by Rakesh Mohan
MSP for Rice in Indonesia: Statistics Indonesia, http://www.bps.go.id/eng/tab_sub/view.php?kat=2&tabel=1&daftar=1&id_subyek=36¬ab=6. Accessed on 21 November 2014.
MSP for Rice in Philippines: Website of National Food Authority, Republic of Philippines, http://www.nfa.gov.ph/index.php?id1=22. Accessed on 24 November 2014.
MSP for Rice in Vietnam: Ministry of Agriculture and Rural Development, http://www.mard.gov.vn/en/Pages/news_detail.aspx?NewsId=993. Accessed on 24 November 2014.
MSP for Rice in Thailand: Thai Rice Exporters Association, http://www.thairiceexporters.or.th/Int%20news/News_2013/int_news_111113-1.html. Accessed on 21 November 2014.
15
Indian Manufacturing Industry: On the Path to Global Leadership
Baba Kalyani
Twenty-five years is a relatively short time in a country’s economic history, but in the quarter century since the reforms, the Indian economy has transformed from being in a state of virtual oblivion to becoming one of the fastest growing in the world. Clearly, this metamorphosis was possible due to the interplay of various factors that broadly include pragmatic government policies, the vision of our entrepreneurs, and a supportive global economic environment.
The Pre-Reforms Picture
Post-Independence India’s economic situation was weak. Foreign-exchange reserves were inadequate and the manufacturing sector was at a very nascent stage of development. The Industrial Policy Resolution (IPR) of 1956 gave primacy to the public sector to create a strong industrial base through which the country could become self-sufficient in various goods and commodities. The role of the private sector was subordinate and essentially required it to support the public sector. This model of development continued through the 1960s, 1970s and a large part of the 1980s. The results were mixed. While on the one hand, the government created an impressive industrial infrastructure in basic industries, on the other, protectionist policies, which did not encourage a free play of market forces, contributed in stifling entrepreneurship and competition. This environment bred all-round complacency and, by the mid-1980s, India had become a high-cost, inefficient and uncompetitive economy.
The Licence Permit Raj earned India the reputation of being among one of the most difficult countries to do business with. It took Bharat Forge a full seven years from the time it was conceptualized in 1959 to start commercial production in 1966. In the intervening period, we applied for an industrial licence, approval for foreign technical collaboration, and permission to import capital goods. The process of industrial licensing was so stringent that if a company manufactured even a little more than its licensed capacity, it could be penalized and the promoters prosecuted. As a result, there was no incentive to innovate and improve operational efficiencies. The technologies that a company proposed to buy from abroad were strictly scrutinized and entrepreneurs had to justify the need to import. As a precondition to being issued licences, companies had to commit to a five-year phased manufacturing programme, under which the import content in the licensed product had to be gradually reduced. If, for some reason, that did not happen, manufacturing activities could be halted and penalties imposed.
Travel overseas for business purposes was another challenge. For every visit that we undertook, permission had to be sought from the Reserve Bank of India (RBI), which would be issued only if we could give a detailed justification for the purpose of the visit, number of days to be spent abroad and the amount of foreign exchange that was needed. There was no fixed time frame within which RBI would issue travel permissions, and I can recall several instances when, although it was important for me to travel, I had to abandon my plans because there was no RBI approval. All this was quite embarrassing to explain to our business partners and associates, leading to the image of our country and entrepreneurs being negatively affected. Discretionary application of rules and procedures reflected a severe trust deficit between the government and the business community, which was perhaps at its peak in those years.
The plethora of permissions and approvals required at every stage meant that entrepreneurs spent more time in Delhi rather than on managing their businesses. Even for something as simple as hiring an engineer from abroad to erect a piece of equipment required an approval from the Ministry of Industry, which it gave only if we could convince the Director General of Technical Development (DGTD) of the merits of the case. That was not the end of the story. We then had to go to the RBI for permission to buy an air ticket for the engineer to travel to India and pay for his hotel and other living expenses while he was here. The permission was given on the condition that the engineer could travel only with Air India and stay in India for a specified duration, which in normal circumstances was not beyond a month. An extension, if needed, required us to approach the RBI again. This procedure had to be followed on a case-by-case basis. Bharat Forge had a technical collaboration with a US company and, though it had been approved by the government, every visit of a foreign technician from our collaborators still required us to go through the same process.
The import of equipment, raw material and technology required us to apply to DGTD. To justify the import, we had to ensure that there was no ‘indigenous angle’, which essentially meant ruling out the possibility of sourcing from within the country. An advertisement had to be placed in designated newspapers, to which domestic companies could respond with their offers within three months of the date of publication. The rush was such that newspapers had a waiting list to publish advertisements! Until this time, the import application would not be processed. On completion of the mandatory period, DGTD would evaluate these offers, and it was up to the importing company to justify the need to import. All these complex procedures meant that there was no easy access to essential manufacturing inputs.
