efforts to liberalize economic reforms. As a result, India today is recognized as one of the most competitive nations in the world, providing a strong talent pool in the areas of science, technology and research, as well as some of the lowest labour costs in the world. However, key challenges loom if India is to build on its achievements over the past 25 years. Namely, the country’s healthcare systems, under-developed physical infrastructure, and policy and regulatory environment still create significant concern.
To improve its policy and regulatory environment and spur economic growth, India in 1950 established the Planning Commission, which is charged with formulating a strategy for the most effective use of the country’s resources to improve the standard of living for Indian citizens. In support of its objectives, the Planning Commission has since its establishment implemented 11 Five-Year Plans, and implemented its 12th plan in March 2012 to target faster, sustainable and more inclusive growth.7
A Focus on Manufacturing
In 2011, India announced its National Manufacturing Policy and its objective of increasing manufacturing sector growth to 2-4% more than GDP growth, increasing manufacturing’s share of GDP to 25% by 2025 and creating 100 million new jobs.8 Manufacturing currently contributes approximately 14.2% to India’s total GDP, which is lower than other emerging economies recognized for delivering significant competitive advantages for manufacturers, including China (32.4%).9
In a highly collaborative, multistakeholder process, more than 26 working groups were involved in developing the current manufacturing policy, including ministry verticals and cross-sector groups. As part of the efforts of this report, the team conducted interviews with chief executives of Indian manufacturing companies and held a workshop during the World Economic Forum on India to understand what executives believe are the most critical aspects of the current Manufacturing Policy and the challenges of achieving the goals outlined in both the 12th Five-Year Plan and India’s National Manufacturing Policy, and to understand their recommendations on overcoming those challenges.
Executives interviewed for this report consistently recognized the high level of stakeholder collaboration and effort that went into developing India’s National Manufacturing Policy, yet believed implementation was analogous to a composer and maestro. Executives said the Planning Commission had and continues to play the role of the composer, but that the role of the maestro – who or what organization may be responsible for leading implementation (or the orchestra) – was still in question. Executives noted that the large number of stakeholders in India and the federal structure would result in wide variations in both the effectiveness and pace of implementation across India’s states, yet urged strong leadership at the state level since much of the regulatory burden and business hurdles are created there.
The Indian Backbone Implementation Network (IBIN) is the Planning Commission’s answer to the implementation challenge. A relatively newly announced initiative, the IBIN is a set of tools designed to manage dialogue, resolve conflicts, coordinate among stakeholders and manage implementation.
In addition to the broad policy implementation recommendations outlined by executives, those participating in the discussions also offered the following specific recommendations for improving India’s competitive advantage.
Design effective ways to scale quality training for the workforce of the future
Executives consistently said skill development is the most pressing challenge to the manufacturing sector in India. Although the Indian government has put in significant effort over the past 50 years to develop its science and technical infrastructure, executives said the current capacity for workforce development does not meet the country’s aggressive growth targets. Unlike Japan and Western European countries, India has a large young workforce, which all participants noted is a key strength to be leveraged. Executives almost unanimously supported the National Manufacturing Plan’s approach to skills development; they stressed that the following actions would do much to scale workforce training initiatives.
- Build skills among the large population of minimally educated workforce: Executives stressed the need to develop creative ways to address the workforce challenge, including leveraging digital technology.
- Establish industry training institutes in the form of public-private sector partnerships to provide relevant vocational and skill training: Executives emphasized the need for both the private and public sectors to take responsibility, particularly for vocational and operator-level training. India’s National Skills Development Corporation was cited as a good example.
- Create additional polytechnic institutes focused on delivering higher education in vocational or technical subjects.
- Develop targeted training and development for the general management and technical supervisory level: Executives consistently said that businesses need workers with strong critical thinking, leadership skills, and highly technical manufacturing skills. The challenge, however, is to comprehend manufacturing at a factory and product design level, management level, and value chain level.
Develop less restrictive labour laws
Executives participating in the discussions said that labour laws in India are “fairly rigid and cumbersome”, making it difficult for companies to hire and lay off workers according to seasonality and volatility in demand. The rigidity of legacy labour laws results in companies hiring fewer people than they need and requiring the people they do hire to work overtime.
