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    Manufacturing Story: At Crossroads

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    January 23, 2014

    By Shreya Bajaj

    According to a study by the global management consulting firm Mc Kinsey and Company, the manufacturing sector in India could grow six-fold to US$ 1 trillion, by 2025. It is important to understand that India’s manufacturing sector is vital for its economic progress, whereas the current condition of this sector forces us to believe that India has followed a peculiar path of growth from the primary sector directly to the tertiary sector, completely missing out the secondary sector. In 2013 Deloitte’s global index for 38 nations ranked India as the fourth most competitive manufacturing nation. The country’s economy saw massive expansion in the period 2006- 2011, attaining a five-year Compound Annual Growth Rate (CAGR) of 7.8 percent. The growth was led particularly by the auto industry. But that revival seems to have been short-lived. India’s automobile industry has entered a phase of stagnation, and so too has organized manufacturing as a whole, as shown by the recent numbers on IIP growth. India’s industrial output has declined or grown at very low rates in almost every month after July 2011.

    Industrial production, as measured by the Index of Industrial Production (IIP), fell 2.1% in November, marking the second consecutive month of contraction. Industrial production unexpectedly contracted in November as buyers burdened by inflation, put off purchases while export growth slowed to a six-month low in December.

    Employment and unemployment surveys conducted by the National Sample Survey Organisation (NSSO) show that the total manufacturing employment in the country declined absolutely by three million  between 2004-05 and 2009-10. The labor intensive manufacturing sector alone has the capability to generate employment on a large scale to absorb the ill-equipped labor pool. However the increasingly jobless nature of growth of the manufacturing sector and the economic slowdown may force 12 million people to join agriculture because of lack of opportunities. The slowdown in this sector has led to the emergence of jobless growth in India.

    The manufacturing sector in India has been on a cyclical decline. Twenty years after the momentous economic reforms of the 1990s, the removal of controls on industry and the reduction of import tariffs — Indian consumers are enjoying a great variety of products, though mostly imported. But India’s manufacturing sector has been languishing at 16 per cent of its GDP, whereas China’s is 35 per cent. And a lot of what passes as manufacturing in the country is assembly of imported components. Many attribute the slowdown in this sector to the interest rates that were hiked by the RBI to tame inflation. However, we need to understand that this slowdown is not transitory rather there are some fundamental issues that need to be checked, that are in particular responsible for the manufacturing industry’s chequered performance.

    FICCI estimates that the higher input costs for the Indian manufacturing sector as a result of cascading effect of indirect taxes on selling prices of commodities, higher cost of utilities such as power, railways , water, high finance costs and high transaction costs caused the sector a severe disadvantage as compared to its Asian counterparts. Also on the top of the list, freedom to import with low or no duties has provided cheap substitutes. However, blaming globalization is not right, we cannot always sustain in a closed economy rather we need to make our goods more competitive. Another prime concern facing the sector is how to increase the productivity in the manufacturing industry. Studies have revealed that the productivity of the manufacturing industry in India is about 20 p.c.of the productivity in the US and it is almost half of the productivity in South Korea.

    Use of outdated technology, poor infrastructure, costly finance and bureaucratic control have dogged the sector. India has belatedly recognized the need for a Manufacturing Policy. There is a need to create the right set of policies to improve technology and increase value addition within the country, thus enable a decrease in imports and an increase in exports and employment. Another key area of focus should be innovation and R&D (Research and Development). “Innovation and R&D will help increase product offerings, competitiveness and efficiency. They also help in increasing productivity and lowering production cost in a manufacturing set up. Labor intensive manufacturing sectors such as textiles and garments, leather and foot wear, and gems and jewellery should be encouraged in order to mix growth with job creation.

    The Union Government is striving to give a new push to the manufacturing sector. The government hopes to ensure that 25 per cent share of gross domestic product (GDP) growth will come from manufacturing by 2022 and will eventually create 100 million job opportunities to make the growth inclusive. The Confederation of Indian Industry (CII) that was set up by the government in January 2013 to revive the projects that have got stuck due to various reasons, has cleared 300 cases which accounted for an investment of more than Rs 6 lack crore. More such initiatives are need to be taken by the government and we hope that the government will take more steps especially in the election year.

    Views presented in the article are those of the author and not of ED.

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