Complex rules and procedures resulted in a poor image of the country among foreign investors. Investments from abroad were negligible and we could not access technologies that could have resulted in a faster and well-balanced economic growth. Several investors in the 1970s and 1980s preferred to set up manufacturing bases in low-cost countries such as Singapore, Thailand, South Korea and Malaysia, in spite of the fact that they had very small domestic markets. The ‘Asian Tigers’, as these countries were collectively termed, became engines for export-led growth. By 1997, when the financial crisis hit these countries, China had already taken major strides in manufacturing, and global investors wasted no time to shift their entire focus to China. Clearly, we were paying the price for our closed-door economic policies.
First Steps in Liberalization
Liberalization in India first began in the mid-1980s and was, to a large extent, restricted to the automotive, technology and communication industries. The first halting steps yielded encouraging results. With the entry of Suzuki Motor company in the Indian automobile manufacturing industry, indigenous component manufacturers for the first time were exposed to Japanese manufacturing processes and practices. This resulted in improved productivity. By nature, I believe, Indians are quick learners. Just when it seemed that the Japanese manufacturers of light commercial vehicles would strengthen their stranglehold on the Indian market, Tata Motors and Ashok Leyland came up with products that were both technologically comparable and competitively priced. Indian component manufacturers did not lag behind and started manufacturing products that were, in some cases, even technologically superior to the imported ones. Gradually, Indian manufacturing industry began to believe that, provided a level playing field, it could compete successfully with the best in the world. Rapid strides made by Indian companies in the information- and communication-technology sectors during that period resulted in improved economic efficiencies. More importantly, the belief that we could develop and manufacture our own products without overwhelming reliance on imports began to gather momentum.
Economic Reforms
The Budget, the New Industrial Policy and Foreign Trade Policy announced in July–August 1991 were landmark reforms in India’s economic history. It was
the first step in India’s transformation from a command-and-control based economy to a market-oriented system. Abolition of industrial licensing, abolition of phased-manufacturing programmes (PMP), de-reservation of most industries reserved for the public sector, opening up to foreign technology and foreign investment, abolition of the MRTP Act limits on company size, the two-step devaluation of the rupee, moving a large number of imported equipment from the Restricted list to Open General Licence (OGL), scaling down of the peak rate of customs duty from a staggering 300 per cent to about 100 per cent with a road map to bring it further down to ASEAN levels, and lifting of several foreign-exchange regulations and controls provided a much-needed zest to the Indian manufacturing industry. Importantly, the DGTD was subsequently disbanded. Suddenly, several constraints that had for years crippled our ability to compete had vanished. Many of our companies at first feared that the sudden opening up of the economy would sound their death knell. In reality, what actually happened was quite the opposite. Companies led by visionary entrepreneurs, who were driven by a passion to be truly world class, emerged as significant players in their respective fields. The reputation of Indian companies being unreliable and manufacturers of poor quality goods and services gradually gave way to recognition of our global vision, quality and ability. Since then, India has rapidly risen to become a leader in global information and communication technologies, large segments of manufacturing and a key player in the new knowledge age.
In the first two decades of the 21st century, several Indian companies through global acquisitions have expanded their manufacturing footprint. What is noteworthy is that infusion of Indian management, technologies and skills resulted in many loss-making companies being turned around and transformed into profitable ventures. These outstanding achievements have created a large number of Indian global business leaders whose intelligence and vision are a source of pride and inspiration for our country. Indian entrepreneurs, managers and technocrats now evoke global recognition, trust and respect.
The Bharat Forge Story
Bharat Forge was set up in the 1960s by my father, Neelkanth Kalyani, who was a first-generation entrepreneur. My father was an agriculturist with no background in industry. He, however, had a vision and, through sheer hard work, self-belief and dedication, set up and steered the company in its initial years. My father believed that strong academics were important for success in any field. From my early years, I had a natural aptitude for science and technology. I was fortunate to get admission into the mechanical engineering stream at the Birla Institute of Technology and Science, Pilani, from where I graduated in 1970. Immediately thereafter, I enrolled for an MS at the Massachusetts Institute of Technology (MIT) in Boston, US. I then returned to join Bharat Forge in 1972 when the turnover of the company was about Rs 5 crore. Looking back, I believe that my engineering background helped in giving a technology orientation to the business, which is strongly manifest across our company today.
The country’s economic situation at that time was fragile and the steep devaluation of the rupee in 1969 had made our project almost a non-starter. Nevertheless, we worked hard and gradually built our business. In spite of the severe odds we faced, we never gave up. Instead, we set goals for our company—first, to become the largest forging manufacturer in India, then the largest in Asia and finally, to be the largest and most technologically advanced forging company in the world. Looking back, the adversities we encountered and overcame in our journey over the past fifty years have made us resilient and given us the confidence to take on any challenge.
