group 2_section b

8/10/2019 Group 2_Section B

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Effect of manufacturing sector in

country's economic growth w.r.t

Germany and India

Group 2, Section-BAnkita (M075-14)Suleman Safdar (M126-14)Rahul Rawat (M117-14)Shalini Sathapathy (M124-14)Swadha Awasthi (M127-14)Manoj Kumar Sahu (M102-14)


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Agriculture Industry Services

Industrialization

Rise in Income

Demand for foodreaches its limit

Demand forindustrial

goods rises

Labour productivity inagriculture increases

Share ofagriculture in

GDP decreases

Employmentopportunity in

industries increases

Agriculturalproducts are

less expensive

Need foragriculture workers

diminishes

Industrialization


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Labour productivity in services does not grow as fast as it grows in agriculture or industries.

Employmentcontinues to grow

Servicesbecomes more

expensive

Income continue to RiseShare of

Services in GDP

increases

peopleneeds become

less material

demand moreservices

Less growthin labour

productivity

Less

mechanization


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Industry and services are responsible for the German rebound. For a countrys economic well-

being it is vital to have an industrial basis.

However, a solid industrial basis is not the result of any industrial policy, but of clear competition

rules and productivity-based wages.

Germanys industrial SME network also favors the increase of exports.

Especially German industrial businesses invest in a new equipment in order to enlarge their

production capacities, not only at home but also abroad.

Indian manufacturers lag behind their global peers in production planning, supply chain

management, quality, and maintenanceareas that contribute to their lower productivity.

Indias manufacturers must also improve the productivity of their capital, in some cases by 50percent or more.

Indias manufacturers could learn a lot from the IT sectors experience in promoting the large-scale

development of skills.

By improving their productivity and bolstering operations, they could become an engine of

economic prosperity for the whole country.


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Economic miracle Wirtschaftswunder, rapidreconstruction and development of West Germany

Currency reform Deutsche Mark replaced Reichsmark,halting inflation

Elimination of Price controls to end repression Reduction of marginal tax rates income tax reduced to

flat 50 percent Social market economy Marshall Plan - powerful aid for investment and the

reconstruction of Europe by US Industrial production risen to 2.5 times from 1950 to 1960 GDP rose by two-third during 1950-1960 Unemployment fell from 10.3% to 1.2% Wages and salaries rose over 80% between 1949 and 1955


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The West German economy however did not grow consistently in the 1960sbecause:

such a pace could not be sustained,

the supply of labour from East Germany was cut off by the Berlin Wall, built in1961

In the 1980s West Germany emerged as a leading economic power, along withJapan and the USA.

In 1982 it owned about $25 billion worth of assets (railroads, oil companies, thelargest national automobile producer (Volkswagen) and other firms).

West Germany developed a mixed economy, in which the government took anactive part in the development of the resources but a free enterprise systemremained.

The growth rate for West German GDP rose to 3.7% in 1988 and 3.6% in 1989, thehighest levels of the decade.

The unemployment rate also fell to 7.6% in 1989, despite an influx of workersfrom abroad


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On July 1, 1990, the economies of the two Germanys became one. It was the first time in history that a capitalist and a socialist economy

had suddenly become one. First phase of unification: West Germany went into a boom, East

Germany into a depression High demand for West German products (seen as better quality)-

decline in domestic consumption of Eastern products

The conversion rates of East German marks to deutsche marks oftenkept those costs high, which resulted in wages far above the

productivity level.

Inadequate infrastructure also became a problem for many potentialinvestors. Telephone service was improved only very slowly. Manyinvestors also complained about energy shortages, as many EastGerman power stations were shut down for safety and other reasons


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CONTRIBUTIONS TO MANUFACTURING SECTOR

Role of Private Sector- Mittelstand

Refers to small and medium-

sized enterprises. Credit forGermany's economic growthsince the beginning of the20th century, often underthe name ofHiddenchampions.

The German Ministry of Economics actively supports theMittelstand.

What makes the German Mittelstand so successful?

Heavily concentrated in machinery, auto parts, chemicalsand electrical equipment


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Role of Public SectorThe second sector includes Germanys marquee auto brands BMW, Daimler, Porsche,Audi. Automakers -central to the German economy, composing about 20 percent of GDP andEuropes single larget auto sector.

