At the root of India’s manufacturing challenge

Source– The post is based on the article “At the root of India’s manufacturing challenge” published in “The Hindu” on 2nd June 2023.

Syllabus: GS3- Economy

Relevance- Issues related to manufacturing sector

News– The article explains the steps taken by successive governments for manufacturing sector and the reason behind weak performance of manufacturing sector despite government initiatives

What are various steps taken by governments in India for the manufacturing sector and their impacts?

The economic reforms of 1991 had almost exclusively focused on manufacturing. But the reforms did not lead to an increase in the share of manufacturing in the economy.

There has been a qualitative change after 1991. The range and quality of products manufactured in India have undergone an impressive increase.

In 2014, the manufacturing sector was given a push through the ‘Make in India initiative’. There was emphasis on foreign direct investment. The Production-Linked Incentive scheme was launched recently.

The tax rate had been lowered substantially in 2019.  Government is pushing public investment. In the last Union Budget, capital expenditure was raised by 18.5%.

But, the record of these schemes has not been impressive. In 2022-23, manufacturing growth is 1.3%. The persistence of low rates of growth despite policy initiatives in manufacturing points to structural issues with the sector in India.

Why is demand side weakness a major factor behind lack of growth in the manufacturing sector?

There is a need to look at the demand side. This is largely independent of the supply side.

Household demand for manufactures follows the satisfaction of its demand for the necessities of life like food, housing, health and education. For a substantial section of India’s households, food occupies a large share. This impacts the growth of demand for manufactures.

The relationship between per capita income and the share of food in household expenditure is strongly negative globally. Countries such as the United States and Singapore, have a low share of food.

The share of food is the largest in India, among major economies and its GDP per capita the lowest. Industry leaders have no control over the demand side of the equation.

What can India learn from East Asian countries?

Exports can sidestep a narrow domestic market. East Asian countries were able to grow their manufacturing base despite the low scale of domestic markets. It requires that manufacturers are globally competitive.

Infrastructure and skill level of the workforce are important contributors to manufacturing growth of East Asian economies. These determine the cost of production and the type of products that a country can produce.

Indian exporters face a competitive disadvantage related to higher turnaround time for ships in India’s ports. Inexpensive power, space and industrial waste disposal services all matter.

Why neglect of education in India is impacting the manufacturing sector in India?

India has fallen most behind the countries that are the manufacturing successes of the world in the education field.

The ranking of countries by the Programme for International Student Assessment reveals this directly. In a group of about 75 countries, India barely manages not to be the last.

Pratham findings point to the very low reading ability and numeracy of Indian children in their early years.

There are issues related to employability of Indian graduates. The skilled workers, ranging from carpenters to plumbers and mechanics have been neglected in economic policy-making in India.

There is no formal assessment available of the state of the vocational training institutes in India. The Planning Commission data shows that only about 5% of Indian youth have had any kind of technical training. The figure for South Korea was over 85%.