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Pulling manufacturing out of the rut

Arun Maira
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It is the only sector that can create jobs and prevent the economic crisis from deepening

In the last two decades, the Indian economy has witnessed a transformational change to emerge as one of the fastest growing economies in the world. Economic reforms unveiled in 1991 have brought about a structural shift enabling the private sector to assume a much larger role in the economy. GDP growth has largely been enabled by growth of the services sector. The worry is that India’s manufacturing sector has stagnated at about 16 per cent of GDP, with India’s share in global manufacturing at only 1.8 per cent. This is in stark contrast to the experience of other Asian nations at similar stages of economic development, particularly China where manufacturing constitutes 34 per cent of GDP and 13.7 per cent of world manufacturing — up from 2.9 per cent in 1991.

Socio-political consequences

The Institute of Applied Manpower Research estimates that 8 to 9 million additional young persons will join the labour force annually, between 2012 and 2022. Additionally, with productivity improvement jobs in agriculture are declining. Therefore, India must create over 200 million jobs outside agriculture by 2025. A large burden of this job creation must fall on the manufacturing sector which has so far been a laggard. Failure to create the jobs required will have serious socio-political consequences.

Besides the employment imperative, growth of the manufacturing sector is also critical for ensuring that India’s trade balance is corrected. The country has been happily importing large volumes of manufactured goods as its economy has grown, which has pleased citizens no doubt. But it has not been able to develop a large, competitive manufacturing base to dampen the need for imports and to export.

There are two broad failures in India’s development since the 1990s which explain why India’s manufacturing sector has languished while high-end information services have grown. The first is the glaring failure to develop power and transportation infrastructure commensurate with the needs of the economy. IT industries are far less dependent on this infrastructure for their operations than are manufacturing units. The second is the absence of an industrial policy, an idea that Indian economists and policymakers threw out of the window when they dismantled the stifling controls of DGTD (Director General of Trade and Development) on industry and lowered duties on imports in 1991. Both these were welcome steps. But the baby was also thrown out with the bathwater. For the last 20 years, even the mention of the need for a concerted industrial policy for India has been taboo.

The National Manufacturing Policy which was introduced in 2011 is a belated departure from the policy neglect of earlier years. It must address the challenges of rapid job creation and expansion of domestic production. It has ambitious goals. These are to create 100 million additional jobs in manufacturing by 2025 by accelerating the growth of manufacturing to exceed the overall growth of the economy by an additional 2 per cent to 4 per cent annually. Thereby the share of manufacturing in the overall growth of the economy will also increase from 16 per cent, where it has been stagnant, to 25 per cent.

Two points must be made here while mentioning these goals. The first is that the summation of the bottom up plans made by the producers and policymakers associated with the various manufacturing sectors results in the same numbers. Therefore they can be achieved. The second point is that these plans were made when the forecast of growth of the economy was 8 per cent in the 12th Plan and faster growth thereafter. The 2 per cent to 4 per cent growth is over and above the base level growth. If the base falls due to other macro-economic problems and policy log-jams, which has happened, the growth of the manufacturing sector will be lower and it will not meet its employment targets. However the need to create jobs will not reduce. Young people will continue to pour out of schools and colleges and many with better skills too. They will be very disappointed if they do not get jobs.

New Manufacturing Policy

It is imperative that three sets of actions are taken simultaneously to prevent a socio-political crisis. One is the stimulation of overall economic growth which the new Governor of the Reserve Bank, the Finance Minister, and the Prime Minister are focussed on. The second is the sorting out of the multiple policy and implementation problems besetting India’s power and transport infrastructure that are now receiving high level attention in the PMO and the Cabinet. The third is the implementation of plans to convert the New Manufacturing Policy to results.

The implementation plan to convert India’s Manufacturing Policy to results has been drawn up by 26 working groups: 16 working on specific industries’ plans, and 10 working on cross-cutting issues that affect all industries, such as the business regulatory environment and human resource and labour issues. Steered by a systematic process, the plans of these working groups converged on five major strategic thrusts to grow Indian manufacturing.

1. Improving the business regulatory framework

2. Human asset development

3. Improving technology and value addition in manufacturing

4. Developing effective clusters for growth of SMEs (small and medium enterprises)

5. National Investment and Manufacturing Zones (NIMZs)

Effective strategies for boosting the manufacturing sector and employment growth must satisfy three important criteria:

i. Immediate impact on growth of employment: effectiveness in creating jobs without prolonged gestation periods is an important criterion in determining which strategies should be given the most attention now.

ii. Countrywide applicability: This will ensure livelihood opportunities are provided to people all across the country, not just in select industrial pockets.

iii. Growth of the MSME (micro small and medium enterprises) sector: This sector has emerged as a vital sector of the Indian economy. It not only plays a crucial role in providing large employment opportunities at a comparatively lower capital cost, it also contributes substantially to manufacturing output. It is estimated that the MSME sector contributes about 45 per cent of manufacturing output and 40 per cent of total exports of the country.

The NIMZ strategy in the National Manufacturing Policy has captured the imagination of the country. This is a big, audacious strategy and will no doubt have a substantial impact on India’s manufacturing when these zones are up and running. They require acquisition of large pieces of land and the building of modern infrastructure. The large urban-industrial estates along the Delhi-Mumbai Industrial Corridor (DMIC), approved in 2007, are fore-runners of the NIMZs. The first DMIC zones are expected to be ready in 2019. The first NIMZs are likely to be ready even later.

Accelerate action

Since we must stimulate manufacturing growth much faster and across the country too, we must turn to the other four strategies listed above. Not only can these be implemented immediately; they require hardly any money to implement which is a great advantage when the Finance Minister is constrained to squeeze plan funds to reduce the fiscal deficit. Action on these four strategies has begun, but it must be accelerated. To put more force behind these strategies, the following actions are required.

1. Communicate the essentials of the Manufacturing Plan widely to politicians, policymakers, the public, and to industry associations. (Sadly, even many industry leaders think the National Manufacturing Policy is only about NIMZs!)

2. Focus action in the States. Eighty per cent of the action for improving the business regulatory environment, human asset management practices, and quality of clusters is in the States. States must be alerted to what they can do, the benefits of which will be more investment in the States and more jobs.

3. At the Centre, resolve inter-ministerial issues fast to facilitate induction of technology and increase value addition in several sectors, including electronics, defence and capital goods.

(Arun Maira is Member, Planning Commission)

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