Tuesday, 2 February 2010

Manufacturing is key

Manufacturing sector is the key to creating jobs. Not agriculture. Not services.

Agriculture employs a lot of people , especially in developing countries, but cannot create more jobs. Land is finite. Agricultural development will be primarily in improving productivity and output ; not in expansion of jobs. In this sector, policy must focus on efficiency; not on job creation.

The services sector is sexy, but not a massive creator of jobs. For all the growth of the Indian IT industry, the number of direct jobs it has created is probably 1 million. Add the indirect employment and you probably can get 5 million. That is a drop in the ocean of the employment challenge in India. So from a policy perspective, this sector needs to be left free, facilitated to grow, and encouraged, but with limited policy intervention.

The sector that can really boost jobs on scale is manufacturing. This is where policy initiatives must be most active.

What sort of policy initiatives ? Some thoughts, equally applicable to developing as well as developed countries.

Make it easy to open a manufacturing unit. In developing countries it is the problem of land acquisition. In the developed countries, it is the problem of myriad of planning permissions, approvals, fighting green lobbyists, obstructionists, etc etc. (Try setting up a power plant in California). Countries must legislate clearly facilitating easy setting up of plants – a fast track clearing process that must be mandated. In today’s atmosphere of joblessness, the political selling of such legislation is feasible.

Provide a clear incentive based on number of jobs created (not on the size of the investment). This will attract those operations that create more jobs, as opposed to capital intensive sectors. I suggest that, especially for developed countries, this is the most desirable track. For example provide an income tax holiday to employees (thereby lowering the cost of labour) and not to the company.

Develop great infrastructure. Manufacturing units needs perfect infrastructure – power, water, transportation, etc. It’s the job of governments to facilitate building such an infrastructure. This is particularly true of developing countries like India and those in Africa. It’s a fallacy that these are mind bogglingly expensive. Allow private participation and capital will come.

Add to this the other boosters namely labour flexibility, labour pricing and training (all to be covered in separate posts) and you can stimulate the manufacturing sector, even in developed countries.

It’s a myth that all manufacturing will move to the low labour cost countries like China. Firstly, labour cost is only a component of total manufacturing cost and often not the largest component. Secondly China is not the lowest wage country – India for example has lower labour costs; it’s a combination of infrastructure, labour flexibility, productivity, speed, etc that makes China’s manufacturing many times India’s.

But labour cost is an issue. Manufacturing will move to places where the total cost of production is cheapest. Can anything be done about labour cost ? I believe yes. In tomorrow’s post.


gils said...

avvvvvvvvv.....ipidi oru out and out bijiness mattera kooda naan ivlo eagera follow panuvennu enakay teriathu ithana naala!!! very curious to know the labour cost angle :) epdiruntha gils...ipdi aaitene!!!

J said...

//Provide a clear incentive based on number of jobs created (not on the size of the investment).//

Very important. A classic example of a lost opportunity was the American Job Creation Act of 2004 which was supposed to create jobs on American soil. But then I also think it was intentionally vague. The way AJCA was structured was far from desirable - companies got tax breaks for repatriating profits from overseas but the types of spending that were considered okay for "job creation" were too broad and there was little accountability on how the cash was spent. Net result, studies show companies did not really increase jobs, on the other hand dividends and stock repurchases increased (this was specially disallowed but was achieved through a back-door method).

I am not sure how the individual level tax breaks would work - presumably the company can pay a lower gross salary but I wonder if the company would have to get into private details of how the tax break affects individuals - which will then become a non-starter.

Very interesting topic....I will stop with the first point lest my ramblings become longer than the original post.

Deepa said...

From a job-seeker's point of view, I feel the variety of skill-sets and qualifications that can be employed by Manufacturing units are much more than the Service sector.

About Labour costs, would also want to add that, apart from taxes, there are some other factors too which probably influence them crawling upwards. eg. In US the average tax rates hover somewhere around Indian rates, but cost-output ratio in US is much higher, almost disincentivizing manufacturing here.

You've picked up a very interesting subject. Labour, being a socio-economic component, works on varied dynamics across industries and across locations . Probably the trickiest component of cost for any industry. Waiting for the series to unfold.

BTW, Mr. Obama so wants to read this!!

RamMmm said...

As you say, China is the best example of how things have matured to boost their economy manifold. Right political noises, infrastructure, cheap labor, incentives and the speed in which everything came into being.

Aside, how do you feel that China is coping with the slowdown?

Ramesh said...

