Monday, 22 July 2013

Mass Production for Employment Generation in Labor-intensive Manufacturing Sector

- by Vaman Desai 

The National Manufacturing Policy (NMP) sounds reassuring to the perpetual skeptics of the growth of Indian manufacturing. And at a point in time when the Indian economy is ailing, the NMP feels like it is just what the doctor had ordered for its health.

NMP proposes setting up of National Investment and Manufacturing Zones (NIMZ) in its ambitious quest to increase the share of manufacturing sector from the current 17% to 25% by 2025.  It also speaks about creating 100 million much needed new jobs. 24.5 million Out of these 100 million will be only in manufacturing sector and naturally a major part of that 24.5 million will come from the labor-intensive manufacturing industries. Thus to realize the supply of the required skilled labor the NMP has set up the National Skill Development Council (NSDC) which in turn has set up skill councils in key manufacturing industry sectors where India has comparative advantage, examples being textile, leather, food processing etc.

However despite these provisions, the supply of labor still remains the primary issue in labor intensive industries. So much so that robust factories with exponential growth potential are shutting down due to this supply shortage. In my brief stint with Pratham till now, I have had firsthand experiences of understanding the causes responsible for the practical constraints in the supply of labor in the labor intensive industries. The low wages paid to the semi-skilled and the skilled labor being the most primary of concerns amongst others such as poor living conditions. This shortage in labor supply is not only coming as a cost to the labor-intensive manufacturing but it is also having a multiplying effect on the cost to the economy as a whole. The critical point to note here is that manufacturing jobs are the primary jobs for economic growth since jobs in other fields are created around the manufacturing sector. That a lion’s share of jobs in manufacturing will come from labor-intensive manufacturing, in India’s case, makes the importance labor-intensive manufacturing jobs especially paramount.  

But the paradox of the present economic scenario is that these most important jobs are the ones which are the least paying and the secondary jobs created as a result of same manufacturing jobs pay much more. To be anecdotal, I can say that a skilled labor producing a leather bag or an apparel is paid Rs. 5000/- a month but a show room sales person who displays these products gets paid Rs. 10000/- a month.  Though the above scenario defies the simple economic logic of wage payment being in proportion to the value added, the complex factors of globalization will ensure that such distortions in the economic logic will prevail. But the ramifications of this are multifold and multidimensional which can severely jeopardize the future of the labor-intensive manufacturing and thus deserve to be looked at.

Due to low payment of wages, poor living conditions and hard labor the labor-intensive manufacturing jobs have high attrition rates. Also that most of these industries are concentrated in the urban and semi-urban parts where as the potential labor comes from the rural parts is leading to a significant regional unemployment. As a result there exists a peril that in the medium-run the labor supply might to dry out for these jobs. On the other hand the vocational training institutes, which are mostly NGO’s, involved in training the rural youth for such jobs have to face the issues of financial sustainability due to the high attrition rates. This can potentially hamper their development initiatives. As much of the skilled labor comes out of such training institutes, any issues of sustainability in these training institutes only severely hampers the future supply of skilled labor which is the prerequisite for the growth of manufacturing sector. This scenario calls for taking up measures which can lead to improvement in the quality of labor-intensive manufacturing jobs and increase the wage levels.

The discrepancy mentioned in the payment of wages between the labor-intensive manufacturing jobs and the related secondary jobs above is not incurable. In fact the major factors responsible for the low paying jobs in this sector are endogenous and not exogenous. Thus the cure lies in identifying the ailments within the labor-intensive manufacturing industry which are responsible for the present mess and treating them accordingly. A cure to these ailments can significantly improve the production efficiency, increase the wage-levels and attract more youth into the workforce.

Most of the labor-intensive manufacturing units, especially in the field of leather, textile and food processing, come squarely under the bracket of micro to small scale enterprises. These factories typically suffer from problems of high fixed costs such as raising land prices and other miscellaneous operating expenses. The high fixed costs coupled with the lack of bargaining power at both the ends of supply chain squeeze their profit margins. The scanty production capacity further does add to the problems as these units can’t accept large scale orders and thus lose out on their potential growth opportunities. Top all of these with the cost incurred in training the unskilled labor to impart the prerequisite skills and it can be quite readily perceived that the aggregate burden of all costs simply becomes unbearable.

The NMP realizes the importance of industry clusters in terms of the advantages they provide in increasing the efficiency of the industry as a whole. But the firms have to be of a minimal size to reap the benefits of industry clusters. Micro to small scale firms suffer from problems, as discussed earlier, which are endogenous. These problems can only be addresses by the internal economies of scale. Only then can the industry clusters be useful in bringing about the external economies of scale which benefit the industry as a whole.

Mass production will be the solution, if not to all the problems, to at least the problems related to the high input costs which are detailed out above. If consortiums of micro to small-scale units are formed to start larger units of manufacturing, appropriate location mapping is done factoring in the twin objectives of low fixed costs and availability of potential labor and a collaboration between such consortiums and vocational training institutes materializes to address the issues of technical training of the labor, a new model of production can emerge which can enhance the productivity while simultaneously addressing the present issues of high input costs and labor supply.

High fixed costs can be absorbed better by larger firms, the larger size leads to an increased bargaining power which will lead to increased profit margins, a higher production capacity will fetch larger and periodic orders which can facilitate future expansions and furthermore the addition of individual capacities in the process will lead to significant synergies in the production process. The overall increase in the profit margins will lead to an increment in the wage levels in the industry, bring in better production practices which can improve the quality of work, also drive innovation and growth within the industry and experience the learning curve. Moreover these firms can directly hire the skilled labor from the training institutes and are saved from the hassle and costs of on-job training. On the other hand the newer and better paying jobs will attract more unskilled youth force to the vocational training institutes, decreases the job attrition rate and bring in financial sustainability in their development initiatives.

The larger manufacturing units will then be able to realize the benefits of industry clusters by experiencing the external economies of scale while also reaping the benefits of knowledge spillover, resource mobilization and labor acquisition. This can further enhance the competitiveness of the labor-intensive manufacturing in India while also providing employment up to the fullest of its potential.
The NMP is a much needed step ahead in realizing the potential of manufacturing employment. But its agenda will not be ministered until the full potential of labor-intensive manufacturing employment is not realized. A step ahead in this direction will be to improve the health of the micro to small scale industries by looking for such novel models of production. This can pave the way for the realization of full employment potential in such industries and thereby moving towards achieving the target 24.5 million jobs in the manufacturing sector.

(The suggestions discussed above are neither exhaustive nor universal in terms of their applicability to the large and diverse labor-intensive manufacturing across India. But they are certainly pertinent to the micro to small scale industries in leather and textile, for the observations are the first hand experiences of encounters with the producers in those industries.)


National Manufacturing Policy, Ministry of Commerce and Industry


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  2. Thanks a lot. It's encouraging. Certainly shows that you appreciate the scope for the growth of labor-intensive manufacturing and its cruciality to the Indian economy.