How self-reliant is Atmanirbhar? Part 2

Friends, I invited comments, as also more thoughts, in my news analysis programme aired on thepublic.india YouTube channel on last Saturday, 13^th June, and the part one of this blog, on the subject of self-reliant Atmanirbhar Bharat. I got many responses. So, in the spirit of Polonius in Hamlet to give every man thy ear, and also not to have this half-empty vessel make its own noise, I draw upon mainly on this treasure of wisdom and these flights of thoughts, rephrase and rethink and present your descant back to you.

Let me take up what Mr. Shaji John says. According to him, at a time when all the other sectors are in doldrums, the only sector standing tall is Agriculture. A significant component of Atmanirbhar Bharat, therefore, has to be built upon self-reliant villages. But we have to rise beyond the sloganeering or the entire concept is likely to fail. Interesting. Ms Subbulakshmi Sundarrajan also says that for our country to concentrate on creating competitive advantages, the gap between policy makers and ordinary men must be bridged. The take away for me is that the intention of the government has to be presented as brass tacks, free of verbiage and obfuscation. But both these issues would be subjects of separate debate altogether and I leave them aside for future. 

I will start with the essence of what V.K.Krishnamurthy from Hyderabad advised me. I would pick up a leaf or two out of the lexicon pages of the PM. Time for Atma Shodhan (Self-enquiry). An honest assessment of where we stand, ignoring all rhetorical posturing. We certainly do not have ready solution to many issues but the mistake would be to brush these problems and our major failings below the carpet. We have high external dependence and lack of progressive thought leadership, an eco-system to develop technologies and a system of financing towards self-reliance. Added to that are the problems of human interactions like mistrust and professional jealousies which are allowed to overtake national priorities while major individual initiative are consigned to be sacrificed at the altar of the lowest public and common good. 

Shashi Bhushan Malik emphasizes, among other things, the need for designs made in India, upgradation of infrastructure, enhancement in the skill level of our workforce and SEZs. So let me first pick up the story of SEZs for today’s Atma Shodhan. An SEZ or a Special Economic Zone is typically an identified limited area, usually under a single management, with relaxed business and trade laws, with the aim to improving trade balance, generating employment, increasing investments, including FDI, and above all, developing an eco-system for manufacturing. They have separate customs area for duty benefits, streamlined procedures and special financial policies encompassing investing, taxation like tax holidays, trading, quotas, and labour regulations.

Break up of 416 approved SEZs: 351 notified, 232 operational, denotification on the rise fresh applications down to near zero. There has been a scale down of land requirements to following Multiproduct SEZ from to 500 Ha (earlier 1000 Hectares (Ha). This shows that interest in SEZs is evaporating. 59% of the operational ones are in IT/ITE service and electronic hardware. 5 % in chemical & Pharma and similar in engineering. 82% of the SEZs are in seven states. Two third of exports are from IT/IES SEZs and Petroleum sector. The actual objective of boosting manufacturing sector (large multi-product SEZs) has not taken off. In absolute numbers, SEZs’ exports have increased significantly from Rs 10,000 crore in 2001 to more than Rs 7 lakh crores. However, what is not said is that SEZs’ share in India’s total exports rose from 5 % to 30% in the same period, which is more like placing your fruits from one basket to another. Moreover, many SEZs, like throughput facilities at Jamnagar and or gems and Jewellery SEZs like SEEPZ have a very high import intensity defeating the very purpose. The true picture of achievement so far does not look very encouraging. 

Having built Asia’s first SEZ more than 5 years ago, India lost its way. It is critical to undertake a detailed expert study for benchmarking with Asia’s shining SEZs like Shenzhen in China, Incheon in Korea, Jebel Ali in UAE and even Chittagong in Bangladesh. 

Land Acquisition bill of 2103 presented acute difficulties for land and the SEZ strategy as size is the key to an eco-system and supply chain. At the same time, 50% of land is lying vacant in the notified SEZs which point to other factors contributing to inactivity. 

The basic objective of the model, i.e., development of key manufacturing sectors of thrust and facilitating enabling eco-system and supply chain, was distorted with SEZ developers becoming land bank companies and infrastructure development for IT offices in urban cities. For example, Noida and Greater Noida, Gurgaon and Gujarat have majority SEZ which are basically urban IT parks, hardly adding any value to the industrial eco-system of the country.

It became all about financial engineering of taxation and incentives, a perverse story from the standpoint of both the government as well as investors. SEZs came up not for exporting or employment generation but avoiding taxes as the driver. The sops were unleashed onto an industrial landscape where businesses were seeking relief from a large gamut of indirect and direct taxes. Once tax concessions like exemption from Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) were withdrawn, interest in SEZs also disappeared. 

