India’s Manufacturing Sector – Issues, Challenges & Government Initiatives

Updates*

India’s manufacturing sector is facing issues and is currently forced to lay off most of its labour force due to lack of profit and growth. In the past few decades, this sector has underperformed when compared to other nations, with a meagre share of 16-17% of the GDP. This is much lesser than that of China and Korea, whose manufacturing accounts for 29% of the GDP and 27% in Thailand. In the coming years, India’s population is going to increase and to make use of this demographic potential, this sector is vital as it can be labour-intensive and can promote an improved standard of living for the future generation. Currently, this sector accounts for only 12% of the total employment of the workforce. Clearly, this sector is not yielding the true potential of India’s demographic dividend due to poor government policies and reforms.

What is the manufacturing sector?

• The manufacturing sector consists of establishments that are involved in the mechanical, physical or chemical transformations of materials, substances or components to make them into new and finished products.
• The establishments in this sector are often called as plants, factories or mills and use power-driven machines and materials-handling equipment.
• This sector also includes establishments that produce handmade products that are produced either in the workers’ homes or in premises where the products made and sold in the same place like in bakeries, candy stores and costume tailors.
• Manufacturing industry may process materials or may contract with other establishments to process their materials for them. Both these types of included in this sector.

India’s manufacturing sector:

• India’s manufacturing sector has evolved through several phases – from initial industrialisation and licence raj to liberalisation and the current global competitiveness.
• In 2017, the manufacturing sector contributed only about 16% of India’s GDP.
• On the other hand, in the east and south-east Asia, the industry share is above 30-40%, while the manufacturing is up by 20-30%.
• Manufacturing sector’s share in the GDP has not grown at all, though between 2004 and 2012, employment growth in this sector was considerable.
• However, the total manufacturing employment has reduced significantly between 2011 and 2016 by 10 million in just four years, especially in the labour-intensive manufacturing sectors like food processing, tobacco, textiles, apparel, leather, wood and furniture.
• This is in contrast to what was achieved in Japan, Korea, Taiwan and China.

What potential does India have to promote the manufacturing sector?

• India has three Ds (Democracy, demography and demand) for the growth of the manufacturing sector.
• 65% of India’s population is below the age of 35 – an advantage when compared to other counties.
• Studies have shown that every job created in the manufacturing sector has a multiplier effect in creating 2 to 3 jobs in the service sector.
• High domestic demand, increasing middle class and young population and high returns make India attractive for the manufacturers.
• The manpower cost is low when compared to other nations.

What are the issues and challenges faced by this sector?

• The reluctance of Banks: Currently, banks are hesitant to offer loans for industrial activities.
• Biased trade regime: India’s trade regime is biased towards capital-intensive manufacturing.
• Small enterprises, because of their smaller size, suffer from low productivity, preventing them from achieving economies of scale.
• Currently, India spends about 9% of GDP on research and development, a considerably small amount when compared with other developed nations. This prevents the sector to evolve, innovate and grow.
• MSME sector is facing tough competition due to the cheap imports from China and other countries that have a free trade agreement with India.
• Black money and corruption are also hindering the sector’s growth.
• Currently, India is facing an investment and consumption crisis.
• The regulatory laws, unfavourable land and labour laws, inadequate connectivity, communication, energy infrastructure etc., are some of the other issues faced by this sector.
• Also, transportation is costly and slow when compared to developed nations.
• Current geo-economic challenges like trade war, US-Iran tensions, are also negatively affecting India’s manufacturing sector.
• Labour productivity in India is less when compared with other nations like China due to the lag in supply chain management, transportation, production planning and maintenance. Today, 62% of India’s population is in the working-age group and more than 54% of the total population is below 25 years of age. However, it is estimated that only 4.7% of India’s workforce is formally skilled. This is in contrast with US (52%), UK (68%), Germany (75%), Japan (80%), South Korea (96%) and China (24%).
• Intellectual Property Protection and Enforcement are risky and expensive in India. Currently, the government is undertaking significant IP Protection reforms, increasing uncertainty and complexity.

What are the government initiatives to promote this sector?

