Need to Revive Manufacturing Sector in India

Source-This post on Need to Revive Manufacturing Sector in India has been created based on the article “Forget metros and highways, India needs to revive manufacturing” published in “The Indian Express” on 26 June 2024.

UPSC Syllabus–GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context-The article highlights the need to revive the manufacturing sector. It suggests that the government must align policies to augment domestic investment, improve domestic value addition and export competitiveness.

The manufacturing sector’s contribution to GDP stood at 16.1% in 2014-15 at current prices but declined by three percentage points to 13.1% by 2022-23. At constant prices, it marginally decreased to 15.6%.

Policymakers believed that excessive capital and labor regulations deterred investors from establishing businesses. They aimed to reduce this “regulatory cholesterol” by aligning regulations with global standards like the World Bank’s Ease of Doing Business Index (EDBI).

What are the challenges faced by India’s Manufacturing Sector?

1) Negative Impact of EDBI Improvements on Investments – Improvements in EDBI rankings did not lead to increased investments anywhere. On the contrary, it has only benefitted employers who have got the opportunity of self –certification for some mandatory compliance by compromising the interest of workers.

2) Limited Value Addition-There was a reported increase in production and exports of mobile phones due to the introduction of Production Linked Incentive Scheme.However,it has mainly led to a shift from importing finished goods to importing their basic components that resulted in minimal domestic value addition.

3) Disparity Between GVA and GDP Growth- From 2014 to 2022, the industrial growth rate, as measured by gross value added (GVA), averaged a modest 3% annually according to credible estimates from the Annual Survey of Industries. This is significantly lower compared to the GDP growth rate of 6-7% over the same period.

4) Inability to Increase Fixed Investment– Government policies have not succeeded in raising the overall rate of fixed investment (gross fixed capital formation), which stands at approximately 30% of GDP at current prices, according to national accounts data. Investment has increasingly favored services, especially in telecommunications and infrastructure, while the manufacturing sector’s share has remained stagnant at 18% or slightly decreased.

5) Industrial Investment and Manufacturing Sector Performance -The actual lack of industrial investment is more severe than indicated by national account figures. Recent discussions on GDP estimates have emphasized that the performance of the manufacturing sector was overstated in the current National Accounts Statistics (NAS).

6) Discrepancies Between NAS and ASI Data -Comparing NAS and Annual Survey of Industries (ASI) data up to 2021-22 reveals large discrepancies. According to NAS, gross fixed capital formation (GFCF) and net fixed capital formation (NFCF) grew annually by 5.3% and 6.9%, respectively, from 2014-15 to 2021-22 at constant prices. In contrast, ASI estimates indicate declines of -1.6% and -9.6% per year over the same period.

7) Stagnant Net Fixed Investment -Since 2014-15, there has been minimal growth in the net fixed investment rate, leading to stagnation in manufacturing capacity.

Read more- Semiconductor manufacturing in India: significance and challenges

What should be the way forward?

1) Need for a Well-designed Industrial Policy-

A) Address the lack of net investment growth in manufacturing

B) Prioritize productive investment over speculative property development

C) Align trade and industrial policies to augment domestic investment

2) Improve domestic value addition and export competitiveness-

A) Support for Small Industries

B) Implement localized, context-specific, and “last-mile” interventions

C) Focus on boosting productive employment in small industries

3) Statistical Improvements-There is an urgent need for the National Statistical Office to correct shortcomings in GDP estimation.

Question for practice

What are the obstacles encountered by India’s manufacturing sector? What steps should be taken to move ahead?