State level support to SEZs was largely missing with huge difficulties in actually getting exemption from the state and local taxes and levies. It did not help that soon after inception, SEZs were seen as villains by a system desperate to shore up its revenues and tax administrators didn’t lose opportunities of getting back at them. The biggest example is the Nokia SEZ at Sriperumbudur that shut down following tax disputes with both the Centre and the State governments.

There were other issues related to financing and structuring showing that the focus was on financial engineering and not industrial development; case in point, the recent amendment to SEZ act so that infrastructure investment trusts and real estate investment trusts would be permitted to invest in SEZs. Some SEZs have indeed succeeded in, or are trying hard to, create an industrial eco-system. While strengthening their efforts, we must look at the following  issues:

While fiscal incentives are necessary, undue emphasis on incentives lures investors to shift their production base rather than genuine value addition to business and activities. It is inconceivable for these zones to take off as isolated islands of excellence just on the basis of fiscal sops. Lack of adequate linkage with the rest of the economy is also critical.

A renewed thrust on manufacturing, high technology, electronics etc. with calibrated relaxations on SEZ as well as DTA supplies in a fair balance rather than large lopsided levies.

We should learn from the recent crisis involving migrant labourers and encourage labour intensive industries SEZ policy which could include low-cost housing and amenities for workers to attract them from different parts of the country.

Replicate the connectivity model achieved at successful SEZs which have facilitated strong multi-modal connections with the hinterland to lower the cost of logistics and improve export competitiveness.

Mr. Rajinder Mohan says that India had seen a regime till 90s when duty on raw material was more than that on finished products. Even today, the government has been failing to give support for product development. There is no will in government to indigenise as the policy is to look and buy and not develop and buy. A sentiment that takes pride in local brands, emphasises resilience and flexibility and encourages local capacity-building and indigenisation must be built up in true sense; signals alone will hardly help unless we see some concrete steps on the ground.

The Prime Minister has emphasised that his vision includes active participation in post-COVID global supply chains as well as the need to attract foreign direct investment. Although spoken in uncertain terms, the intent of freeing Indian entrepreneurship and innovation from bureaucratic hurdles showed up. There are countless appalling instances of lack of government and corporate support for new home-grown technologies and products. Opening up of new sectors which are now a reserve of public sector, decriminalisation of most aspects of corporate law and reduction in cost of capital must follow the primary sentiment, pride in Indian products. And that is where I bring in Atma Samman or Atma Vishwas (self-respect). Self-respect has to be built up in people’s psyche. We have a misplaced socialist instinct entrenched in our beliefs that all private enterprise is venal, fashioning their business as profiteering. A clear national value in building our own, domestically, whether by public or private effort, must be articulated for Atma Nirbharata. Only when chances are given and failures tolerated, improvements and quantum leaps occur.

All this may sound mere preaching and didactic and not directly actionable but we have to collectively think of this. What should also follow this is Atma Tyag (Self-denial). Denying technology to ourselves till home-grown technologies prosper. Recognising that in a hyper competitive world, in the areas where we trail but have the wherewithal to develop, we should deny ourselves. We should sacrifice immediate consumption while investing in our own. If we could succeed in Space or Nuclear programs in an environment of denial of technology, it is sad that the same success is nowhere to be seen for some basic products, including consumer electronics. Example: Battery buses and trucks. Huge investments are in the offing but the heart of these vehicles, the battery bank and the electronics and controls are all imported. Half the investments should be redirected for vehicles with Indian electronics and controls, even if it means higher costs; if this is done, I am sure in three years India would be fully self-sufficient in this field. It cannot be a case that we would not help our local industry, even if they be sub-standard in the first round, and keep allowing MNCs and then complain about lack of domestic capability. Needless to add, benefits like large orders and tax rebates for R&D effort would have to be provided by the government but the companies must come forward.

Friends, I came across an interesting article on Network 18 by Srinivas Kantheti, the MD of WheelsEMI. He has written that while he had no quarrel with the discourse on the unfair practices of China, he would talk about an industry where China had been beaten by India. His narrative is that it is not the government, neither the people but companies that compete and the blame for demise of manufacturing in India rested with Indian companies. 

