India Transformed

by Rakesh Mohan

  Within weeks of assuming office, Modi launched his ‘Make in India’ initiative. In spite of the rapid strides made globally by our manufacturing companies and even though skills, capabilities, capacities and technologies were indigenously available to manufacture a large range of products within the country, we were importing about 75 per cent of our defence requirements. In the capital-goods sector, our dependence on imports is close to 45 per cent and even in the automotive industry we source over 40 per cent of components from abroad. Taking advantage of our country’s liberal import policies, several foreign companies had begun to dump their products into India at unfair prices. The rise in imports is clearly not to the advantage of Indian manufacturing industry as well as for job creation within the country. The emphasis of the government’s ‘Make in India’ programme will progressively result in a marked reduction in reliance on imports in defence production, aerospace, railways, capital goods and other critical infrastructure sectors. Clearly, the trend is shifting towards indigenization and import substitution but with a difference. Our focus is now not just the domestic market as it was in the past but to become a significant player in the global market.

  To facilitate ‘Make in India’, the government has also initiated measures to improve the ease of doing business. In Maharashtra, for example, the number of approvals to start a new venture have been reduced from seventy-five to twenty-five. With competition among states to attract investments gathering steam, Gujarat, Andhra Pradesh, Telangana, West Bengal, Odisha, Karnataka, Tamil Nadu, Madhya Pradesh and several others have taken steps to lay out a red carpet for investors. However, this is an area where a lot more still needs to be done.

  Skilling India

  The ‘Skill India’ campaign is another noteworthy initiative that will help us leverage our demographic advantage. I see ‘Skill India’ as an enabler to empower people so that they can contribute effectively to growth and development. Empowering youth and making them key stakeholders in development is a key challenge for our country. More than 75 per cent of our population is less than thirty-five years old. Many of these young people are technically qualified and are willing to work hard. On their shoulders rest the hopes and aspirations of an entire country. We need to build on this strength and make a ‘Skilled India’, which would be a source of sustainable competitive advantage. In the manufacturing industry, one of our key advantages is ‘frugal engineering’, which Carlos Ghosn, CEO of Renault, aptly summarized as follows: ‘There is a thirst for learning in this country that allows an Indian engineer to innovate and create a product frugally as compared to engineers in other parts of the world who need significantly more resources to do the same thing.’

  I believe that this is a clear indication that India is being perceived as an embryo for R & D and technology development in the world. High-quality entrepreneurship coupled with the strength of our ‘brain power’ and ‘skills of innovation’ will make India one of the three largest economies of the world by 2030, with lesser dependence on foreign technologies and more reliance on domestically manufactured goods and services.

  I am confident that ‘Make in India’ will help attract significant investments from India and abroad into the manufacturing industry. If India is to realize its potential as a leading global economy, the share of manufacturing in GDP will need to increase from the present 16 per cent to 25 per cent in the next five to seven years. This would also help create a 100 million additional jobs in the country, which is an equally important priority. While doing this, we also need to take adequate steps to ensure that the technologies that we use are environment friendly.

  Corporate India has to play a key role and partner with the government for the success of ‘Make in India’. Several of our companies have taken various initiatives, particularly in the area of developing technical skills and capabilities. At Bharat Forge, we have created a talent pipeline through which we work closely with engineering colleges, particularly in the rural areas. Under this initiative, we help institutes design their course curricula so that it is relevant to the needs of modern industry. We also invite faculty from these institutes to our company and conduct workshops and training sessions to provide them with a better understanding of technological developments that are taking place in industry. Finally, we recruit a fairly large number of students from these institutes and induct them into our workforce.

  Bharat Forge has taken over three Industrial Training Institutes (ITIs) at Khed, Bhor and Malegaon in Maharashtra besides having set up our own ‘Centre of Excellence’ at Khed. We have created new infrastructure and introduced courses that would be useful to imbibe students with skills required by modern industries. We also conduct vocational training courses at these ITIs to equip people with non-technical skills and capabilities.

  Our group’s in-house training activities are conducted at the state-of-the-art facilities set up at the ‘Kalyani Centre for Technology and Innovation’. We run structured in-house training programmes for our employees aimed at enhancing their skills and competencies. We have tied up with leading academic institutions from India and abroad to deliver these programmes. They include BITS, Pilani; University of Pune; Defence Institute of Advanced Technology, Pune; IIT Bombay; University of Warwick, UK; and Deakin University, Australia. We are confident that these initiatives will help empower people and contribute in creating a base of high-quality technically qualified knowledge resource in the country.

  The Way Forward

  Indian manufacturing industry is at the cusp of a great opportunity. Manufacturing growth in China has slowed considerably. Recent geopolitical developments, including fears of growing protectionism among the large trading nations, has resulted in global investors evincing renewed interest in India, a consumption-driven economy. Our government has also seized the initiative and, in a series of measures, has reformed the country’s foreign-investment policy to allow higher levels of investment from abroad in diverse sectors, including railways, defence, civil aviation, pharmaceuticals and single brand retail. As a result, India has become one of the most open economies in the world. I would, however, like to exercise a word of caution. While Indian industry welcomes competition, government must ensure a level playing field for domestic companies and fully safeguard our interests.

