At the Root of India's Manufacturing Challenge

Table of Contents

Root of India’s Manufacturing Challenge Background

What is the Manufacturing Sector?

Manufacturing is the process of turning raw materials or parts into finished goods through the use of tools, human labour, machinery, and chemical processing.
The manufacturing sector is part of the goods-producing industries supersector group.
Among the most important manufacturing industries are those that produce aircraft, automobiles, chemicals, clothing, computers, consumer electronics, electrical equipment, furniture, heavy machinery, refined petroleum products, ships, and steel etc.

India’s Manufacturing Sector at a Glance:

Economic contribution: Currently, manufacturing accounts for about 15 percent of the country’s GDP.
Global share: India is the sixth-largest manufacturing economy in the world and contributes 3.1% to the world GDP.
Employment: Manufacturing sector in India employs about 12% of the total labour force. Overall, more than 30 million people are employed in the sector (organised and unorganised).
Capacity utilisation: In the second quarter of FY22, capacity utilisation in India’s manufacturing sector stood at 72.0%, indicating significant recovery in the sector.
- It is measured by the Reserve Bank of India (RBI). It indicates not only the production levels of companies but also the potential for future investment.
Share in exports: Manufactured goods consists of almost 65% of Indian merchandise exports or around 43% of total exports. Manufacturing exports saw a CAGR of more than 15 per cent to touch $418 billion in fiscal year 2021-22.
FDI Share: 35% of all FDI inflow. India is rapidly emerging as a preferred country for foreign investments in the manufacturing sector.

Decoding the Editorial

The article is discussing the impact of the economic reforms implemented in India in 1991, which primarily focused on the manufacturing sector.

Economic Reforms 1991:
- The reforms brought significant reductions in tariffs and the removal of bureaucratic barriers but did not result in a substantial increase in the share of manufacturing in the overall economy.
- However, there has been a qualitative change in the sector since 1991, with an impressive increase in the range and quality of products manufactured in the country.
- The rising quality and variety of goods being produced without a proportional growth in the manufacturing sector’s share of the economy may indicate a concentration of wealth and income among a smaller segment of the population.
Gaps in Development of Manufacturing Sector:
- There has been a significant gap in attention to the manufacturing sector in India following the economic reforms of 1991.
- The government’s focus on manufacturing reemerged in 2014 with the launch of the “Make in India” initiative, which emphasised attracting foreign direct investment (FDI).
- Additionally, the more recent Production-Linked Incentive (PLI) scheme was introduced to subsidise production in specific sectors.
- However, despite the initial enthusiasm and high-profile announcements, the performance and outcomes of these initiatives have been underwhelming or disappointing.
Low Manufacturing Growth and Structural Issues:
- According to the first advance estimates of the national income for the fiscal year 2022-23 in India, the manufacturing sector has recorded a growth rate of 1.3% which is lower than the growth rates observed in agriculture and various segments of the services sector.
- The data provide clear evidence of the impact of the demonetization policy implemented in 2016, which contributed to the slowdown of the manufacturing sector. Demonetization refers to the government’s decision to invalidate certain currency notes as a measure to combat corruption and black money.
- Despite the implementation of policy initiatives specifically targeting the manufacturing sector, it continues to experience consistently low growth rates in India. This implies that there are underlying structural issues or factors hindering its growth and development.
The Demand Side Problem:
- The article reads that while the government has taken measures to improve the supply side of the manufacturing sector, it is equally important to address the demand side.
- The focus on improving infrastructure, policy initiatives, and lowering taxes has primarily targeted enhancing the supply capacity and competitiveness of the manufacturing sector.
- The article emphasises that household demand for manufactured goods is closely tied to the satisfaction of basic needs such as food, housing, health, and education, which cannot be postponed.
- In India, a significant portion of household expenditure is allocated to food, which constrains the growth of demand for manufactured goods.
- It is mentioned that there is a strong negative relationship globally between per capita income and the share of food in household expenditure. Wealthier countries like the United States and Singapore have lower shares of expenditure on food.
- In contrast, India has a relatively higher share of food expenditure and a lower GDP per capita. This indicates that the demand for manufactured goods may be limited by the large share of expenditure dedicated to food in India.
- Therefore, focus should be on stimulating demand by involving measures to improve income levels, enhance access to basic necessities, and promote economic stability and social welfare.
The Export solution:
- While industry leaders have no direct control over the demand side of the equation, the possibility of exporting can help the manufacturing sector overcome limitations of the domestic market.
- Comparisons with East Asian economies show that successful exporting requires infrastructure and a skilled workforce. Infrastructure affects production costs, while the skill level of the workforce determines the type of products a country can produce.
- The article also highlights challenges faced by Indian exporters, particularly in the northern regions, in reaching seaports due to inadequate infrastructure and practices. India’s ports have longer turnaround times compared to ports in countries like Singapore.
- Additionally, factors like inexpensive power, available space, and proper industrial waste disposal services are important considerations for competitiveness in the manufacturing sector.
Problems in the Education system:
- The article highlights the significant challenge India faces in the education sector, particularly in comparison to the countries that have succeeded in manufacturing.
- It mentions that India’s performance in international assessments like the Programme for International Student Assessment (PISA) ranks comparatively low among around 75 countries, while the countries of East Asia excel in these assessments.
- Also the leading Indian employers have expressed concerns about the lack of employability of university graduates, even from prestigious institutions like the Indian Institute of Technology.
- While India’s universities have expanded to cater to the aspirations of the middle class, there has been a neglect of vocational training institutes and the development of skills necessary for various skilled trades such as carpentry, plumbing, and mechanics.
- Also, the former Planning Commission data showed that only about 5% of Indian youth had received any form of technical training, in contrast to South Korea’s figure of over 85%. This highlights the stark difference in the preparedness of the labour force for manufacturing-related jobs between India and countries like South Korea.
- This lack of adequate skills and education among the labour force poses a challenge for India to make a mark on the global stage for manufacturing. Addressing these education and skill gaps becomes crucial for the long-term success and competitiveness of India’s manufacturing sector.