The 1970s went into establishing Bharat Forge. The 1980s was a period of consolidation and our phase of growth commenced in the 1990s, corresponding with the launch of India’s economic reforms. Developments in the Indian automotive industry during the 1980s and, notably, the recommendations of the Raja Chelliah Committee on reforms in the country’s indirect tax regime were clear indicators that the economy would be liberalized sooner rather than later. Till then, our focus was entirely on the domestic commercial vehicle market, which was our major customer segment. In 1985, we bagged our first export order from a tractor-manufacturing company in the erstwhile USSR for supply of forged track links. While we successfully executed that order, there was growing realization that if we were to succeed in global markets, it was imperative to invest in modern equipment and technologies.
When we decided to import two new forging press lines in 1990 from Germany, Bharat Forge’s turnover was about Rs 100 crore, while the cost of the equipment was Rs 150 crore. There are always a few defining moments in a company’s history. For us, the decision to make this investment at a time when the global economy was in turmoil due to the first Gulf War—particularly when we had no visibility with the customers who we would sell our products to—was a watershed. It was a decision that could either make or break the company. Many had termed the investment a ‘white elephant’. However, I was confident that the decision was imperative because that was the only way in which we could secure our company’s long-term future. The fact that our decision was to a large extent based on the confidence that opening up of the Indian economy would lead to new opportunities was vindicated when we started to receive inquiries from customers in different parts of the world. There appeared to be a perceptible difference in the way Indian companies began to be viewed in the international market. While earlier our efforts to make headway with potential customers were generally met with stoic resistance, the opening up of the economy appeared to have broken the ice. We began to be taken a lot more seriously and, perhaps, there was realization that a market as large as ours which was just being opened could no longer be ignored.
While initially Bharat Forge began supplying products in forged condition, customer trends in the global automotive industry favoured suppliers with capabilities to manufacture higher value-added machined components and aggregates. We therefore invested in high-speed machining lines for crankshafts and front axle beams, which were our thrust products for exports. Gradually, as we established long-term relationships with customers, we became end-to-end service providers. We now have the capability to design, develop, manufacture, test, validate, supply and provide after-sales service to customers. This has enabled us to firmly lock-in with supply chains of virtually every global automotive manufacturer and become their partner in their various vehicle development platforms. Today, Bharat Forge is a supplier to almost every automobile manufacturer in the world; every second, heavy truck (Class 8 and above) manufactured in the US runs on a ‘Made by Bharat Forge, India’ front axle beam; and we are the largest integrated forging company in the world with a global manufacturing footprint. I believe that this would not have been possible if India had remained a closed and protected economy.
While exporting from India was our first priority, the experience in dealing with global customers led us to believe that they preferred suppliers with dual-shore manufacturing capabilities. This essentially meant that a supplier of critical components was expected to have at least two manufacturing facilities from where he could supply the same product. The reasoning behind this was that any unforeseen eventuality or delay should not disrupt the customers’ supply chain and manufacturing schedule. This reality—combined with our vision to make Bharat Forge a global company—led us to take a strategic decision to establish manufacturing facilities in close proximity to our customers’ manufacturing plants. Rather than set up greenfield projects, which would need considerable time to establish, we decided to take the acquisition route. In 2004, we acquired Carl Dan Peddinghaus, a German forging company, and followed that by acquiring another company in the same group, which specialized in the manufacture of aluminium forgings. Later, we acquired a third company in Germany and then one in Sweden, which was a key supplier to Volvo Motors. Bharat Forge now has eleven global manufacturing facilities—four in India, four in Germany, one each in Sweden, France and United States. About 70 per cent of our total revenues come from sales outside India, w
hich qualifies us as a global company.
While the commercial vehicle industry has always been Bharat Forge’s main customer, we have, over the years, diversified and developed capabilities to manufacture and supply critical components for the fast-growing passenger-car industry. To reduce our dependence on the automotive industry and to provide a hedge against global economic cycles, we have further diversified into manufacturing products for various non-automotive applications in industries such as aerospace, defence, railways, marine, energy (conventional and non-conventional), oil and gas, mining, and construction equipment. Our facilities at Pune, Baramati and Satara are inherently versatile to cater to customer requirements in all these sectors.
Make in India: A Transformational Initiative
The 1990s and the early part of the 21st century saw a phenomenal rise of the IT and IT-enabled industry. Low costs, availability of skilled manpower and our demographic dividend contributed in creating competitive advantage for India in this industry. A large number of our young workforce was drawn to the IT sector and, globally, India became a hub for development of high-quality software. Developments in the IT industry coupled with growth in the financial and other service-oriented sectors resulted in the share of services in national GDP increasing to about 60 per cent. The growth in services, though welcome, had an impact on manufacturing, which was no longer able to attract the kind of talent that was needed, particularly for critical areas of research and innovation. Importantly, the perception about manufacturing as not being ‘fashionable’ began to grow.
The global economic and financial crisis of 2008 was a setback for the world economy as well as for Indian companies. It took us about five to six years of concerted hard work and perseverance to recover. Even during this testing period, Indian companies performed relatively better than their global counterparts. What the manufacturing industry in the country required was recognition to bring it on centre stage as a key driver of economic growth. This push came when Narendra Modi took over as prime minister of India in 2014.