While hiring young engineers in the year 2000 for Bajaj Auto, he learnt that technology companies got preference in hiring. Designing and building was not even considered technology, it was bracketed as manufacturing. Bajaj Auto then started to build its R&D wing, batch by batch, by affording the highest salaries and hiring not from the elite colleges alone but gems from mofussil colleges, youngsters who were passionate and knowledgeable. Many students could not express so well in English so the interviews were conducted in vernacular languages. An effort to make designing and manufacturing of motorcycles sexy and paying for it. TVS of Chennai also employed the same approach and built a great R&D department.

Equipped with robust R&D base, Indian two-wheeler industry fended off the attempt of China to flood India with products which were 30 percent cheaper. Although many dealer and media predicted the demise of Indian manufacturers, within six months this attempt failed as the quality of these motor cycles was no match to Indian motorcycles. Bajaj then started attacking them in Africa and South America. Africans had two choices: buy expensive Japanese motorcycles or cheap Chinese ones. In such a market Bajaj priced their products more than the Chinese models but less than the Japanese ones and today they are a market leader. TVS is number two. The Chinese have been driven out. With the primacy of three Indian companies, Hero, Bajaj and TVS, India today dominates the world motorcycle market.

Kantheti says that similar efforts were not made for TVs, computers, mobile phones, pharmaceuticals and other industries although it was the same country, same labour laws, same infrastructure as the Indian companies involved had a myopic vision. Of course, the government also did not help. So the government, people and the corporate are all responsible for our lack of presence in the global manufacturing scenario. People? When even ITI-trained technicians refuse to work on a shop floor, when a stock broker is paid more than an engineer and when typing code is mistaken for technology, and when people would not send their son or daughter to work on the shop floor, the attitude of our people has to be castigated.

The entire article can be accessed at:

http://www.cnbctv18.com/views/how-one-indian-industry-beat-china-at-manufacturing-and-created-a-global-footprint-6135001.htm

This issue of people’s attitude brings us to the question of skill sets among our workers. I will refer to a very interesting interview of Tim Cook, the CEO of Apple, at the Fortune Global Forum in 2017. It has Cook saying that it was unthinkable for any country in the world to reach the level China had already reached and it would be a herculean task to relocate industries from China. Why? I present a summary of what Cook says: 

The number one reason is that Chinese people have reached a level of extraordinary skills. They have nearly two million application developers in China who write very innovative mobile apps for the iOS App Store, which are sold the world over. Moreover, the entrepreneurs that run them are some of the most inspiring and entrepreneurial in the world. It is not limited to highly skilled software developers. China has moved into very advanced manufacturing and you find an intersection of craftsman skill as well as sophisticated robotics. 

It is not so much about the size of the market but the quality of relationships that is possible in China today. The process engineering and process development associated with Apple products require innovation by the manufacturer and not the designer alone. Not only in the product but the way that it is made because the requirement is to manufacture at a great scale of hundreds of millions but with quality level of zero defects. This requires a hand-in-glove partnership with very technically accomplished and competent people and such a platform is provided by China like nowhere else. The popular conception is that companies come to China because of low labour cost but the truth is China stopped being a low-labour-cost destination many years ago. It is now about the skill, the types of skill and the quantity of skill in one location. The vocational expertise is very deep in China and Cook credits their education system for continuing to push it.

The full interview can be accessed on YouTube at:

https://www.youtube.com/watch?v=_ng8xQ-SNGc

We have to embark on a massive skill development mission which extends much beyond the botched Skill India slogan. We must consider large-scale apprenticeship schemes like Germany. I will relate a simple instance from my early days in Germany. While visiting a factory on business, I was surprised to see teenage girls and boys training on the shop floor, not like a factory visit, but hands on. I was told that they were students of the dual vocational training system which is established in the German education system. This system involves cooperation between mainly small and medium sized companies, on the one hand, and publicly funded vocational schools, on the other. This cooperation is regulated by law. Trainees in the dual system typically spend part of each week at a vocational school and the other part at a company, or they may spend longer periods at each place before alternating and the training lasts two to four years. The system is so well supported by companies, government and their law that rightful employment of the trainees in the skill trade they specialize in is much easier than in other countries. China has also evolved its own vocational training model.  

We have our ITIs and Act Apprentices but it they do not attract the best possible simply because our society, parents and trainees alike, do not see value in undertaking vocational qualifications. They view it as being inferior to an academic education although a large number of those undertaking academic training remain unemployed or underemployed. Significant tax breaks on apprenticeship expense will have to be borne by the government. The companies would have to participate as if they were not training apprentices but their future employees. The process would take some years to lead to meaningful fruition, it may even be painful, but the time and pain would be well worth in the long run.

(to be continued in part 3 soon)