Context: Potential of manufacturing sector in India.
Manufacturing Industry in India has gone through various phases of development over the period of time. Since independence in 1947, the domestic manufacturing sector has traveled from building the industrial foundation in 1950’s and early 1960’s, to the license–permit Raj between 1965 and 1980. Then it underwent a phase of liberalization of 1990’s and finally to the present phase of global competitiveness. The Indian Manufacturing sector currently contributes 16-17% to GDP and gives employment to around 12% (2014) of the country’s workforce.
Importance of the manufacturing sector in Indian economy:
- Economic development: Growth in manufacturing is crucial for India’s economic development. To capitalize on the demographic dividend, India must create nearly one million jobs per month over the next decade. Manufacturing has the potential to provide large-scale employment to the young Indian population and thereby enable a significant section of the population to move out of poverty.
- Favourable conditions: India has several strengths that could help it become a manufacturing powerhouse: a large pool of engineers, a young labor force, wages that are half that of China’s, and significant domestic consumption of manufactured goods. So government can tap the potential to increase the contribution of manufacturing sector to economy’s growth.
- World-class excellence: India does have a few shining examples of world-class excellence in manufacturing and well-established core sectors such as textiles, auto components, and, more recently, petrochemicals. This excellence can be promoted to defense and MSMEs sector.
- Multiplier effect: Manufacturing is at the heart of India’s economic activity, providing a powerful multiplier effect. Manufacturing production processes increase the demand for raw materials, energy, and construction, as well as for services, from a broad array of supplying industries, leading to a healthy growth in output and employment creation. In fact, as per the Government of India’s National Manufacturing Policy 2011, ‘Every job created in manufacturing has a multiplier effect of 2-3X additional jobs in related activities.’
- Economic growth: according to international monetary fund (IMF) world economic outlook (WEO), India is world’s fastest growing economy in the world. And India would World’s fastest growing economy for the next several years. To maintain the continuous growth in future India should focus on the manufacturing sector.
Government initiatives and issues with respect to manufacturing sector:
- National manufacturing policy (2011): The major objectives of the National Manufacturing Policy are to increase the sectoral share of manufacturing in GDP to at least 25% by 2022; to increase the rate of job creation so as to create 100 million additional jobs by 2022; and to enhance global competitiveness, domestic value addition, technological depth and environmental sustainability of growth. But after the 8 years of launch, the manufacturing sector contribution to GDP growth is still reeling at 16% to 17% only. Manufacturing accounted for a tenth of total employment in the 1980s, and continues to account for about a tenth of total employment today. Within manufacturing, the share of labor-intensive industries such as textiles and leather has actually shrunk over the past few decades.
- Make in India initiative: Prime Minister Narendra Modi launched the Make in India initiative on September 25, 2014, with the primary goal of making India a global manufacturing hub, by encouraging both multinational as well as domestic companies to manufacture their products within the country. It targets 25 sectors of the economy which range from automobile to Information Technology (IT) & Business Process Management (BPM). It also seeks to facilitate job creation, foster innovation, enhance skill development and protect intellectual property. The logo of ‘Make in India’ – a lion made of gear wheels – itself reflects the integral role of manufacturing in government’s vision and national development. While the government has taken successful action in some areas, notably in cutting red tape, India jumped 30 places in the World Bank’s Ease of Doing Business rankings to break into the top 100 nations. However, according to reports and economists, manufacturing in India’s economic output has tapered in the wake of demonetization and the confused launch of a goods and services tax (GST).
- Foreign direct investment (FDI) reforms: The Make in India initiative has made a tremendous impact on the investment climate of the country as shown by significant growth of 46% in Foreign Direct Investment (FDI) equity inflows and highest ever FDI inflows at US$ 55.5 billion in 2015-16. According to RBI annual report, the increase in foreign capital flow was mainly due to higher flows into the communication services, retail and wholesale trade, financial services and computer services.