• Make in India initiative aims to make India the global manufacturing hub. It also aims to increase the sector’s GDP share to 25% from the existing 16%, and create 100 million new jobs by 2022.
• Skill India aims to create jobs and promote entrepreneurship within India.
• Sharm Suvidha is a web portal that provides a single platform for all labour law compliances.
• Other labour reform initiatives include Random Inspection Scheme, Universal Account Number and Apprentice Protsahan Yojana.
• Defence Procurement Policy (DPP) prioritises the promotion of indigenous defence technology.
• National Manufacturing Policy (NMP) provides for Technology Acquisition and Development Fund (TADF) that facilitates the acquisition of clean, green and energy-efficient technology by MSMEs.
• Pradhan Mantri MUDRA Yojana (PMMY) provides loans for small business.
• Startup India scheme’s objective is to generate employment and promote economic development. Its seeks for the development and innovation of products and services and aims to increase the employment rate in India.
• Standup India aims to promote entrepreneurship among women and SC and ST communities.
• Infrastructure Development Projects: *
  • For example, the National Infrastructure Pipeline (NIP), which was built on a whole-of-government approach, is already in place and will cover the fiscal years 2019-20 to 2024-25.
    According to India Investment Grid statistics, there are 15,454 projects available with a total project cost of $1,981.83 billion as of May 5, 2022.
  • The National Industrial Corridor Development Programme was established to support the integrated development of industrial smart cities with plug-and-play infrastructure and multi-modal connectivity.
  • In addition, since 2020, a number of Production-Linked Incentive (PLI) schemes have been announced for various sectors to incentivize manufacturing with the goal of achieving ‘Atma Nirbhar Bharat.‘
• Manufacturing in Warehouses: *
  • The Central Board of Indirect Taxes and Customs (CBIC) has introduced a new and improved version of the programme focusing on manufacturing and other bonded warehouse operations.
  • Manufacturing in warehouses saves working capital, which is typically scarce in the case of small businesses, while also assisting MSMEs in better positioning in the international market by shortening the delivery schedule in the global supply chain.
  • CBIC has revamped the Bonded Manufacturing Scheme to help businesses gain a competitive advantage.
    • The CBIC launched the Bonded Manufacturing Scheme under the Customs Act of 1962 to support the “Make in India” programme.
    • Under this programme, a manufacturing unit can import goods (both inputs and capital goods) with no interest liability under Customs duty deferment.
    • There are no investment requirements or export obligations under the scheme.
    • If the goods produced by such manufacturing operations in bonded warehouses are exported, the duties are fully remitted.
    • The import duty is only payable if the finished goods or imported goods are cleared in the domestic market.
    • Onboarding to the bonded manufacturing programme is entirely digital, with a microsite available on the ‘Invest India’ portal.

Why is the manufacturing sector not able to generate jobs?

In the period of 2005-10, an average of 12 million individuals entered into the workforce per annum. During the same period, the economy grew at an average of 8.7% and above 9% in three of the five years. Despite the high rate of growth, the economy managed to create only 5.5 million jobs annually in the industry and service sector during the same period. According to the latest salary index, manufacturing is the lowest-paid sector in 2016. That is, despite the growth, the hourly salary dropped 16% for the manufacturing sector. This sector accounts for only 15% of the total national employment, leading to jobless growth of the economy. Some of the causes for this are as follows:

Labour laws:

• The labour laws in India are excruciatingly complicated. The laws change based on the number of labourers.
• The worst of the laws is the Industrial Disputes Act, which says that if the manufacturing firm has 100 workers or more, it cannot dismiss any of them under any circumstances unless prior approval is given by the government, which is rarely given. The law is mandated even if the industry is going bankrupt.
• Thus, the investors are not willing to enter into this sector.
• Indian firms, as a result, remain so small on average.
• Labour is in the concurrent list and more than 40 central laws and more than 100 state laws govern the subject.
• The central government is keen to consolidate the central laws codes – wages, industrial relations, social security and welfare and occupational safety, health and working conditions. This brings about reforms to ensure ease of business.

Lack of necessary skills and education:

• The manufacturing sector, for it to grow, requires an educated workforce with the necessary skills and training.
• India’s skill ecosystem needs to be fixed. According to a FICCI report, India has 5.5 million people enrolled in vocational courses, while China has 90 million.
• Also, India’s education system lacks soft-skills and value-based training that meets the demands of the industry.
• Employment and unemployment survey conducted by the National Sample Survey Organisation (NSSO) revealed that the total manufacturing employment in the country has fallen by 3 million, between 2004-05 and 2009-10.
• Hasty fixes rarely work in the policymaking and the FDI cannot revive the sector and generate jobs without the education reform.

