India’s slow but sure de-industrialisation is worrying

Source: The post is based on the article “India’s slow but sure de-industrialisation is worrying” published in Live Mint on 16^th June 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

Relevance: concerns with manufacturing sector

News: The national accounts data released last month showed India’s provisional GDP growth rate at 7.2% in 2022-23. This was higher than the government’s estimates and also that of the Reserve Bank of India (RBI).

However, the data also suggests that the structural reasons that contributed to the Indian economy’s slowdown before the pandemic are still present and may have worsened.

What structural reasons are still present in the Indian economy?

The continued weakness of private consumption and investment suggests that the economy is suffering from weak demand.

The GDP estimates show that the manufacturing sector, which is the largest sector of the economy in terms of GDP share and the third largest in terms of employment, grew only at 1.3%. This is its second lowest growth in the last 25 years.

Moreover, manufacturing sector growth was 7.8% annually between 2003-04 and 2013-14, which increased to 9.1% between 2013-14 and 2017-18, but then declined to almost a third at 3.4% in the last five years.

Similarly, the share of manufacturing in the GDP has also declined.

What does the weakening manufacturing sector imply?

A weakening manufacturing sector raises concerns for the overall economy, especially for employment as this sector serves as a big source of jobs.

According to the employment and unemployment survey of the National Statistical Office (NSO), manufacturing accounted for 12.6% of all workers in 2011-12. This declined to 10.9% in 2020-21.

The declining share of manufacturing in overall economic output as well as employment is a worrying sign for the economy’s long-term growth prospects.

This decline signifies a gradual de-industrialization of the economy, which will not only impact output growth but also employment and income growth.

Despite various policies like the ‘Make in India’, PLI schemes, and corporate tax benefits, the slowdown has continued. This suggests a policy bias in favor of large corporations rather than strengthening small and medium enterprises (SMEs).

This also indicates the problem of declining demand in the Indian economy. Despite policy efforts and state incentives, the manufacturing sector has suffered due to a reduction in its consumer base.

What can be the way ahead?

Due to the declining trend in the manufacturing sector, workers have shifted from manufacturing to agriculture.

Although agriculture has played a significant role in the economic recovery from the pandemic, it is unlikely to continue its contribution due to increasing input prices and the threat of El Niño.

Therefore, a revival of India’s manufacturing sector is necessary. Hence, the key to boost the manufacturing sector lies in boosting overall demand in the economy, especially discretionary spending.