India Can Create 70 Million New Jobs And Add 2% Annually To GDP Growth By Global Sourcing Of Manufactured Exports, Says M.S. Banga

Noting that India has already demonstrated the potential to become a global sourcing centre for services, Mr. Banga highlighted, “However, India cannot rely on services alone to drive exports. Manufacturing constitutes 72% of global trade worth US$ 6 trillion. For exports to be a major platform for growth, it is imperative that we focus on and drive manufactured exports.”

Mr. Banga said that HLL, already one of India’s largest exporters, has decided to make sourcing an integral part of the business strategy. “Sourcing already accounts for about half of our total exports of Rs.1500 crore. HLL’s vision is to build a billion-dollar sourcing business out of India,” he said. Mr. Banga was addressing HLL’s annual general meeting.

Five initiatives: He said that India must move quickly to pre-empt other countries in the race for global sourcing, and suggested five immediate initiatives, that Government and Industry will have to take. This will help overcome India’s disadvantages, in cost, image and process competitiveness, vis-à-vis other low-cost nations, like China, Korea, Thailand or Mexico, which are already ahead in the race to become global sourcing centres in manufactured exports.

The five initiatives are: identifying, nurturing and promoting 2 or 3 ‘Star’ sourcing sectors; creating ‘Virtual’ Special Economic Zones; completely privatising Mumbai and Chennai ports; driving industry productivity and process excellence through the Total Process Management (TPM) tool; and an enabling fiscal and regulatory Regime.

‘Star’ Sourcing Sectors: Mr. Banga said that, within the country’s portfolio, Pharmaceuticals, FMCG and Processed Marine products have the potential to become ‘Star’ sourcing sectors in the immediate term. “There is a rationale for the choice of these sectors. The US FDA requirements are stringent for pharma. Consumer involvement in food items is high. FMCG items are items of mass consumption. If we are able to successfully create a niche for ourselves in these sectors, it will give the ‘Made in India’ brand for manufactured exports a big boost, which we can then extend to other sectors,” he said.

To nurture the ‘Star’ sourcing sectors, he called for the establishment of a quasi-government Apex Sourcing Body, with strong linkages to both the Commerce and Finance ministries, and independently managed by professionals deputed from Industry. “A good role model is NASSCOM, which has played a crucial role in positioning India as a global IT services sourcing base. Manufactured goods sourcing too will gain from a similar organisation, whose focus will be on building the India Inc. brand through some key activities - attracting lighthouse global companies to establish manufacturing bases in India; continuously highlighting legal and regulatory changes required by the sector; and finally, being a knowledge repository for information and research on the sourcing potential of India,” he said.

‘Virtual’ Special Economic Zones: Welcoming the Special Economic Zone (SEZ) legislation, he pointed out that to enjoy the benefits of this legislation, a company needs to be physically located within the SEZ. This would require an exporter to spend resources in relocating facilities. This might not be feasible for many industries, which need to be located near the source of raw materials (e.g., steel) or skilled labour pools (e.g., diamonds). Secondly, an SEZ will take two to three years to begin functioning with the full infrastructure in place.

Therefore as an interim action, he suggested the establishment of ‘Virtual SEZs’ (VSEZs). A VSEZ is similar in concept to the current EOUs. Any unit that exports more than 50% of its production in a block of three years, wherever it is located, will be a deemed VSEZ, enjoying all the benefits available to an SEZ, including fiscal advantages and freedom from administrative procedures. To begin with, the VSEZ facility could be extended to those companies with an export of Rs.100 crore per annum, which would kickstart sourcing without waiting till the SEZs are fully established.

Privatisation of Mumbai & Chennai ports: In the light of the encouraging experience of privatising three terminals in Chennai and Mumbai ports, Mr. Banga called for the complete privatisation of these two ports. This will not only enhance efficiencies and bring down costs, but also earn Rs.2000 crore, in addition to the annual revenue streams. Besides establishing world-class processes and systems in at least two ports, this will serve as a model to rapidly privatise other ports as well.

Productivity & process excellence: Highlighting the need for industry to develop an obsessive commitment to productivity, he suggested the adoption of Total Process Management (TPM) as a tool. “A TPM factory is unbelievably superior to a non-TPM one – I have seen this for myself. On an average, HLL has doubled productivity through TPM and, in some cases, taken it up to three times the original levels. We have now adopted TPM in our offices and sales processes as well,” he recounted. He suggested TPM training to be included in ITI and Engineering education, which will provide more than 200,000 TPM-trained personnel annually to industry. He also proposed a JIPM (Japanese Institute of Plant Management) certification programme for exporters along the lines of SEI-CMM for IT services companies, which will add considerably to the image of India’s sourcing.

Fiscal & regulatory regime: Mr. Banga pointed out that the approach to the regulatory regime for exports should be such that it actively enables exports as a growth driver. He has suggested Comprehensive VAT for exports and Simplification of Transfer Pricing rules.

Pointing out that 140 out of 147 countries in the WTO already have Comprehensive VAT, he strongly suggested immediate introduction of Comprehensive VAT for the exports sector, which would also provide useful learnings for implementation subsequently in the domestic sector. On transfer pricing, he said that price fixation in international markets is subject to many variables, all of which may not be common across firms, industries or, indeed, across time. Therefore, transfer pricing rules must be less formulaic. A simple solution is to increase the margin for variance from 5 to 15 %, and simplify the administrative and documentation procedures. In order to learn, the simplified regime could first be implemented for imports, and then extended to cover exports.

Mr. Banga concluded, “India must move quickly to pre-empt other countries in the race for global sourcing. Government and Industry must work together to dramatically improve India's Cost, Image and Process competitiveness. The time is right for us to move Exports to the top of the economic agenda and make it a national priority.”