Naushad Forbes, Director, Forbes Marshall & Chairman, CII Innovation Council, gives his take on the Indian manufacturing growth story, provides insights on improving energy conservation and fostering innovation in India. 

How do you look at the sudden surge in demand in the manufacturing sector?

Yes, there has been an improvement in the growth rate, but I would not like to term this as a surge. The improvement in the growth rate is really a reflection of our long-term potential and the coming together of many things finally. If you look at four decades of protection to the period of 1991, one could look at it as really a period of building good widespread capabilities in the Indian industry. But these capabilities were held back by government policies; policies that were redundant and directly intended to actually keep industry down as opposed to letting it flower and flourish. All that changed past 1991, when there was a huge boom in the economy, particularly in services. That is when, services really took off and general view was that services would drive the Indian story forward. In that same period, there were more and more manufacturing companies that were also doing the right things. Looking at Bharat Forge, I think Baba Kalyani was one of the first really articulate, passionate advocates of manufacturing and of Indian success stories coming from manufacturing. The role that Hans Gass played as the then MD of Sandvik in turning the factory from a relatively low performer in the group into one of the leading performers in the Sandvik group worldwide, was highly credible too. Same goes with the likes of Tata Motors and Bajaj’s. Some of these role models started to inspire manufacturing more generally and by the early 2000, there was much greater confidence in manufacturing. This confidence was further reinforced after India opened up to consumer goods imports. Yes, a lot of Chinese imports came in but a lot of Indian exports went out too. In the last couple of years we have seen a remarkable export growth, with it growing around 30-35 per cent a year in dollar terms. Today, we export a quarter of our total GDP and this is up from 6 per cent in 1991. Our exports are driven not only by services but very strongly by manufacturing. So we are now becoming not only a manufacturing-led growth story but even our export story is manufacturing-led.
How do you improve the manufacturing output and make manufacturing more efficient today, in these constant ups and downs of the economy?

I think one should take a longer term view of the Indian manufacturing story, which is a part of the Indian growth story. According to me, the only question for India for the next 25 years is whether we would be growing at 7-8 per cent or at 9-10 per cent. If we do all the right things on the reforms side, whether it is in the remaining part of FDI, financial sectors, education & skills development, various infrastructure reforms, etc, we will grow at 9-10, if we don’t we will still be at 7-8 per cent. If one indeed has the view of growing at 7-10 per cent over 25 years then that says invest. Invest in manufacturing, capacity, in getting better and on the basis that you would be confident of the future. Fear of failure would creep in but at the worst, what will happen is that we will have some capacity ahead of demand but we will have it for a year or two, which is okay. A much more potential serious problem, which we have been coping with for several years, is that we have less capacity than the demand. This is a bigger danger than the former. I think as a country we have the potential to grow at 10-12 per cent for 25 years and it can come about if manufacturing grows at somewhere between 15-18 per cent y-o-y for 25 years.

Manufacturers are trying their best to cut down on energy costs. Are they doing enough on the energy conservation front? What are your recommendations?

The trend is thoroughly positive and the pace is improving with firms investing in energy conservation. Today, energy conservation is receiving attention like never before in our industry. Why is that? One reason is that energy costs have gone up and everyone has become more aware and concerned about the costs. From our side as a firm as well, we have tried to become more credible in terms of the way we go about energy conservation proposals with customers. We tell them that “X” is the fuel consumption for your industry, this is what the gap is and this is what you need to do to reduce it. Though the awareness has increased, there is particularly a huge amount to do in certain industrial clusters. In answer to what could one do to speed up the process, this would be a terribly unpopular proposal, but if you really want to improve efforts towards energy conservation, energy prices should be increased drastically and in a short time. The objective is to shock people. If prices are doubled over a two year period then no one notices but if the same is done overnight, then everybody takes notice and does something about it.

Forbes Marshall conducts energy audits. What are the basic problems that your teams come across that if taken care of can help reduce the energy costs to a measurable extent?

We find a very mixed strike rate in the implementation of the audit. Our audit conversion ratio is approximately one third; meaning one third of all the audit recommendation actually gets implemented. Now that one third is higher than what it used to be but obviously not, what it should be. In order for an effective energy conservation program to really take-off at the firm level, you need three levels of involvement. One, the top management commitment needs to approve a proposal. Two, there should be imaginative plant engineers and energy managers who will put together the right kind of schemes and proposals and three, there should be technicians on ground who will make sure that whatever is implemented delivers savings not just today but six months down the line. If improvements are sustained through the right kind of training and technician involvement then that will inspire the company and top management to invest in other schemes as well. I am yet to find top management of a company that has rejected an energy conservation proposal that has made sense.

Tell us more about CII’s Innovation Index Model.

The usual matrix used for innovation is R&D as a percentage of GDP, which is a very imperfect measure. Because if one looks at R&D as a percentage of GDP for India then for the last 20 years it hasn’t changed and has been varying between 0.7 to 0.9 per cent. This however does not mean that innovation in India has not changed in the last 20 years. Hence, we need a broader set of metrics that are more comprehensive and look beyond R&D as a percentage of GDP. Also there is no logical basis to figure out which is the most innovative company. So we decided to have some metrics at the firm level. We decided a sectorwise approach for this. The automobiles and auto-components was grouped under one sector, while engineering, pharmaceutical, textiles and garments, specialty chemicals formed the others. We thought of making a list of firms between these sectors and tried to establish a set of metrics around product innovation, IPR, the proportion of new products in sales, R&D spending, engineers employed, growth in exports, etc. Currently, we are at a stage where we have identified the sectors and the list of firms and are starting to gather some data for those firms. When we put all that together we will then have a list of firms in each sector with some metrics and hopefully coming out of there will be some overall metrics that can apply to all firms and identify how innovative a firm is. If we can do this for innovation, just like how in manufacturing a few companies lead the growth story, the same can happen here.