India could be an antidote to global concerns around slowing growth and plateauing corporate profits as the country will see a surge in consumption demand and that would require a lot of innovation from multinational companies (MNCs), Rajat Dhawan, a director in McKinsey’s New Delhi office and its leader of operations practice across the Asia-Pacific region said in an interview. India’s manufacturing push will require the government to frame policies that are enablers of growth, Dhawan said. Edited excerpts:
What is your overview of India’s manufacturing sector now?
I think it is a terrific time for India to prioritize manufacturing. If I look at the global scenario, it feels like the forces are all aligning right now for India to put forward its manufacturing sector on the global stage. If I just look at the evolution of global corporate profits, some three decades ago, corporate profits were 7.5% of the global GDP. Over a good 30-year run, they grew to about 10%. We feel that’s the peak of global profits. It is a peak because bottoming out of cost improvements have happened. Many of the economies globally are actually slowing down. Growth has gone away from many developed economies and many developing economies are going through their own bumpiness. We also believe that a couple of decades of run that China has will plateau. But India offers a superb antidote to all these issues that the global MNCs have seen. India is where the consumption demand will be. This is where a lot of innovation can happen. We have lots of young people who will drive productivity growth. India could really position itself for the next 30 years and say that here is a large bunch of answers to MNCs to invest here, leverage the domestic market for innovation, productivity growth and use it to make for the world and hence use India as an antidote to plateauing corporate profits.
Historically, was there a point when India had this kind of an opportunity?
We have industrialized in a manner where we have lagged some of the other economies. We have seen what Japan did in 1960s and ’70s and then the baton went to Korea and some of the South-East Asian economies and then to China. Could we have raised our hands at some point in time? Possibly, mid-90s, we had this kind of an opportunity when China was rising. Last 15-20 years, it was like a batsman who was smacking sixes and it was very difficult to come in front of the Chinese juggernaut. Right now, you feel there is the China+1 question being asked. Which is, where else apart from China can I be as an MNC? India definitely has a pretty significant stake.
Is the China story really over?
I would not say that. It is one of the largest and most important economies. It is one of the largest manufacturers globally. It is 10 times the size of India’s manufacturing GDP. By no means is the story over. There is a little moderation that has to come in terms of expectations about how many dollars that country can continue to pump into infrastructure growth. There may be some structural questions to be asked about the level of debt that is there in the system and how much it can carry. But, there are other countries who can raise their hands now.
Where do we stand when it comes to the skill sets and manufacturing culture vis-a-vis countries like Germany?
I think Germany and Japan are superb examples of countries which have reached the highest levels of maturity in terms of manufacturing. I think a couple of things really worked there. One is a very different level of engineering and innovation. Second is the softer aspect of culture, which is very disciplined and very quality driven. Frankly, there is no reason why Indian companies or MNCs in India cannot replicate that. We have large numbers of Deming Prize (a global quality award) winners in India across many sectors. Some of the sectors such as auto components and pharma have really proven that. Together, they do $25 billion of exports and they have very high demands on precision, quality and engineering fronts. I think it is about broad-basing the revolution.
Frugal engineering is something that has come out of India and now we see global companies doing the same thing. Why is it that our innovation fails to make a global impact? Tata Nano is one such example.
I think there are several examples where frugal innovations have succeeded in the country and those innovations have travelled outside India. I can cite examples from water coolers, smaller refrigerators, water purifiers to medical devices. Frankly, entrepreneurial spirit in the country is so strong that one or two failures really do not stop people. The company that you mentioned has not stopped innovating and I am sure it will meet global success.
On the policy front, what are the basic factors that one needs to keep in mind?
The lion’s share of the work has to be done by corporates in terms of the culture of innovation, productivity, cutting waste and ensuring quality. They have to watch for their return on capital employed so that they continue to generate sustainable returns and can bring capital back in terms of investments. Having said that, manufacturing is an ecosystem game. To that extent, it is different from agriculture and services. There, the government policy needs to continue to be a big enabler. Clear shifts are needed on areas such as infrastructure, power, ports, logistics and roads. It is going to be a slow revolution. The second big piece is labour. One side is hiring and retrenchment, the other side upskilling labour. The third is land. It is a state topic. Many states have come forward. I hope that consensus gets built on the back of some successes. Finally, everything around product market barriers and ease of doing business. A lot has been said. I think Make in India can really make a dent. These are sufficient conditions. The necessary condition is any entrepreneur who puts in money needs to see returns. Therefore, I have always maintained that the lion’s share of the work will be done by corporates.
How big is the debt problem?
I think debt remains a challenge, but thankfully it remains limited to resource-intensive industries, by and large. It is accentuated given the fact that commodity prices are on a big downswing and debt levels on books do not have adequate coverage vis-a-vis the Ebitda. I think it will remain a dampener in commodity industries.
What could GST do in this regard?
It will have a huge streamlining and ease-of-doing business impact. The real impact on bottom line will probably be hard to guess. It depends which sector you are in, in terms of GST slabs, etc. I guess there is a huge benefit just in terms of streamlining and ease of doing business.
What are the sectors where India can make an impact in the next 10 years?
We believe that sectors where innovations can happen in the local markets, that becomes a great test bed to take them global. Sectors where we can leverage fundamental talent pool and demographic advantages that we have, those are sectors where opportunities are the most. That does not mean there are no other opportunities. Just to take some examples, I would say in the category of global innovations but for local markets, I believe automotive in general has huge potential. We can be a leader of small to medium car production and exports. In components, we have $12 billion of exports. That has to go up 5-6 times in the next 10 years and that potential exists. I would say branded generic pharma is another industry where we have a dozen or so leading companies that have really established themselves. They now have capabilities to scale up. I would say even in some of the tougher industries to compete in such as aerospace and defence, there is a ton of opportunities in the next 5-10 years to take part in the global supply chain.
Whether we will see a systems integrator, an aircraft manufacturer in the next five years, that is probably difficult. In 15-20 years, can we have a staircase of capabilities assembled by one or two companies? I think we can definitely do that. Even on naval side and on defence side, there are companies which are OEMs (original equipment manufacturers) and that continues to be another sector where domestic consumption could be served by local players.
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