In particular, high-end cars have become hot commodities for affluent consumers inbooming new markets, such as China, which alone accounts for 25 percent of BMWs globalprofits.

five companies and seven marques dominate the automotive industry in thecountry: Volkswagen(subsidiaries Audi and Porsche), BMW, Daimler, Adam Opel and Ford-Werke.Ranked 1 in Europe and 5 internationally as the most effective FDI destinations in byCorporate Executives


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CURRENT TRENDS


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CHANGE IN TRENDS IN PRESENT DAYINDUSTRY

The service sector contributes around 70% of the total GDP, industry 29.1%, andagriculture 0.9%.

Combination of service-oriented manufacturing, R&D spending, links between industryand academia, international cooperation and the Mittelstand contribute to the overallcompetitiveness of the economy of Germany.


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Sources : retained earnings, bank loans and equity Dominant modes of industrial finance were retained corporate earnings and bank loans; distributed through

a preferential arrangement involving one particular bank the hausbank (house bank) . Individualshareholders among the public at large could, in principle, only buy company shares with that bank, and thebank would hold them collectively in trust for all small shareholders, which gave the bank, as the proxy voterfor all these shares, a large voice in company affairs.

Mittelstand have secured access through local savings banks(Sparkassen); Sparkassen provide about two

thirds of all lending to Mittelstand companies and 43% of lending to all companies and households. Reconstruction Loan Corporation, or KfW, a public law institution which was established after WWII explicitly

to compensate for the short-term lending policies of the major commercial banks. Role of KfW:

Capital market funding for a range of larger industrial and developmental projects through issuance of stateguaranteed bonds. The bank has been used as a strategic tool for reorganising declining sectors e.g. the steeland ship building industries.

Refinances banks with established relationships with Mittelstand firms; these are provided with capital at thecost available to publicly listed companies at fixed rates of long duration, up to twenty years in some cases

Decentralised German system has helped to support a larger SME sector than is the case in other advancedcountries, as these firms need more help in coping with labour and product market regulation


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The high level of bank firm coordination In other nations, firms interact with banks primarily as a means to raise

capital or they tap into the equity markets and the result is an arguablymore short term approach to investment and product market strategy.

An illustration of this is that the private equity industry is much lessdeveloped in Germany.

Bank lending to the private non-household sector has held up well,despite a general tightening of credit conditions since 2008 (DeutscheBundesbank Annual Report, 2011). German SMEs are still significantly

more likely to hold bank loans (54%) than those in the UK (25%)


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Diversified Quality Production (DQP): Volumeproduction techniques applied to high qualityproduct lines. Workers in DQP systems enjoysubstantial autonomy and stage frequent strikes andlockouts

Government plays a minimal rolein industrialbargaining, besides setting out the legal andinstitutional framework in which it takes place.

Vocational skills : A critical ingredient for success inthe quality--competitive German manufacturing

system is a reliable supply of workers with firm andindustryspecific skills. Such skills are costly toprovide and acquire and so firms and workersconsidering investing in such skills rely on variousassurances against possible skills redundancy, forexample technical change or firm restructuring.


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Highly export dependent German manufacturing sector Ever changing socio-economic landscape with high service

employment and a dramatic increase in female Training efforts of firms have fallen quite dramatically, from 700,000

annually in 1992 to below 600,000 Numbers of workers and companiesengaged in vocational and technical training are falling quite rapidly, andgood jobs are now also found outside the stable manufacturing sector .

Large companies and the Mittelstand face a situation in which theproduction of skills will have to be managed more carefully than in the

past.


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oMittlestand refers to small medium sized enterprises in German-speaking countries. Economic and businesshistorians have been increasingly giving Mittelstand companies more and more credit for Germany's economic

growth since the beginning of the 20th century, often under the name of Hidden champions.oThe decentralised German system has helped to support a large SME sector than in the case of in the other

advanced countries, as these firms need more help in coping with labour and product market regulation.oGermany's Mittelstands are heavily concentrated in:machineryauto partschemicalselectrical equipment

oThese units have less than 500 employees and an annual revenue below EUR50 million. The importance ofthese units can be reckoned by the quantum of their contribution to the economy. Mittelstand companiesaccount for nearly 50 per cent of the countrys GDP employing approximately 70 per cent of the nationsworkforce.

oMittelstand emerged under the German governments strategy to ensure industries in Germany enjoyed acompetitive edge

oThe strategy linked regional educational institutes with nearby industries. Students pursuing post-secondary

education were required to execute a project in these units in order to complete their course and receive adegree. This enabled the manufacturing units to achieve lean production by applying concepts from vocationaltraining colleges, polytechnics and universities, and local industries. This also enabled in creating a well-trainedworkforce for the manufacturing units.

oWhile Mittelstand companies have been subject to limited access or high cost capital, they have beeninnovating on a constant basis that has helped them develop niche businesses.

oThe success of GermanysMittelstand strategy can be illustrated in the case of pencil manufacturers Staedtlerand Faber-Castell. These two companies operating in the low-technology industry have been able to maintain

leading position globally in the high-end pencil market for more than 175 years despite the high wagesprevalent in the country.