To improve in this area, executives said policy changes need to be enacted that focus on improving workforce relations and allowing greater flexibility for companies to react to changes in demand. Furthermore, executives agreed strongly that the labour costs in India must remain competitive. Some executives pointed to the Mahatma Gandhi National Rural Employment Guarantee Act, which gives adults living in rural areas a guaranteed period of work each year at a minimum wage on a public project, as a significant disadvantage to the manufacturing sector in terms of keeping the cost of labour low, as manufacturers compete with the agriculture sector to attract talent.
Invest in globally competitive infrastructure
While India has achieved a lot in terms of infrastructure, many executives noted concerns with the quality of India’s infrastructure, and more concerning, believed the country still has a long way to go for achieving an infrastructure environment that enables competitiveness.
Infrastructure challenges that present hurdles for industry in India are primarily focused on supply-side constraints. For example, power supply is a challenge, as is the high cost of capital and controversies that often accompany land acquisition.
The World Economic Forum ranks Indian infrastructure 84th out of 144 countries. Not surprisingly, executives want to see tremendous effort and focus in this area from both policy-makers and public-private partnerships. In fact, there is demand for a greater level of private involvement to increase competition. Some executives said that the nation’s policy framework itself is lower priority than some of the basic factors that make India competitive as a manufacturing destination. In discussing the hard infrastructure challenges in India, one executive stated, “We don’t have a clue how this is going to happen.”
Develop infrastructure to bring industry, not vice versa: The prevailing sentiment was that it is irrelevant whether government, public-private partnerships or industry develop infrastructure. Historically, the model in India has been for industry to begin establishing itself in a location, and power supply, roads, water and other capabilities are added until the grid is overloaded. Executives said that this is the wrong way to build domestic capabilities and attract foreign direct investment.
Executives consistently noted that specific industries have specific needs when it comes to infrastructure. For example, auto executives and other consumer product companies called for improved roads to spur customer demand and efficiently deliver products to market. For technology industry executives, telecommunications infrastructure is critical. Regardless of industry, the overriding message was to invest heavily in all forms of hard infrastructure, both for domestic purposes and to attract foreign direct investment.
- Create industrial clusters that result in integrated industrial townships with state-of-the art infrastructure: Beyond direct measures that government can pursue in a country’s infrastructure development (building ports, highways, power grids, etc.), executives were generally highly supportive of clusters that provide infrastructure and land use on the basis of zoning, clean and energy-efficient technology, necessary social infrastructure, skill development facilities, etc., to provide a productive environment to persons transitioning from the primary sector to the secondary and tertiary sectors.
- Support the creation of industrial clusters by enacting regulatory improvements that remove complexity and uncertainty in areas that include land acquisition improvements, labour laws and taxation.
- Develop showcase clusters to immediately demonstrate the benefits through such initiatives: Executives supported the creation of two or three showcase clusters developed quickly and immediately to illustrate the benefits that result in these integrated environments. Citing Tianjin, China, as an example, many executives believed that states would be more inclined to buy into the concept of national manufacturing zones. Said one executive: “If we wait for all stakeholders to be aligned, we will wait forever.”
Relax policies defining reasonable levels of foreign direct investment
Executives consistently believed that key to growing India’s manufacturing sector faster than GDP is an environment that promotes both private and foreign investment. These perspectives are supported by the National Manufacturing Policy, which states, “Foreign investments and technologies will be welcomed while leveraging the country’s expanding market for manufactured goods to induce the building of more manufacturing capabilities and technologies within the country.” However, many executives believed current laws are restrictive to supporting the objectives outlined in the policy and noted the following recommendations.
- Review and reform regulatory restrictions on foreign investments in sectors deemed important and strategic to India’s growth objectives: In the face of the economic downturn in Europe and the United States, India receives more and more attention from international developers, investors and financial institutions. However, the perceived lack of commitment from the government to relax regulatory controls and other factors are contributing to an environment of uncertainty among these stakeholders. Achieving the growth objectives outlined in the National Manufacturing Policy will be driven in large part by participation from international organizations, and removing restrictive barriers of entry and regulatory controls is critical to the process.
