The manufacturing muddle

The manufacturing muddle

Context:

• The Union Budget has reinforced the correction of the Inverted Duty Structure (IDS) which has adversely impacted manufacturing for decades.

Inverted Duty Structure (IDS):

• Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods.

Key concerns:

• Chinese/other imports have swamped India’s small- and medium-sized enterprises and large manufacturing companies, raising the import-intensity of manufacturing as well as dampening job growth by raising capital intensity.
• The goods and services tax (GST), especially the IGST or Integrated GST component, has begun to erode the advantage that the IDS was giving to foreign exporters in Indian markets.
• Customs duties have been raised on capital goods and electronics, and silica for use in manufacture of telecom grade optical fibre.
• These have been among the sectors adversely impacted by the IDS in the past 10 years or so.

Advantage for China:

• India’s policy structure failed to utilise its labour advantage to grow labour-intensive manufacturing exports.
• As a result, while China reduced the absolute numbers and percentage of the poor in the population by absorbing surplus labour in manufacturing, India’s poverty reduction was much slower.
• While China’s agricultural and rural income growth was much higher as it sustained consumer demand, it also generated industrial jobs much faster.
• While India grew construction jobs very fast since 2000, all the way to 2011-12, manufacturing output and employment growth left much to be desired.
• Moreover, analysis shows that between 2004-05 and 2011-12, but much more between 2011-12 and 2015-16, the growth of manufacturing jobs not only first slowed after 2011-12 but also became negative.

Fall in agricultural jobs:

• The share of the workforce in agriculture has been falling steadily, from 60% in 1999-2000 to 49% in 2011-12.
• But the fall has slowed sharply after 2011-12, when the pace of non-agricultural job growth slowed along with GDP growth.
• Since 2012, the numbers leaving agriculture over 2011-12 to 2015-16 fell to 1 million per year, as non-agriculture jobs grew slowly since 2011-12.
• It appears that as GDP growth slowed after 2011-12, youth who had benefited significantly from jobs in manufacturing have suffered disproportionately.
• This dropped precipitously to 10.8%, just as the share of all employment in manufacturing fell, between 2011-12 and 2015-16.
• The only sector with a significant increase in labour absorption, especially the young, has been services, where employment rose from 36 million in 2011-12 to nearly 52 million in 2015-16 for them, and for all labour from 127 million to 141 million.

Way ahead:

• The resolution of the twin balance sheet problems together with the Insolvency and Bankruptcy Code, should now pave way for new manufacturing investment.
• Policy must attempt to close the loop between rising demand and supply through consumer demand, which the Budget attempts through its agriculture and rural infrastructure focus.
• More manufacturing policy initiatives, such as an early announcement of an Industrial Policy by the Department of Industrial Policy and Promotion, must be sustained over 2018.