Beyond the Editorial

What is the Services Sector?

Also known as the tertiary sector, is the third tier in the three-sector economy.
The service sector is the largest sector of the global economy in terms of value-added and is especially important in more advanced economies.
India’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction.

India’s Services Sector at a glance

Economic contribution: Services sector in India continues to outperform agriculture and industrial sector growth, contributing around 55% of GDP.
Global share: India is among the top 10 service exporter countries in 2020 having a 4.1% share in world commercial service exports.
Employment: Services sector in India employs about 25% of the total labour force.
Share of exports: Service exports contribute to around 40% of total exports. Computer, business and transportation services constitute more than 80 per cent of total services exports.
FDI share: Services sector is the largest recipient of FDI inflows in India, accounting for almost 54 per cent of the total FDI inflows into India.

The debate of manufacturing v/s services in India

Arguments in favour of manufacturing sector

High employment potential: Manufacturing can create a high number of direct and indirect jobs, while the growth of employment in agriculture is slow and declining, manufacturing offers the best opportunity for the workforce to shift away from agriculture.
Availability of workforce: Manufacturing sector in India has the potential to become the engine of growth as it tries to incorporate the huge available workforce in India, most of whom are semi-skilled.
Rural development: The sector will push growth in the rural areas where more than 5 million manufacturing establishments are running already. This will be an alternative available to the new generation of farmers.
Growth potential: Recently, India emerged as the world’s second-most attractive manufacturing hub. The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025.
Competitive advantage: Increasing share of young working population (demographic dividend) and there has been immense policy support through initiatives such as Make in India, Production Linked Initiative (PLI) scheme and Skill India Initiative etc.
Problems with the service-led growth:
- Skewed employment generation: Though the services sector’s contribution is over 55% of GDP, it has not been able to create enough jobs in a commensurate manner.
- External dependence: Our growth in the services sector is mainly linked with the export of skill-based services, which are dependent upon external demand, thus unsustainable in the long-run.
- Non-uniformity: Growth pattern in the services sector has not been uniform across all services in India. For example, software and telecommunication services have grown much rapidly, while education and health services have witnessed slow pace.
- Limited potential: The service has limited potential to export or achieve economies of scale, and thus unable to benefit from expanding global trade
Spillover effect: Manufacturing sector has high forward and backward linkages and has a positive spillover effect on services growth. Therefore, targeted policy attention to manufacturing is necessary.

Arguments in favour of services sector

Attractive ecosystem: Government initiatives such as ‘Digital India’, ‘Startup India’, fast growing technology infrastructure and well developed financial market make the Indian services sector an attractive ecosystem for both the entrepreneurs and the investors.
Digital talent: India is the digital capabilities hub of the world with the presence of 75% of global digital talent.
Competitive advantage: Large pool of skilled manpower, especially in the areas of IT & BPM available at a relatively low cost and a rapidly increasing youth population looking to migrate from agriculture to other sectors.
Niche features of the sector: Features of the services sector such as low setup costs, no requirement of inventory logistics, flexible working hours and great adaptability to changes makes the sector an attractive investment destination.

Economic Survey 2014-15’s take on the manufacturing v/s services debate

By quoting several empirical studies on things such as potential to create employment, need of skilled and unskilled labour force, formality and informality of the sector, etc. the survey ruled in favour of the manufacturing sector.