Srivats Ram, Managing Director of Wheels India, explains why inflation, infrastructural bottlenecks and labour laws are the key constraints to be dealt with for Indian manufacturing to revive, or take on China.

As an auto parts supplier to commercial vehicles, you must have a finger on the pulse of economic activity. So what is your sense on the recent improvement in economic data? Is it sustainable?

It is a difficult call to make. Commercial vehicle (CV) sales had dropped almost 50 per cent from their peak a couple of years ago. From that level, sales are marginally up now. I am confident they will not decline further. But I am not seeing the signs of growth and momentum which are normally seen during a revival. Infrastructure-related activity is an enabler to this segment and you may need to wait for a longer period for such activity to materialise. I would say FY15-16 would be a better year for the CV sector.

How is this downturn different from the one we faced in 2009?

It is dramatically different. In 2009, what we saw was actually an event-based slowdown, triggered by the global crisis. The Government then had financial resources at its disposal (to stimulate the economy). Now it seems to be terribly short of cash. Last time around, there were many fiscal measures taken by the Government – reduction in excise duty and infusion of funds – which enabled a speedier recovery.

When you have an event-based slowdown, there is also a tendency to overreact and thereby possibility of a quick bounce-back. The current slowdown is a downturn in the business cycle. India has never seen such a prolonged one in the last 20 years.

Passenger cars seeing negative sales growth and two-wheeler sales being almost stagnant is unheard of. The current slowdown is almost 30 months old, substantially longer than the 8-month slowdown we saw in 2009. We have had high inflation without any growth to overcome it. This really affects companies, their competitiveness, scale and outlook.

I would also be concerned about the fact that a lot of companies are really in a very bad financial situation, but because of the laws of the land, are unable to shut down. Last time around, there was a lot of chest thumping that we are different from everyone else and that we are more resilient, strong and vibrant. That may have been a little delusional, in retrospect.

That said, there has been a lot more communication from the new government and they seem to have a plan in place. But you will see the real recovery only next year.

There is a view that India cannot match China in manufacturing, because we lack scale and our labour costs are high. Do you agree?

Labour costs have been going up due to high inflation and inflation has been persistent. Infrastructure issues have also posed challenges. These are fixable problems. So I don’t think that the game is lost in the industries that have some scale. Yes, competing with China will be difficult in an industry where scale is non-existent.

It is also important to have labour law reforms to have flexible manpower.

This is a big issue that is preventing investments in the manufacturing sector; it is not easy to scale down and scale up in India. Building infrastructure, demonstrating consistent policies towards manufacturing and labour law reforms would be the three areas that the Government needs to focus on if they want manufacturing to drive growth.

With recent automobile projects going to cities in Gujarat and Andhra Pradesh, is Chennai losing its status as the preferred destination for the auto companies? What does that mean for component players like Wheels India?

The auto component sector tends to be located where the OEMs are, because the logistics costs in India are high. Chennai is not a bad destination. But the challenge is that the State has seen a significant amount of investments and industrial growth. It (now) requires continuous investments in infrastructure to support this.

Chennai has a skill base but increasingly one has to handle the higher costs of a metro. But that is the dilemma for manufacturers across India.

Infrastructure tends to be the best around cities, so companies tend to concentrate there. So if you want good infrastructure, it comes with a price, which is higher costs.

Many Indian auto component companies have been diversifying overseas. Does India have the potential to be a manufacturing hub supplying to global OEMs?

Yes, ACMA has set forth an export target of $35 billion by 2020 from the current $10 billion. Companies above a certain scale in our sector are actively exploring exports. You see, we have a very competitive domestic market that forces you to drive costs lower in order to meet extremely low price points. If you can meet the lower price points in India, there is no reason why you cannot be competitive in the global market. While India is not the lowest cost country for auto parts, it is a de-risking alternative for companies that are buying from China. There is potential to exploit that.