India's manufacturing sector could potentially capture nearly 35 percent of its future output volume simply by increasing its workforce productivity by 30 percent. This conclusion is based on an analysis conducted by KPMG, which covered over 130 large Indian manufacturing companies over a ten-year period.
The study revealed that companies that increased their productivity faster than their competitors demonstrated more robust profit and market value growth. These companies saw profits grow by approximately 10–11 percent annually, compared to about 7 percent for average-performing companies. The difference was even more pronounced in market capitalization: productivity leaders showed a Compound Annual Growth Rate (CAGR) in market capitalization of around 19 percent, whereas average organizations showed about 10 percent.
Overall, high-productivity companies achieved profitability growth of over 50 percent and doubled the expansion of their market capitalization compared to their peers.
Small factories lag behind large enterprises
However, this growth is unevenly distributed across the manufacturing sector. According to the report, over 70 percent of large manufacturing companies will require radical measures to reach the level of productivity growth needed to realize India's manufacturing ambitions.
Furthermore, there is a significant gap between small and large factories. Small and unorganized manufacturing units produce less than 20 percent of the output per worker compared to large enterprises. Even among companies in the manufacturing sector, there is sharp fluctuation in productivity, with differences reaching from 300 to 1000 percent.
Six ways to stimulate production growth
KPMG identified six key areas to stimulate growth in manufacturing: productivity enhancement, workforce changes, global integration, capacity investment, innovation and technology, and consumption-driven growth. However, productivity is highlighted as the most powerful lever for growth because its benefits are sustained in the long term.
The report emphasizes that productivity is the 'most powerful lever for Indian manufacturing' because productivity gains 'are continuously embedded into the system, increasing output, margin, and competitiveness year after year.' It also notes that, unlike levers dependent on scale or demand, productivity improvements are permanently integrated into the system.
To boost productivity, companies will need to rethink labor organization, organizational structure, and methods of utilizing the workforce. Additionally, digital tools, artificial intelligence, performance management, and changes in corporate culture are necessary to support these changes.