What can be the way forward?

Promote the growth of labour-intensive industries:

• Wood, paper products and textile industries are labour-intensive and mostly do not require any special qualification.
• Promoting the growth of these industries as a short-term solution can ensure the absorption of the growing unskilled workers.

Promote MSMEs:

• MSMEs are vital for the country’s economic and social development.
• In India, they account for 8% of the GDP, 45% of manufacturing output and 40% of exports.
• Also, the labour-capital ratio is much higher in MSMEs than in larger industries.
• They are considered the budding grounds for new entrepreneurs and innovators.
• The sector’s competitiveness must be improved to reap the benefit of the globalisation that provides new opportunities and access to supply chains across the world.
• One of the ways to improve the competitiveness among the MSMEs is the cluster approach, which addresses the general problems of taxation, interest rates or FDI policies and simplified labour laws.
• Increasing the accessibility to credit for the MSME sector by categorising it under the priority sector can also promote its growth.

Labour reforms:

• Reforming of the existing labour laws must be prioritised to make them simplified and flexible.
• They must be reformed in a way that will promote investment and ease of doing business within the sector.
• This will prevent the companies from resorting to outsourcing and contracting of labour.

Improve education quality and labour productivity:

• The quality of teaching in schools and colleges must be improved.
• The high-quality vocational training must be provided within the education system.
• India’s labour productivity, though increased in the last decade, is lower than that of China. This should be addressed to compete in the global market.

Power:

• Stable, low cost and uninterrupted power is vital to promote the growth of the energy-intensive manufacturing growth.
• In India, additional tax for heavy manufacturing industries like coal cess, RPO and PAT increase the overall energy cost.
• According to a report by NITI Aayog, for energy-intensive manufacturing units, coal cess, RPO and PAT lead to a carbon tax of $9.7 per tonne of carbon dioxide emissions.
• In terms of quality of power, India ranks 80 out of 137 countries.
• According to the World Bank, access to electricity is the second-most important obstacle for manufacturing firms.
• Thus, promotion of investments, renewable energy, research and development are vital to ensure energy efficiency and sustainability.

Improving logistics:

• The logistics cost is estimated to be around 14 to 15% of the GDP in India, almost double of the 7-8% of the GDP in the developed countries.
• In India, nearly 60% of cargo travels by road. This is because of the overconsumption of the railway networks, high rail freights, long transit times, inadequate port depths, high turnaround time at ports and poor warehousing facilities.
• Addressing these issues can promote the growth of the sector.

Promote research and development:

• India is spending about 0.6-0.7% of its GDP on Research & Development.
• This is much less than the US (2.8%), China (2.1%), South Korea (4.2%) and Israel (4.3%).
• The government should give greater emphasis on industrial application-oriented R&D and greater collaboration with the private players.
• Incentives must be provided for private companies to indulge in innovative research through increased access to credit and tax incentives.
• The collaboration of the research institutes with the industries is vital to facilitate the transfer of knowledge between the two players.

What can India learn from other countries?

China:

• China is currently one of the dominant players in the global economy and its growth is mainly because of its manufacturing sector.
• China’s manufacturing sector contributes more than a quarter of the global manufacturing GDP.
• China’s comprehensive economic planning, high investments in infrastructure growth, incentives and subsidies, progressive decentralisation and market-oriented reforms led to its manufacturing revolution.
• Currently, the Chinese government, through its Made in China 2025 strategic plan, is incentivising the Chinese companies to improve their factories’ quality, productivity and digitisation.

South Korea:

• South Korea has become a high-tech manufacturing country by giving higher emphasis on the purchase of technology and subsidies on R&D investments made by the public and private players.
• Tax incentives for R&D are provided at every stage.
• Thus, increased investment in research and development led to it gaining a competitive edge in technology and design.

Conclusion:

India’s manufacturing sector needs up-gradation and reforms for becoming globally competitive. Absence of effective, flexible and targeted policy support along with supportive measures like the development of infrastructure and education would mean the stagnation of the sector. The government needs to address the core problems for the landmark initiatives like Make in India and Skill India to work and manufacturing sector to grow.

Test yourself:

Critically analyse the potential of India’s manufacturing sector. What should the government do to harness it? (250 Words)