Magnets for manufacturing

Devising State-specific industrialisation strategies in coordination with the Centre will improve manufacturing

Updated - August 26, 2020 01:00 am IST

Published - August 26, 2020 12:15 am IST

The country’s manufacturing sector activity recorded another sharp deterioration in business conditions during May, 2020, according to a monthly survey.

The country’s manufacturing sector activity recorded another sharp deterioration in business conditions during May, 2020, according to a monthly survey.

Many think that in the aftermath of the pandemic , several manufacturing companies operating from China will relocate their businesses to other destinations, including India. Many American, Japanese, and South Korean companies based in China have initiated discussions with the Indian government to relocate their plants to India. Companies are expected to exit China due to three primary reasons. The first is the realisation that relying heavily on China for building capacities and sourcing manufacturing goods is not an ideal business strategy due to supply chain disruptions in the country caused by COVID-19. The second is the fear of Chinese dominance over the supply of essential industrial goods. The third is the growing risk and uncertainty involved in operating from or dealing with China in the light of geopolitical and trade conflicts between China and other countries, particularly the U.S. Prime Minister Narendra Modi’s emphasis on using the COVID-19 crisis as an opportunity to pursue the goal of a self-reliant India must be viewed against this background. Can India succeed in attracting manufacturing firms and jobs from China?

India’s position

India lags far behind China in manufacturing prowess. China ranks first in contribution to world manufacturing output, while India ranks sixth. Against India’s target of pulling up the share of manufacturing in Gross Domestic Product (GDP) to 25% by 2022, its share stood at 15% in 2018, only half of China’s figure. Industry value added grew at an average annual rate of 10.68% since China opened up its economy in 1978. In contrast, against the target of 12%, the manufacturing sector has grown at 7% after India opened up its economy. Next to the European Union, China was the largest exporter of manufactured goods in 2018, with an 18% world share. India is not part of the top 10 exporters who accounted for 83% of world manufacturing exports in 2018.

Comment | How India can become self-reliant

This contrasting trend is not surprising because compared to China, India faces numerous constraints in promoting the manufacturing sector. They chiefly include infrastructure constraints, a disadvantageous tax policy environment, a non-conducive regulatory environment, high cost of industrial credit, poor quality of the workforce, rigid labour laws, restrictive trade policies, low R&D expenditure, delays and constraints in land acquisition, and the inability to attract large-scale foreign direct investment into the manufacturing sector. Unless these challenges are addressed, the dream of making India a manufacturing powerhouse rivalling China would be difficult to realise.

Role of states

Since India follows a federal government system, a lasting solution to these constraints cannot be possible without the active participation of State governments and effective policy coordination between the Centre and the States. Currently, manufacturing growth in India has been powered majorly by Maharashtra, Gujarat, Tamil Nadu, Karnataka and Uttar Pradesh. An important requirement for the development of the manufacturing sector is the availability of land area. This could be one of the reasons why manufacturing activity is mainly concentrated in these five States which cover a substantial portion of India’s geographical area. However, what is of concern is that some States that also have large land area contribute disproportionately little in manufacturing GSDP. These include Andhra Pradesh, Bihar, Chhattisgarh, Madhya Pradesh, Odisha, Rajasthan, Telangana, and West Bengal. The reasons for less manufacturing activity in these States have to be carefully examined, and based on this, State-specific industrialisation strategies need to be devised and implemented in a mission mode with active hand-holding by the Central government. Strong and carefully designed policy actions on the part of individual States would improve India’s overall investment climate, thereby boosting investments, jobs, and economic growth. In addition to its initiatives aimed at attracting manufacturing companies looking to relocate their plants to India from China, the Centre has urged the States to evolve their plans. However, such a strategy would be more effective if the policy actions of the Centre and the States are well coordinated.

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In this context, a suggestion put forth by Union Minister Ravi Shankar Prasad is worth attempting. To promote electronic manufacturing, he suggested forming a Strategy Group consisting of representatives from the Central and State governments along with top industry executives. The purpose is to instil teamwork and leverage ideas through sharing the best practices of the Centre and States. A similar approach is needed for developing the whole manufacturing sector.

Sthanu R Nair teaches Economics and Public Policy at IIM-Kozhikode. Views are personal

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