Smart manufacturing yet to take off

India’s engineering industry needs to gear up for the rapid adoption of Industry 4.0 processes across the board in efforts to achieve the status of a global hi-tech player in engineering products

DEBOLINA MUKHERJEE AND SHRILATA GHOSH

Sr Assistant Director, and Assistant Director, EEPC India Policy Division

ECONOMIC diversification is a key element of economic development associated with structural changes in trade structure and expansion of export diversification. Lack of economic diversification often leads to increased vulnerability to external shocks that can undermine prospects for longerterm economic growth. Economic diversification helps to manage volatility and provide a more stable path for equitable growth and development. Successful diversification is all the more important now in the wake of slowing global growth and the imperative in many developing countries to increase the number and quality of jobs.

Trade expansion is central to creating new, higher productivity jobs that will facilitate growth through structural transformation. In a globally competitive scenario, countries completely relying on exports of primary products face constraints in the long-run development process. Thus with the development process there is a shift from natural resource-based and low-technology-intensive exports to medium- and high-technology-intensive exports. Efforts towards technological change and globalisation are also generating new opportunities for resources to shift within agriculture to higher productivity activities, and services as well as manufacturing can drive diversification and structural transformation.

In the Indian context, trade statistics illustrate that there has been a decline in the export share of agriculture and allied products from 19.4 percent in 1990-91 to 9.9 percent in 2010-11, paving the way for self-reliance in the post-liberalisation period. In fact, the share of the manufacturing sector increased till 1999-2000, but has been experiencing a declining trend from 2000-11. During 2010-11, the share of manufacturing in India’s merchandise exports constituted roughly 61.5 percent. As noted by Kumar and Gupta,1 lack of focused approach in identifying, sustaining, and building the country’s competitive advantage, concentration of exports in low-value categories, and relatively poor inflow of foreign direct investment (FDI), especially in export-oriented industries are responsible for the relatively weak performance of India’s manufacturing exports.

In this paper, we will examine whether there has been a change in the composition of manufacturing exports, whether India’s manufacturing exports are more technology-intensive, and focus on the shift in the technology intensity of India’s manufacturing exports.

OVERVIEW OF INDIA’S MANUFACTURING SECTOR

MANUFACTURING has traditionally played a key role in the economic growth and development of countries. In developing countries, the importance of manufacturing has diminished over the last 20-25 years, resulting in de-industrialisation. However, industrialisation – or increases in the share of manufacturing in gross domestic product (GDP) – is a key feature of modern economic growth.

India story so far

In the last decade India has emerged as one of the fastest growing economies.

While revising down the GDP growth outlook for 2020 to 6.1 percent, the IMF has pegged the medium-term GDP up to 2024 at 7.4 percent, making India one of the fastest growing economies ahead of China at 5.9 percent (these estimates are prior to the onslaught of Covid19. The revised estimates are still emerging). Today the service sector contributes 54.13 percent and the manufacturing sector contributes 18.32 percent followed by agriculture, which is at 14.39 percent. Given India’s large domestic market, which needs ‘products’ to consume, such low contribution of manufacturing is not a healthy sign.

Manufacturing provides many jobs, at all levels. It is important as an employment generator. Among all sectors (service, agriculture, social, manufacturing), manufacturing distributes wealth most equitably among the workforce; hence is a key factor to pull people above the poverty line. For example, in most of the fast-developing Asian countries such as Thailand, Indonesia, Malaysia, Taiwan, Philippines, Korea, and China, manufacturing has contributed 30-50 percent of GDP, and thus has helped in eradicating poverty. In contrast, the Indian manufacturing sector’s contribution to GDP has moved from 16 percent to 18.32 percent in the last 10 years.

The Make in India initiative is designed to take manufacturing to 25 percent of GDP. For India to realise these projections its manufacturing industry has to play not just significant but a leading role. Under this initiative, the Government of India has identified and taken many steps to improve competitiveness of Indian manufacturing organisations. The government aims to create 100 million new jobs in the sector by 2022. This has resulted in India jumping to 68th rank out of 140 countries on the Global Competitiveness Index of the year 2018.

Market size

The gross value added (GVA) at basic current prices from the manufacturing sector in India grew at a CAGR of 5 percent during FY16 and FY20 as per the annual national income published by the Government of India. The sector’s GVA at current prices was estimated at $397.14 billion in FY20PE.