- Defence manufacturing (MAKE IN INDIA): India’s current requirements on defense are catered largely by imports. The opening of the defense sector for private sector participation will help foreign original equipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic markets as well as aim at global markets. Besides helping in building domestic capabilities, this will also bolster exports in the long term. The offset policy (which stipulates the mandatory offset requirement of a minimum 30% for procurement of defense equipment in excess of USD 306.69 million) introduced in the capital purchase agreements with foreign defense players. It would also ensure that an eco-system of suppliers is built domestically. But Lack of an institutional capacity and capability to take it to its logical conclusion. As indicated earlier the “Make” procedure for ICVs failed to achieve the results with just four companies competing for one weapon system. Here all three services are involved with a plethora of weapon systems and the opportunities limitless.
- Micro, small and medium enterprise (MSMEs): With around 63.4 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. Government of India launched initiatives like:
- MUDRA scheme,
- National Manufacturing Competitiveness Programme (NMCP)
- Cluster Development Programme (MSE-CDP),
- Credit Linked Capital Subsidy Scheme (CLCSS)
- Performance and Credit Rating scheme.
But still face so many problems like the distribution of MSME`S in all over India is not equal because of unavailability of raw material, unawareness or lack of entrepreneurial skills development and lack of support of financial and technical assistance from concerning local authorities at district or state and central level. The unavailability of adequate and timely credit facility, high cost of credit, lack of modern technology , no research and innovations, insufficient training and skill development, complex labor laws are the main problems of the MSME`S.
- Labor issues: For industrial growth, and ease of doing business in India, labor Reforms is a must, and should be considered as a top priority for governments in the centre as well as in states. The proposed amalgamation of 40-odd labor acts into four labor codes was a bold step announced by the current government. And diligent efforts have been made by the labor ministry in the proposed code on occupational safety, health and working condition. But the passage of bills with respect to four labour codes is still under consideration.
Measures to improve the manufacturing sector in India:
To bolster the manufacturing sector, India needs to develop supply side scenario, develop skill level of workers, provide enabling infrastructure, ensure deployment of technology, instill best practices and strengthen research and development. A productive business environment requires conducive policy framework, financial support, technology readiness, efficient labour, market access, and infrastructure and goods market efficiency.
- Policy framework: An enabling policy framework to support the manufacturing sector growth is inevitable. The ‘Make in India’ initiative of the Government thus tries to build the enabling framework for manufacturing sector to become competitive. Make in India was designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property, build best-in-class Manufacturing Infrastructure India needs to bring about structural reforms addressing all the factors of production i.e. land, labor, capital, entrepreneurship and technology.
- Augmentation of Industrial Infrastructure: According to strategy for NEW INDIA @ 75, The government can play a crucial role in creating domestic manufacturing capabilities by leveraging proposed public procurement and projects. Mega public projects such as Sagarmala, Bharatmala, industrial corridors, and the Pradhan Mantri Awas Yojana (PMAY) can stimulate domestic manufacturing activities provided the projects are suitably structured and demand is aggregated strategically. This should be accompanied by simplification of the regulatory process.
- Strengthening and promotion of MSMEs: Setting up of mega parks and manufacturing clusters in labour intensive sectors with common facilities to reduce costs and improve quality. It is also recommended that state governments should set up plug and play parks (flatted factories) to ensure international productivity standards. Workers of industrial units in the new mega parks should have decent accommodation within reasonable proximity of the work place. An expert committee should examine sector-specific pain points and make its recommendations within three months. The Department of Public Enterprises (DPE) should ensure registration of all public sector units (PSUs) on the Trade Receivables Discounting System (TREDS) portal. Initiate a small business research programme in some select ministries for encouraging R&D in MSMEs.
- Industry 4.0: Launch a major initiative to push industry to adopt Industry 4.0. Industry 4.0 is characterized by increasing digitization and interconnection of products, value chains and business models. It will significantly impact sectors like automobile, pharmaceuticals, chemicals and financial services and will result in operational efficiencies, cost control and revenue growth. Experts feel that emerging markets like India could benefit tremendously from the adoption of Industry 4.0 practices.
Way forward: India has the capability to push its manufacturing contribution to GDP to 25% by 2025. The stage has been set and the initiatives rolled out. The initiatives taken to promote the manufacturing sector will benefit all the other segments of the economy. The overall growth momentum of the economy offers incentives not only to the domestic entrepreneurs but also the foreign investors. The Indian manufacturing sector will slowly but surely gain the foothold in the coming years.