Manufacturing must take off to revive Indian economy

Rohit Joshi and Ankita Chakrabarty/Zee Research Group/Delhi

It has been more than 20 years since India witnessed economic liberalisation but the contribution of India’s manufacturing sector to the overall GDP (Gross Domestic Product) has remained stagnant at about 15 per cent. This has led to a scenario of inadequate jobs as manufacturing has generated jobs at a snail’s pace of one-two million each year since the 1970s.

Talking about the National Sample Survey (NSS) 66th survey, an Espirito Santo (investment bank) report revealed that in the 2005-2010 period, manufacturing and agriculture lost seven million and 15 million jobs respectively. Consequently, employment in manufacturing sector dropped from 55.7 million in 2005 to 48 million in 2010. The anomaly is that this (job loss in manufacturing sector) has happened in a period (2005-10) when India’s GDP grew at an average rate of 8.74 per cent.

Reasoning out the jobless growth witnessed in manufacturing, Madan Sabnavis, chief economist at CARE Ratings said, “During the period under review, average manufacturing growth was around 10 per cent. It was primarily a technology enabled manufacturing growth. This growth basically came in from large manufacturing companies. The companies economized on labour and leveraged technology in order to develop superior results.”

“SME (small and medium enterprise) segment has been left out over the years and the focus was on the large scale industry. However, for more comprehensive growth to take place in the manufacturing sector it has to spread to the SME segment,” added Sabnavis.

Referring to the stagnant share of manufacturing activity, Keki Mistry, vice chairman and CEO of HDFC Ltd averred, “I guess the problem is because of the fact that fresh investments are not happening in the industry for a while. New facilities are not being created and hence no new jobs are there. Further, certain regulatory approvals are taking time and on the top of it, high interest rate regime is adding to the woes.”

The manufacturing story has continued to suffer in recent years. The investment climate has deteriorated in the country. Foreign Direct Investment (FDI) slid by about 21 per cent to 36.9 billion dollars last fiscal year (2012-13) compared to 46.6 billion dollars in 2011-12.

In the month of July 2013, the South Korean mining giant Posco cancelled plans to construct a steel plant in the southwestern state of Karnataka. Similarly, after waiting for seven years, ArcelorMittal scrapped plans for a steel mill in the eastern state of Orissa. Incidentally, both companies had cited similar reasons for pulling out: weak market conditions and problems in securing land and mining licenses in the country.

Though the government is conscious of the challenge, so in an attempt to expedite decisions on approvals or clearances for implementation of major infra projects, the government had set up the Cabinet Committee on Investment (CCI) in December 2012 headed by Prime Minister Manmohan Singh as the chairman. As on August 5, 2013, the CCI has given a clearance or issued direction for 171 projects entailing a total investment of Rupees 1, 69,426 crore according to Ministry of Finance.

However, looking at the employment base breakup across sectors, manufacturing employs only 10.2 per cent of India’s labour force. In contrast, services sector which contributes the maximum of 60 per cent to the GDP accounts for 27 per cent of employment. Moreover, agriculture and allied activities which accounts for nearly 51 per cent of employment, contributes 13.7 per cent to the overall GDP.

When compared with countries like China, Thailand and Malaysia, India’s manufacturing sector accounts for a small portion of its GDP. While, in case of China, manufacturing constitutes 30 per cent of the country’s GDP, manufacturing accounts for 35 per cent of Thailand’s GDP. Similarly, manufacturing accounts for 24 per cent of Malaysia’s GDP.

Despite being a communist nation, China is amongst the top destination for FDI investments. MS Unnikrishnan, managing director and chief executive officer at Thermax said, “While the contribution of China’s manufacturing sector to the overall GDP is about 40 per cent, the contribution of India’s manufacturing to the GDP is nearly 15 per cent. India is good at making plans but very poor at implementation of them. However, China is good at both. China is extremely good at disciplined implementation. Moreover, they have the money to implement the plans ( two trillion dollar of forex reserves).”

Taking into account the problem (stagnant share of manufacturing), government has introduced the National Manufacturing Policy (NMP) 2011 to boost the growth of manufacturing so that the sector constitutes for a quarter of GDP and generates employment for 100 million more workers over 10 years.

Commenting on the NMP, Unnikrishnan said, “Policy document has been created but there are no signs of implementation until now.”

Further, he iterated that job creation will happen only when the contribution of manufacturing to the economy rises. “We need to implement manufacturing oriented investment supporting kind of policies. Fiscal benefits (single window clearance, free land) should be provided to investors. Availability of cheap capital and many more amendments to the labour policy are required,” added Unnikrishnan while offering solutions to the India’s manufacturing woes.

By continuing to use the site, you agree to the use of cookies. You can find out more by clicking this link