By Mansha Bajaj

Edited by Liz Maria Kuriakose, Associate Editor, The Indian Economist

According to a study by the global management consulting firm McKinsey and Company, the manufacturing sector in India could grow six-fold to US$ 1 trillion by 2025. Manufacturing sector can actually turn out to be the Achilles Heel of India’s economy. However it is important to understand that India’s manufacturing sector is vital for its economic progress. The current condition of this sector forces us to believe that India has followed a peculiar path of growth directly from primary to tertiary sector, completely missing out the secondary sector.

In 2013, Deloitte’s global index for 38 nations ranked India as the fourth most competitive manufacturing nation. The country’s economy saw a massive expansion in the period 2006–2011, attaining a five-year Compound Annual Growth Rate (CAGR) of 7.8 percent. The growth was led in particular by the auto industry. But that revival seems to have been short-lived. India’s industrial output has declined or grew at very low rates in almost every month after July 2011.

Employment and unemployment surveys conducted by the National Sample Survey Organisation (NSSO) show that the total manufacturing employment in the country declined absolutely by three million between 2004-05 and 2009-10. The labour intensive manufacturing sector alone has the capability to generate employment on a large scale to absorb the ill-equipped labour pool. However the increasingly jobless nature of growth of manufacturing sector and the economic slowdown may force 12 million people to join agriculture because of lack of opportunities. The slowdown in this sector has led to the emergence of jobless growth in India.

The manufacturing sector in India has been on a cyclical decline. Twenty years after the momentous economic reforms of the 1990s, the removal of controls on industry and the reduction of import tariffs — Indian consumers are enjoying a great variety of products, many imported. But India’s manufacturing sector has been languishing at 16 per cent of its GDP, whereas China’s is 35 per cent. And a lot of what passes as manufacturing in the country is an assembly of imported components.

Many attribute the slowdown in this sector to the interest rates that were hiked by RBI to tame inflation. However we need to understand that this slowdown is not transitory, rather there are some fundamental issues that need to be checked, that are in particular responsible for manufacturing industry’s chequered performance.

On the top of the list is another reason, freedom to import with low or no duties has provided cheap substitutes. However blaming globalisation is not right, we cannot always sustain in a closed economy rather we need to make our goods more competitive.

Another prime concern facing the sector is ‘How to increase the productivity in the manufacturing industry?’ Studies have revealed that the productivity of the manufacturing industry in India is about 20 p.c. of the productivity in the US. It is almost half of the productivity in South Korea. Use of outdated technology, poor infrastructure, costly financing and bureaucratic control have dogged the sector.

Now, India has belatedly recognised the need for a Manufacturing Policy, to create the right set of policies to improve technology and increase value addition within the country, thus enabling reduction of imports and increase in exports and employment.

So, what ought to be the components of the manufacturing policy to solve the problem of ‘Low Productivity Trap’.

A key area of focus must be innovation and R&D (research and development). Innovation and R&D will help increase product offerings, raising competitiveness and enhancing efficiency. They also help in increasing productivity and lowers production costs in a manufacturing set up. Labour intensive manufacturing sectors such as textiles and garments, leather and foot wear, gems and jewellery should be encouraged in order to mix growth with job creation.

The Union Government is striving to give a new push to the manufacturing sector. The government hopes to ensure that 25 per cent share of gross domestic product (GDP) growth comes from manufacturing by 2022 and will eventually create 100 million job opportunities to make the growth inclusive. The Confederation of Indian Industry (CII) which was set up by the government in January 2013 to revive the projects that have got stuck due to various reasons, has cleared 300 cases that account for an investment of more than Rs 6 lakh crores.

Improved infrastructure including roads, railways, ports and electricity is essential for manufacturing growth. Because profit margins per worker are low in sectors where labour costs are 80 percent or more of the total costs, it is important that transportation and electricity are available to entrepreneurs at competitive rates. Myriad labours laws—52 of them at the Centre and three times those in the states—drive our entrepreneurs away from employment-intensive manufacturing sectors and also encourage them to opt for capital-intensive technologies in their manufacturing. We must think of creative ways to introduce greater labour-market flexibility such that the interests of workers already employed and those seeking good jobs are balanced.

Also, apprenticeship is a very important vehicle for skill creation. Yet, India has only 300,000 apprentices compared with 10 million in Japan. Red tapism and the Inspector Raj remain major sources of costs and corruption facing small and medium firms. Larger firms are able to absorb these costs more easily. The government must endeavour every way it can to cut this red tape and Inspector Raj to help small and medium size firms. If China can do it, so can we.

Winding up business when losses persist year after year remains an arduous task in India. The average time to complete closure of a firm under the current Board of Industrial and Financial Restructuring and Sick Industrial Companies Act exceeds fifteen years. When exit is costly, businesses hesitate to take what is normal risk in other countries. They enter only those businesses where the chance of failure is nearly zero. Another reform that can be undertaken is Privatisation. Genuine privatisation should involve transfer of ownership rather than just disinvestment to raise government revenues, which had gathered some momentum under the NDA, has been at a standstill during the last ten years under the United Progressive Alliance (UPA) government. Careful work by Gupta (2012) shows that public sector units (PSUs) for which privatization involved the sale of majority stakes, and therefore resulted in the transfer of management and control to private hands, have exhibited vastly superior performance compared to PSUs for which such a transfer did not take place. To quote Gupta, “Compared to partially privatized firms, sales and returns to sales increase by an average of 23 percent and 21 percent, respectively, when firms sell majority equity stakes and transfer management control to private owners. Moreover, the sale of majority equity stakes is not accompanied by layoffs. In fact, employment appears to increase significantly following privatization.” These are important gains suggesting that further privatization could make a significant contribution to manufacturing growth.

Mansha is currently pursuing B.com (H) from Shri Ram College Of Commerce. She is a passionate writer who wishes to bring change in the world through her writing. Feminist by nature, she takes keen interest in issues relating to women. She finds pleasure in reading novels, specially those written by Sidney Sheldon and Nicholas Sparks. Her other interests vary from dancing to sports, particularly table tennis.

Posted by The Indian Economist | For the Curious Mind