Business conditions in the Indian manufacturing sector continue to remain positive. The manufacturing component of IIP stood at 129.8 during FY20. Strong growth was recorded in the production of basic metals (10.8), intermediate goods (8.8), food products (2.7), and tobacco products (2.9) percent, respectively. The index of eight core industries stood at 131.9 in FY20. Merchandise exports decreased 4.78 percent y-o-y to reach $314.31 billion in FY20. Some snapshots of Indian manufacturing overview:

Gross value added by manufacturing

  • India’s manufacturing sector has witnessed strong growth over the past few years.
  • The sector’s GVA at current prices was estimated at $397.14 billion in FY20PE.
  • GVA at current prices for FY20 grew 0.3 percent y-o-y.
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Source: Ministry of Statistics and Programme Implementation

Index of industrial production

  • The index of industrial production (IIP) is prepared by the Central Statistics Office to measure the activity happening in three industrial sectors, namely mining, manufacturing, and electricity.
  • It is the benchmark index and serves as a proxy to gauge the growth of the manufacturing sector of India since manufacturing alone has a weight of 77.63 percent in the index.
  • The manufacturing component of the IIP stood at 129.8 during FY20.
  • Strong growth was recorded in the production of basic metals (10.8), intermediate goods (8.8), food products (2.7), and tobacco products (2.9) percent, respectively
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Source: Ministry of Statistics and Programme Implementation

NOTABLE TRENDS IN INDIA’S MANUFACTURING SECTOR

Export driven expansion

  1. As per India Manufacturing Barometer 2019, 85 percent of the respondents were confident of increase in turnover, driven by global demand.
  2. Going forward, business leaders expect global demand to play a major role in expansion of India’s manufacturing industry.

Additive manufacturing

Popularly known as 3D printing, this new manufacturing technology uses digital models to create products by printing layers of materials. This has huge potential in India with the rise in mega projects coming up.

Industrial internet of things (IIOT) and industry 4.0

With the rise of IoT in consumer tech, the manufacturing sector has also started implementing this new network of sensors and actuators for data collection, monitoring, decision-making, and process optimisation over internet infrastructure. Data is a huge component of this whole setup and Indian companies have a lot of potential in this area with many large companies already betting on big data and analytics. As an example, Indian Railways will be rolling out locomotives with solutions like remote diagnostics and proactive predictive maintenance and these trains will be part of a wider ecosystem connected to industrial internet.

Advanced robotics

While standalone robotic workstations are already commonplace even in Indian companies, advanced robotics use enhanced senses, dexterity, and intelligence to automate tasks or work alongside humans.

Digital technologies

With the advent of the digital age, Indian manufacturing companies have started adopting digital technologies in their production processes, which will help in increasing efficiency. It is estimated that 65 percent of manufacturing companies will have high levels of digitalisation by 2020.

Focus on backward integration

Backward integration helps manufacturers to increase efficiency and overall cost of products without sacrificing on quality. Various organisations are looking at backward integration as a means to reduce costs.

Focus on forward integration

Forward integration strategies also help organisations to realise cost benefits.

Collaboration

The Government of India has been pushing for greater technology transfers and collaborations along with more FDI and domestic production.

Exports of manufactured goods

  • Manufacturing is a key component of India’s merchandise export.
  • Merchandise export decreased by 4.78 percent y-o-y to reach $314.31 billion in FY20.
  • The engineering sector contributes the maximum share among all the sectors
  • The top four items in India’s manufactured exports are engineering goods, gems and jewellery, chemicals and related products, and textiles.
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Source: Ministry of Commerce

CLASSIFICATION OF INDIA’S ENGINEERING SECTOR

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ENGINEERING goods have witnessed a rise in exports over the years due to high growth rates of two major items including machinery and instruments, transport and equipment besides residual engineering items.

The engineering sector, being the largest of the industrial sectors in India, can be broadly categorised into two parts – heavy engineering and light engineering.

The heavy engineering segment forms the majority of the engineering sector in India. In 2019-20, out of the total engineering net value added of $76.3 billion, the heavy engineering market contributed over 55 percent with the light engineering segment accounting for the remaining. The sector is relatively less fragmented at the top, as the competencies required are high, while it is highly fragmented at the lower end (e.g. unbranded transformers for the retail segment) and is dominated by smaller players.