  There are many factors that are working in favor of manufacturing in India. We have a stable government committed to economic reforms, our economy is sound and among the fastest growing in the world, our institutions are robust, we have a large and growing domestic market, there are high-quality entrepreneurial and professional capabilities available in our country, and we have a strong demographic advantage supported by an educational infrastructure that will provide an assured pipeline of trained manpower for years to come. We now need to leverage these advantages to create a competitive and cost-effective manufacturing ecosystem, through which we can make the country self-reliant and an exporter of a range of manufactured products. To achieve this, there are a few enablers that we need to put in place and some challenges that we must prepare to deal with.

  At the macro level, there have been several successes that can be attributed to the twenty-five years of economic reforms in India. To my mind, the notable among these are:

  A clear consensus among political parties about the benefits of economic reforms. Domestic and global investors are, therefore, confident that economic reforms in India will inevitably continue, notwithstanding which political party is in power.

  Narrowing of the trust deficit between government and industry. Greater openness in interactions between the government and industry has given confidence to both sides.

  Transparency in government procurement procedures in key sectors such as aerospace, defence and railways, which until recently were in the government’s exclusive domain but have now been opened for private-sector participation. Policies and procedures are for the first time being prepared in consultation with all stakeholders. My only suggestion is that implementation of pol
icies should be fast tracked so that the country is able to achieve a higher level of self-reliance within the shortest possible time.

  There are also certain areas in which we need to place greater emphasis in order to draw maximum advantage:

  The ‘ease of doing business’ is an area where a lot has been done in the past two years, but there is still scope to do even more. While the government of India has initiated several measures, we need to see more traction at state-government levels where most industrial approvals and permissions are actually issued.

  State governments need to play a more proactive role in industrial development. One of the key areas in the domain of state governments is labor, which has been an issue of serious concern for entrepreneurs from India and abroad. I am glad that some state governments have begun taking steps to reform their labor laws, which have otherwise remained static for decades. I believe that strong political will is necessary to modernize labor legislation in the country to bring it at par with competing countries. While this is a challenge, it is also an imperative for sustainable competitive advantage of the Indian manufacturing industry.

  State governments also need to be made stakeholders in the country’s exports. Mechanisms need to be put in place through which state governments facilitate exports, particularly at a time when Indian exports are facing severe headwinds in international markets.

  With India emerging as a major global manufacturing and export power, we need to aggressively leverage the successes of Indian companies to build brand equity. ‘Make in India’ must become a symbol for precision quality, credible reliability, outstanding innovation capabilities, a conscientious protection of the environment, and a benchmark for customer care and service. Government and industry will need to work together to create Brand India.

  Recent trends in manufacturing speak about the onset of the Fourth Industrial Revolution. It has been explained as a ‘technological revolution that will fundamentally alter the way we live, work and relate to one another’. It involves fusion of technologies in the physical, digital and biological worlds. The speed of change that it will bring will disrupt almost every industry. In the automobile industry, driverless cars could become the disruptor, threatening the employment of millions of people. On the other hand, because of technology, people may not need to step out of their homes, making travelling itself redundant. As a country, we will need to keep a close watch on developments such as these. We will need to prepare, adapt and embrace new and emerging technologies that could reshape the very way in which we live.

  While keeping pace with technology, we will also need to create a manufacturing ecosystem, in which our companies can grow, flourish and prosper. For this, the need is for a hassle-free environment in which policies and procedures are well documented and are administered without discretion. The manufacturing industry must be the key driver of growth in the Indian economy because it is only through growth in manufacturing that we’ll be able to create employment opportunities for our young population.

  While the government’s role is to facilitate investments and create conditions for industrialization, the onus is clearly on the private sector to provide the momentum for growth. In the twenty-five years since reforms, we have seen a significantly changed mindset among Indian entrepreneurs. No longer do they need protection from the government to shield them against competition. There are several instances of Indian companies having competed successfully against their global counterparts, both in the domestic and international markets. TCS and Infosys rank alongside global giants in terms of software capabilities; Tata Motors is now a name to contend with in the global automobile industry; and Reliance is among the top ten global producers for most of its major products and is widely regarded as one of the most competitive and profitable petrochemical companies globally. These successes have given us immense confidence. We now need to leverage the strengths that we have developed to scale up to the next level, in which we build unassailable, long-term competitive advantage. One of the key factors is the need to closely monitor market and technology trends in our businesses and respond by aligning them with customer expectations and requirements. We must also continuously emphasize on developing new sources of competitive advantage in areas including finance, materials and manpower. The days of being satisfied with making incremental changes to our businesses models are behind us. We now need to develop new mindsets that will allow us to make radical changes in our business models, should these be required to capture opportunities.