@gils - I take that as a huge huge compliment. But then gils has always been that nice mixture of wit and fun coupled with sharpness !

@J - Please do comment as much as you would like. Would love a discussion and you are very well informed on this , and most issues. The tax break idea is borrowed from China. Here, when your company becomes eligible for the incentive, the employees covered are then taxed at a much lower rate. They have a national ID card here (India's PAN could serve that purpose too) - the tax dept simply changes the applicable tax rate to whatever the lower rate is in their system. Quite efficient and employers factor this break into the overall cost to company when they employ people.

@Deepa - Yes, manufacturing has the potential to offer employment to all levels of education more than the services sector. Labour is indeed the most difficult factor to handle - its not just a question of costs or rational logic, of course.

@RamMmm - More than anything else China's success in creating jobs is all about political will. One man made the difference - Deng Xiaoping. I think he was one of the greatest leaders of the 20th century, irrespctive of whether you like the political system or not. The financial crisis is long over in China. Because of their excellent fiscal management in the past they could spend their way out of trouble, which is what they did. The increased bank lending massively (big bubbles have been created, but that's another story) and spent mind boggling sums on infrastructure. Nobody in the world can even remotely match the infrastructure what China has and is building. Amazing.

Sandhya Sriram said...

Great Thoughts Indeed! Wow. A few more from my end, nowhere to match your class but just to add my name on your comment pane.

While large industries have the capability to spend on research and innovate, the many many small and medium are not able to and may need pay a bomb for buying a new technology. if government sets up community research centres, it is a double win. it can absorb many engineers to do this task and in turn levarage the capabilities of the indian young minds for the economy

YOur point on incentivising in a developed economy is absolutely fantastic - great thought. In a developing economy, since it is important to encourage investments into better technology A midway is maybe required. A midway here is to set up organized training centres where people are trained for job related skills and companies are incentivised for recruiting these individuals (a tax sop for amounts spent on these). it will be a triple win. it would bring a channel to all the workforce, it would create an accurate database of available talent, it would help companies minimise their cost of recruitment.

On Infrastructure, maybe an extension of BOLT scheme, Large companies should be given double tax deduction for any money invested on infrastructure. for ex: if a company takes a contract and maintains a public road leading to its factory or create and manage an RO Plant and generates water for meeting needs of the area in which the factory is located, give tax deduction for that. this will enable companies who have the money to invest and in turn faciliate smaller companions on the way.

Harmonise tax rates. it is absolutely painful to manage multiple tax rates and credit mechanisms. remove all exemptions for PAN Number. irrespective of whether the person is a taxable assessee or not issue him a PAN Number. Instead of breaking ones head on how to create a social security number, integrate it with the PAN Number. let every member record each transaction with his PAN number. at the end of the month based on the summation of the total transactions which has cumulated in this database, work out a single a tax liability which the person can discharge and get done with. no returns, no assessments, only audits @ periodic frequency. this will create compliance, save time spent on evading and net net bring down the cost of manufacture

I know that these suggestions may be theoritical but as you kindly permit all sorts of rambling on your blog, i have taken this liberty :-))

Half Indian said...

I totally agree. The last question is very interesting to me. Wait for your next post.

Vishal said...

Wow... you make this place rock everytime you log in! And I am sure everyone out here is eagerly waiting for the next post on this topic.

Quiet agree that manufacturing and infrastructure are key to create more and more jobs. In fact, both these activities go hand in hand. Equally true is the fact that low labor cost is not the sole factor to decide whether to set up a manufacturing unit. Tax re-structuring can also be a fantastic way to stimulate manufacturing. I hope Mr. Mukherjee gets the link of this blog.

However, I think that job flexibility is a big problem for manufacuring sector in India (would await your post on this) and political intervention as rampant as ever ... West Bengal and Maharashtra have been biggest victims of this of late.

Ramesh said...

@Dave - Thanks very much

@VA - Thanks Vishal. Job flexibility is a real challenge. Actually the scene is not as bad as it is in say France. This is the most difficult one to post on !

@Sandhya - Very well considered and thoughtful comment. Am honoured that you are taking the time to really offer a wise comment. All of them very practical. Just as India has all those complexities of the PAN as you have stated, other countries have equally mind numbing provisions. There isn't a country in the world with a simple tax code !

Exkalibur666 said...

Totally agree. From a long term point of view, a key question is how do we sustain manufacturing while preserving the environment..especially in developing countries where at the name of fast paced growth the environment is degraded to breaking point.

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