Challenge for manufacturers

Domestic manufacturers, hit by a strong currency and cheap imports, need to sharpen competitive edges by cutting costs and upgrading technology.

For many producers in the Indian economy the rising rupee must seem like a viral fever that spares no one. Till a few months back the exporting community was hit by the rupee’s strengthening against the dollar and the Commerce Ministry, like a good doctor, was promising relief for those merchandise exporters complaining the loudest. Now it is the turn of domestic manufacturers to feel the effects of a rupee that persists at high levels with some analysts predicting t he dollar will stay below Rs 40 for a sustained period. Since imports have become cheaper, it is not only domestic manufacturers of semi-finished or finished goods such as auto components and tyres that have to fear competition from imports, but also those who produce raw materials. Soon, producers across the spectrum will begin to get restive.

They should not because extreme nervousness tempts one to reach for the help-line to the Commerce Ministry that can at best offer temporary and partial concessions. Instead, they should learn from a section of the exporting community that has turned an apparent handicap into a challenge to effect structural adjustments in the product mix, pricing strategies and markets, apart from cutting costs wherever possible. Textile exporters, for instance, have begun to shift to euro-currency markets, increase production capacities and trim the flab that a weak rupee’s price advantage allowed them to accumulate. The high-tech sector, likewise, has moved up the value chain but it has done more by shifting incremental services offshore, closer to clients and to areas whose currencies are still weak against the dollar. Domestic manufacturers do not have that comfort; instead, they are additionally burdened by rising costs on two counts, apart from the effects of a strong currency. One, the historic cost of poor infrastructure and power shortages and, two, those associated with rising wages on the heels of strong economic growth. Cheap imports following a strong rupee add an extra bitterness to the manufacturers’ cup of woes.

But here lies the challenge of sharpening competitive edges by cutting costs wherever possible. One productive way of doing so is to pressure policymakers into doing their bit for power generation, labour law reforms and land acquisitions —in effect, setting in motion the next and most crucial reforms for growth into the next decade and beyond. The second is to upgrade technology wherever possible to mitigate rising wage inflation and achieve better logistics. The third has been used most effectively by the US, Japan and the East Asian tigers, namely exporting production to low-cost centres. India has its own equivalent of a low-cost but onshore locale — the unorganised hinterland whose growth could offset some of the cost disadvantages of domestic producers.