  The Indian manufacturing industry has the inherent strength to rise to any challenge. It has done so in the past, will do so in the future and is poised to create a niche for itself on the global stage. I take great pride when I see the Indian tricolour fluttering at the entrance to Bharat Forge’s manufacturing facilities abroad. I look forward to the day when we will be able to see our flag flying in the skies of many more factories in different parts of the world. I am confident that the path we have chosen will result in immense progress and prosperity for our country in the years to come.

  16

  Political Economy of Petroleum Sector Deregulation

  Vikram Singh Mehta

  India must create an efficient, profitable, competitive and sustainable petroleum sector. This sector does not lend itself to a surgical fix. It cannot be systemically overhauled in one fell swoop. Change can be brought about through step-by-step incremental measures: good can be done even if the best is not within reach.

  Introduction

  On 24 July 1991, Finance Minister Manmohan Singh unshackled the Indian economy from ‘Licence Raj’ and ushered in reforms that wove together the forces of globalization, liberalization and technology. He quoted Victor Hugo’s ‘nothing can hold back an idea whose time has come’ to herald this relatively radical shift. I say ‘relatively radical’ because the government had no choice but to take the turn it did. The country was on the edge of a financial crisis and the Fabian ‘command-and-control’ foundations on which economic policy was grounded had recognizably corroded. The FM’s pronouncement focused on the macroeconomy but the ‘idea’ permeated every interstice of the economy. In particular, it triggered conversations within the Ministry of Petroleum on the steps required to liberalize the oil and gas sector and create a world-class and competitive petroleum industry.

  In 1991, the petroleum sector was arguably the most heavily regulated sector of the Indian economy. Every aspect of the value chain—from exploration and production, refining and distribution, sales and marketing and pricing and margins—was controlled directly or indirectly by the central government. The petroleum companies and their management were run as appendages of the Ministry of Petroleum. This state of affairs was the result of an early decision by Prime Minister Jawaharlal Nehru to place the petroleum industry under the custodianship of the State. He deemed the energy sector and, in particular, Petroleum to be strategic and in occupation of the ‘commanding height’ of the Indian economy. He did not believe the private sector could be entrusted to deliver the corresponding public interest.

  This Nehruvian view was given formal expression in the industrial policy resolution of 1956, which reserved petroleum for the public sector. This policy created two 100 per cent government-owned public enterprises, viz. Oil and Natural Gas Corporation (ONGC) for exploration and production of oil and gas, and Indian Oil Corporation (IOC) for refining and marketing petroleum products. The government determined that these two companies would be the corporate vehicles through which it would develop the petroleum industry. The incumbent private companies, Burmah Shell, Exxon and Caltex, were informed they would be allowed to continue but their operations would be circumscribed and limits placed on the remittance of profits to their parent company. Their assets were nationalized in 1976 but from 1956 onwards, these three companies operated under the shadow of this notice.

  This article is a story of the steps taken to undo a forty-year-old legacy of ‘command-and-control’ and the results and co
nsequences of these initiatives. It is a story of the conflicting pressures that the Indian government faced when, on the one hand, they looked to the discipline of the market to harness India’s hydrocarbon potential, and on the other, sought administrative control to meet political and social objectives. It is a story which offers useful pointers to the difficulties of finding a pathway between the autonomy of the free market and the fetters of public-interest–driven regulation.

  Background

  As already noted, the petroleum industry was run as an extension of the Ministry of Petroleum almost from the time of Independence. The Ministry of Petroleum approved the exploration programme despite the technical complexities; it determined the production plans and capital outlays for refineries; appointed the distributors and dealers; and decided the market shares for each company. Moreover, it set the prices and margins for each of the main consumption products (viz. LPG, kerosene, diesel and gasoline) through an ‘oil pool’ account that was managed via a complex linear programming exercise. The formula assured the PSEs a fixed 12 per cent (marketing companies) to 15 per cent (exploration companies) post-tax return on capital employed.

  Thirty years of this ‘command-and-control’, closed system created an industry that was inefficient and corrupt. There had been some successes, like the discovery of the offshore Mumbai High field in the early 1970s, but these were exceptions. The underlying reality was underperformance across the value chain. The production of oil and gas (for example, Mumbai High) was declining; the refineries were suffering from scale diseconomies and high operational costs; there was a widening mismatch between indigenous supplies and domestic demand, leading to shortages of essentials; the distribution, pipeline and storage infrastructure was shoddy, compounding leakages, imbalances and black marketing; the dealers were incentivized to spike kerosene into diesel because of the differential in the price of diesel and kerosene created by the subsidy regime which led, in turn, to fuel adulteration and air pollution, and there was no concept of customer service. The industry was, in short, ripe for reform.