Recently Government data has revealed that factory output shrunk by 4% in September 2019, standing at the lowest in last 7 years. Data released by the National Statistical Office (NSO) highlighted that the Indian manufacturing sector’s current contribution to The Index of Industrial Production (IIP) to be lowest in the last five years.
Undoubtedly, this sharp decline in the performance of the country’s manufacturing sector will adversely affect the country’s economy further.
Manufacturing Sector: The Saviour
India has taken initiatives like Make in India, GST, drafting National Policy on Electronics, increasing export incentives, launching phased manufacturing programme (PMP), Modified Special Incentive Package Scheme, and planning a new industrial policy have increased the FDI inflow within the country, giving hope of transforming the manufacturing sector to become $1 trillion industry by 2025.
Building domestic manufacturing scale can beef up the industrial sector, leading to technological up-gradation, growth in skill development, resulting into an increase of manufacturing capacity, reduction of import expenses, better position in the export market, higher revenue generation, and as a result economic growth.
Unfortunately, the share of India’s manufacturing sector in the GDP has remained nominal (16-17%) since 1990. While countries like China (~40%), South Korea (29%), and Thailand (27%) have given their manufacturing sector the advantage that eventually has helped their country to progress. This must represent a clear understanding of how focusing on manufacturing industries can support sustainable economic growth.
However, in order to increase production rate, make India made products competitive, and match the progress with developed countries, more focus is needed in solving delays in policy development and enforcement, bureaucratic hurdles.
India is home to a huge (~600 million) working-age population, and its labour cost is much lower than many emerging economies. Therefore, the country can create a formidable workforce and do wonders if it were to focus on building manufacturing scale and skill development. What our country desperately needs is the fundamental structural reforms, focusing on flexibility of land and labour laws and simplifying Government bureaucracy and making the financial system less dependent upon state-run banks.
With required initiatives implemented, India can battle cyclical economic headwinds and boost its current GDP from US $ 2.9 tr to the US $ 10.4 tr by 2034. Just like China, which was behind India in per capita GDP around 1980 (India’s per capita GDP- US $354, China’s per capita GDP- US $339), but became a global manufacturing hub and the world’s largest exporter by focusing on its manufacturing scale building. Now China’s nominal GDP at the current prices is at $14.2 trillion, and India’s nominal GDP at the current prices is only $2.972 trillion.
The Way Forward
Government of India needs to focus on increasing investments towards manufacturing (there is a 1.2% decline in private investment in FY 18-19). Supporting exports through favourable policy implementation and supporting manufacturing units to build scale can bring forth private investment that India desperately needs.
Focusing on increasing consumption levels is also important. Government spending will definitely increase people’s income as a trickle down effect. It will allow people to spend more, creating market demand and reviving production rate.
There needs to be better financing solutions for manufacturing sectors. Reforming banks is also a necessity. PSBs are showing hesitance over lending due to their huge burden of bad loans (INR 8.64 trillion). NBFCs are also facing challenges as they borrow short term to lend long term, creating a mismatch. Better governance should be implemented with the recapitalization of PSBs. And for NBFCs, the Government should work towards restoring confidence among NBFCs facing a liquidity crunch.
Skill development and job creation are also extremely important to boost India’s production rate and the economy. For that to happen India needs to invest in domestic manufacturing as it promises to create jobs (100 million new jobs by 2025). Also, identifying promising sectors like Solar can help India create a huge number of (2 lakh jobs by 2022) jobs to facilitate economic growth.
Indian Government has supported several manufacturing industries and among many- solar, steel, fertilizer, cement, refinery products and the energy industry have shown considerable progress. However, it is important for the Government of India to now prioritize industries that present the most lucrative opportunities for the country, and have the potential to shoulder overall growth. Fortunately, we are now standing at the beginning of the green energy revolution. And since energy and economy are inter-related, this presents ‘the’ greatest opportunity India ever had to turn around its industrial, economic and social scenario through focusing on solar manufacturing.
The way forward is clearly visible. All that is remaining is to take action towards bringing expected results into life. Government of India’s intent to nurture growth is clearly visible but aggressive modifications in policies and new initiatives are immediately needed to increase the production percentage and build an industrious, progressive India.