- Enact basic financial sector and capital market reforms to attract private investments: While executives said India’s growth is appealing to private investors, many also believed that current policies work against growth by adding risk and cost to private investments, which discourages capital inflow to the manufacturing sector. Specifically, cost of capital is extremely high, and private equity investors have limited exit strategy options.
Remove uncertainty from India’s regulatory and legal environment
Most executives participating in the discussions agreed that the “regulatory goalposts” need to stop moving in India and that the inconsistency and arbitrariness of regulations is a hindrance to making investments.
Executives said the lack of transparency diminishes private sector confidence and opens the door for increased levels of corruption. Many noted that the National Manufacturing Policy cites regulatory reform as a key pillar in strengthening the manufacturing base, as it aims to centralize and rationalize business and environmental regulations among the various states and federal agencies. Executives also applauded Web enablement under the policy on matters related to business application, reporting and regulatory compliance. These measures, once implemented, would resonate with business leaders.
Other recommendations noted by executives include the following.
- Implement laws that build trust among stakeholders, rather than laws that reinforce an environment of distrust.
- Address the basic hurdles and fundamental issues that keep businesses from growing, developing and investing in India: Executives said regulatory reform, land acquisition reform and financial sector regulation are needed to spur investment and growth. Participants consistently supported environment and safety regulations that are in the best interest of society, but encouraged limiting the scope of such regulation to not impose overly burdensome regulation on business.
- Remove and rationalize regulations to accelerate the pace of decision-making and approvals: Executives said that accelerating the pace at which decisions and approvals are made would significantly benefit the Indian economy. Interestingly, executives noted the importance of improvements in this area in the context of foreign organizations looking to invest in India, as well as domestic companies looking to reinvest in the country. One executive noted, “Some large companies in India seem to be focusing more on investment overseas than investing in India due in part to the regulatory burden and slow pace.”
Develop a more liberal and simplified tax structure with a greater level of transparency to improve consistency of interpretation
Executives participating in the discussions consistently called for improving tax policy in India – both in terms of facilitating more consistent interpretation and in terms of providing greater tax incentives and benefits related to priority areas that support competitive manufacturing. Vocational training, infrastructure and R&D were cited as specific areas that would benefit from such tax incentives.
Create a sustained competitive advantage by encouraging technological innovation and movement up the value chain
While India’s technical talent is recognized the world over, many executives noted significant gaps in promoting interaction between industry and research institutions. Executives said the following actions would help to facilitate the connections that are required to create an environment that results in the ability to sustain the development of technological innovations.
- Improve the intellectual property filing process and create an environment that results in an increase in the number of filings.
- Develop industry-led standards and create activities that result in global acceptance of those standards.
India’s approach to the automotive industry, which is a leading manufacturing sector, was noted as a success story in efforts to develop industry-led standards. The automotive industry took up policy entrepreneurship to bring all stakeholders together to work towards a common vision. As a result, an ecosystem was created in which auto-producing hubs in Chennai, Pune and the National Capital Region each benefitted from clusters of allied industries supplying components and parts to enable the big companies to mass produce.
- Encourage and fund risk taking to create an environment which rewards efforts that drive and support activities that move technological innovations from R&D, through applied research to full commercialization.
- Create inspirational science and technology goals and make attainment of requisite skills needed to attain those goals an aspiration.
- Build India’s Department of Science & Technology into a world-class organization to encourage greater collaboration with industry.
- Share and apply best practices and knowledge across states to encourage innovation.
Provide government incentives for small and medium-sized enterprise manufacturers
Baba Kalyani, Chairman & MD, Bharat Forge, India and Seo Bo Shin, MD & CEO, Hyundai Motors India
- Provide access to the basics beyond access to adequate and timely financing, to include availability of suitable technology, marketing resources and skilled workers. Executives cited the critical role that SMEs play in the manufacturing ecosystem, including their ability to take risks on a smaller scale to promote innovation. The cluster approach will significantly promote SMEs and address some of their unique challenges related to access to credit, adoption of new technologies and development of human resources. Finally, it is important to note trade policy came up during the interviews and working sessions in the context of policy-maker support in boosting exports to meet India’s aggressive growth targets, and energy policy was touched upon by executives commenting on the criticality of infrastructure. However, these topics were not regarded as priority in the face of the more pressing policy issues previously noted.