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o The economy of Indiais the tenth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP)o Agriculture sector is the largest employer in India's economy but contributes a declining share of its GDP (13.7% in 2012-13). Manufacturing

industry has held a constant share of its economic contribution, while the fastest-growing part of the economy has been its services sectoro After Independence, as a reaction to the colonial past, Indiasdevelopment strategy focused on self-reliance development of heavy

industries in the public sector. Thisdidnthelp the cause of private manufacturing firms.o The economic reforms of 1991 brought about a structural shift enabling the private sector to assume a much larger role in economy.o GDP growth has largely been enabled by the service sector growth. Manufacturing stagnated at an average 15 per cent of the GDP

compared to other countries in Asia which registered between 30 per cent and 40 per cent of GDP. Indiasshare in world manufacturing isonly 1.8 per cent.

o Yet, receding levels of government ownership have dramatically improved the productivity of labour and capital in other parts of theeconomy. Indiasautomotive sector, for example, was among the first to be liberalised, in the early 1990s, and the entry of multinationaland domestic players sparked a competitive transformation.

o Subsequently, between 1995 and 2005, the automotive sectors GDP per manufacturing employee grew by a factor of 15. Today, Indiaproduces nearly three million small cars a year, of which about one-quarter are exported.

o The hurdles in development of manufacturing sector of India are : Land market problems - Distortions in the land market (including high stamp duties and cumbersome regulations) are a huge barrier to

productivity improvements in India Labour hurdles - Stringent labour laws make it difficult for Indian companies to restructure and, thus, to increase their productivity and

expand output. Infrastructure issues - Urgent attention is needed to create more railway lines, roads, ports, and power-generating capacity across India.

Poor infrastructure saps industrial productivity Policy woes Goods and Services Tax (GST), environment clearances, cost of money, investment in research and development are the

key barriers in improving productivity. The implementation of GST will add approximately 3 per cent growth in the manufacturing sector.


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o Taking a leaf out of the German manufacturing sector India should concentrate on Small and MediumEnterprises (SMEs).

o The importance of the SMEs in manufacturing sector is mainly due to the quantum of units that fall in thiscategory, forming 90% of the total industrial units in the country.

o Further, SMEs account for 45% of the nationsindustrial output and 40% of the total exports. SMEs form 95 percent of the total industrial units in the country and manufacture around 8,000 quality products for the Indian aswell as international markets.

o Need for FDI in manufacturing to push both jobs & growth. It will take substantial investment to generate thenecessary level of manufacturing growth: over the past four years, manufacturing has been losing GDP share,expanding just 4%.

o The country languishes at number 134 of the 189 nations ranked in the World Bank's Ease of Doing BusinessIndex, slightly better than Ecuador, but not as good as Yemen or Bangladesh , and 24 places below Pakistan.

o Focus on bringing down capital costs and rationalise taxes. Companies in India are subject to some 33 taxescompared to 5-7 in developed countries.

o The major benefits of Foreign Direct investment (FDI) in case of India have been identified as filling the gapbetween investment funds required and domestic sources of funds.


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o Make in Indiais an international marketing campaigning slogan coined by the Prime Minister of India, NarendraModi on September 25, 2014 to attract businesses from around the world to invest and manufacture in India.

o The highlights and purpose of Come, Make in India are :The campaign, 'Make in India' is aimed at making India a manufacturing hub and economic transformation in

India while eliminating the unnecessary laws and regulations, making bureaucratic processes easier andshorter, and make government more transparent, responsive and accountable.

The government emphasized upon the framework which include the time-bound project clearances through a

single online portal which will be further aided by the eight-members team dedicated to answering investorqueries within 48 hours and addressing key issues including labor laws, skill development and infrastructure.

This campaign basically gives hope to the unemployed to find a decent job if not big jobs as manufacturingleads to creation of lot of service sector activity. But India will have to make sure to focus on quality educationrather than just skill development.

o The government has identified 25 key sectors in which India has the potential of becoming a world leader. Thecampaign is aimed to transform the economy from the services-driven growth model to labour-intensivemanufacturing-driven growth. Helping in creating jobs for over 10 million people, who join the workforce everyyear.

o It aims to attract foreign companies to set up factories in India and invest in the country's infrastructure. The newgovernment has liberalised defense manufacturing and insurance sectors to attract FDI.


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group 2_section b

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