Robust growth in India’s engineering

  • India’s engineering exports include transport equipment, capital goods, other machinery equipment and light engineering products such as castings, forgings and fasteners.
  • During FY09-FY19, engineering exports from India registered growth at a CAGR of 8.8 percent
  • Engineering exports from India declined to the extent of 5.8 percent to $76.3 million in 2019-20 from $81 billion in 2018-19
  • Engineering exports can be divided in eight major categories. Out of these eight categories, iron and steel and products of iron and steel, account for a share of 21 percent of total engineering exports.
  • Transport equipment and automobiles, capital goods and other machineries contribute more than 62 percent share out of total engineering exports.
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Note: Heavy engineering dominates the sector, accounting for nearly 80 percent of the output

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Figures6 & 7 present engineering exports over the past 10 years as well as the key categories of engineering exports.

In the engineering sector, most of the capital goods, transport equipment, industrial machinery, machine tools, electrical machinery, as a whole contributed 62 percent share out of total engineering exports during 2019-20, while the remaining lies with light engineering. While this is a significant achievement, stagnancy in India’s global exports share is a matter of deep concern. For the last 10 to 15 years India’s share in global exports has stagnated around 0.8-1 percent. This stagnancy is a reflection of the fact that India’s engineering exports are majorly in the low- or medium- value chain. As a consequence while exports from the country have increased in the last few years, the engineering industry has not witnessed significant value chain upgradation – a negative impact on India’s engineering export competitiveness. In the next section we look at the change in technology intensity of India’s engineering exports.

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Source: DGCI&S

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Source: DGCI&S

TRENDS IN TECHNOLOGY INTENSITY

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TO analyse the trends in technology intensity of India’s engineering sector, we divide India’s exports into four divisions:

  1. High-technology
  2. Medium-high-technology
  3. Medium-low-technology
  4. Low-technology

This is as per the UNCTAD division of HS codes by technology intensity

Table1 clearly indicates that the share of high-technology-intensive exports in India’s total engineering exports have not gone up in the last five years. In fact, the composition of India’s export basket in the last five years has remained almost same with highest share of medium-low-technology-intensive products. Therefore, while since the advent of the Indian engineering industry, there has been a definite shift in India’s export portfolio towards a medium-technology range, further value additions have not taken place in the recent years.

Table2 indicates the top 15 high-tech exports by India and its share in global exports. From the table it is evident that among the top 15 products, India has substantial global share in only around five products.

At the same time, if we look at the top 15 high-tech products exported globally, for most of the products, India’s share is less than even 1 percent (Table3).

In the next section we delve look into India’s position in terms of export competitiveness by technology intensity with respect to a set of competing countries.

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Analysis

The method for this analysis has been adopted from a paper by Bojnec and Novak2 which looks into the technological intensity of Slovenia’s merchandise exports vis-à-vis EU-15 countries.

The indices used to determine and compare the technological intensity are: Relative Trade Advantage Index (RTA): Relative export advantage – Relative import penetration

Relative export advantage (RXA) = (Xij/ Xit)/(Xnj/Xnt)

Xij: Export of j commodity by i country

Xit: Total export of i country (total exports can be total engineering or total sectoral exports)

Xnj: Total export of j commodity by the set of competing countries

Xnt: Total exports of the competing group of countries (total exports can be total engineering or total sectoral exports)

Relative import penetration (RMA) = (Mij/Mit)/(Mnj/Mnt)

Mij: Import of j commodity by i country

Mit: Total import of i country (total imports can be total engineering or total sectoral imports)

Xnj: Total import of j commodity by the set of competing countries

Xnt: Total imports of the competing group of countries (total imports can be total engineering or total sectoral imports)

RTA = RXA – RMA

RTA > 0, i country has export advantage

Price competitiveness of exports (IATTij) is measured by ratio of India’s export to import unit values

IATTij: UVXij/UVMij

UVXij: Value of export/Quantity of export

UVMij: Value of import/Quantity of import

If UVX>UVM, product has greater price competitiveness

For this analysis, we consider the following five countries as India’s competing set of countries (C-5): Mexico, Brazil, Malaysia, Thailand, and Vietnam.

Observations

  1. Relative trade advantage Table4 indicates the relative trade advantage of India’s exports vis-à-vis that of the C-5 countries.
    The table notes that while India’s RTA for low-technology industries has become negative, its maximum RTA lies in medium- to low-technology. RTA in medium- to high-tech products has become positive but is still low compared to medium- to low-tech products. This is in contrast to the C-5 group, which has a negative RTA for medium- to lowtech industries but its RTA for high-tech industries is becoming positive whereas for India it is still negative. This clearly indicates that India has not achieved much specialisation in high-tech segments.
  2. Price competitiveness of exports Table5 indicates the price competitiveness of exports. It shows that even with low exports price competitiveness of India’s high-tech products is far more than the others.
    Therefore there is a need for Indian engineering exporters to shift towards high-technology exports to earn better price in the global market. Technology upgradation is the need of the hour, especially for the MSMEs which contribute 45 percent of India’s manufacturing output and 40 percent to exports directly or indirectly.
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Source: Author’s calculation from ITC Trade Map

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Source: Author’s calculation from ITC Trade Map

PATH TOWARDS ADOPTING INDUSTRY 4.0

INDUSTRY 4.0, a name given to the Fourth Industrial Revolution, is referred to as the process of digitising the manufacturing sector. It is also termed as Smart Manufacturing, which encompasses an integrated management of information associated with use of digital technology. It integrates advanced manufacturing techniques and the Internet of Things to create a manufacturing systems that are not only interconnected, but communicate, analyse, and use information to drive further intelligent action back into the physical world. The term was first coined by Germany in Hannover Messe 2011 and since then it has been adopted by several countries but not all countries have been able to adopt it successfully

A 2018 research paper by the World Economic Forum and AT Kearney revealed that only 25 countries are poised to take advantage of the Industry 4.0.3 The paper assessed 100 countries and economies across all regions and stages of development and assigned the participants to four categories: Leaders, High potential, Legacy, and Nascent. As per their categorisation Japan, Korea, Germany, Switzerland, China, Czech Republic, USA, Sweden, Austria, and Ireland are the top 10 leaders in successful adoption and implementation of Industry 4.0. In the same paper, India has been ranked as a Legacy country, which implies that there is a significant manufacturing base; however, there is a need to invest in technology platforms and innovation capacity to mitigate the risk of losing in future. This indicates the low level of preparedness of India in adopting the Industry 4.0.

Barriers faced by Indian industries while adopting Industry 4.0

The Indian exporting community especially in the engineering sector is majorly constituted of MSMEs. These MSMEs often do not have the scale or knowhow to adopt the technologies given their high implementation cost. At the same time, there is also a lack of awareness among these manufacturers regarding the latest trends in technology prevailing in the industry.

Other than this, lack of skilled labour needed to implement such technologies is not available with many manufactures across product categories. Additionally this may bring procedural and regulatory hassles, which also restrict a company’s willingness to adopt such technologies. Poor internet connectivity and lack of proper data management systems are also responsible for the slow adoption of these technologies.

Steps taken to develop technology intensity for Indian exports

The Government of India is aware of the imperative need for technology upgradation. The New Industrial Policy framed by the Ministry of Commerce and Industry after consultations with other ministries envisages transforming India into a global leader in Industry 4.0. The policy aims to align Indian manufacturing with new technologies drones, artificial intelligence and block chain.

The World Economic Forum (WEF) has set up a Centre for the Fourth Industrial Revolution in Maharashtra. Artificial intelligence, block chain, and drones are the first three projects to be started at the centre in India. WEF will work in collaboration with the NITI Aayog, business leaders, academia and start-ups in these projects. Furthermore in June 2020 it was announced that the government would also offer incentives in the form of tax breaks or subsidies to prompt the industry to adopt Industry 4.0. the Department of Heavy Industries (DHI) implemented the SAMARTH Udyog Bharat 4.0, an Industry 4.0 initiative under its scheme on Enhancement of Competitiveness in Indian Capital Goods Sector. DHI has also partnered with a number of industry associations to organise a series of awareness workshops on Industry 4.0 across India with an objective to foster adoption of smart manufacturing.

Export promotion councils have also been instrumental in this process.

EEPC India has established two Technology Centres, first among all EPCs. The first one has been functioning since June 2017 in Bengaluru and the second one since August 2019. Industry 4.0 is an important aspect of these technology centres. EEPC India also plans to open such technology centres in other locations across India. Additionally the Council promotes Industry 4.0 in various national as well as international frontline trade shows on engineering that exhibit the most advanced technologies available globally and strive to provide breakthrough opportunities to Indian companies to learn, disseminate, and develop this revolutionary concept. More such initiatives to create awareness and capacity building is required among MSMEs to fully adopt the technological advancements.

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Conclusion

Technology will play an extremely significant role in the coming days as India’s manufacturing recovers from the impact of the Covid19 pandemic. With disrupted supply chains globally, technological advancement of India’s manufacturing will not only help India become self-reliant but also uplift its status as a global high-tech player. In such a scenario, both government and private enterprises have to come together and bring in more initiatives that will spread usage of advanced technologies in a cost effective way among the MSMEs.

Notes

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