The manufacturing sector in India is facing a crisis due to the absence of a concrete policy in favour of states which have not picked up the pace of growth of states such as Maharashtra, Gujarat, Tamil Nadu and Karnataka. The recent manufacturing policy of the central government does not address the issues of states like Bihar. On September 30, the Bihar government is expected to discuss the challenges of the manufacturing sector in the state with industry representatives.
The manufacturing sector can create jobs and prevent the economic crisis from deepening.
In the last four decades, many emerging countries and states within India adopted a development strategy that focused primarily on promoting the manufacturing sector. As a result, countries such as China, Taiwan and South Korea succeeded along with states within India like Maharashtra, Gujarat, Tamil Nadu and Karnataka in accelerating growth and employment in this sector.
After Independence, as a reaction to the colonial past, India’s development strategy focused on self-reliance — development of heavy industries in the public sector. The first bout of industrial policy reform was initiated in the 80s and the second bout in 1990-91 as a pro-business reform and pro-market reform respectively in response to the declining share in the manufacturing sector which suffered from high cost of production, substandard quality of products and lack of competitiveness of its export.
The economic reforms of 1991 brought about a structural shift enabling the private sector to assume a much larger role in economy. GDP growth has largely been enabled by the service sector growth. Manufacturing stagnated at an average 15 per cent of the GDP compared to other countries in Asia which registered between 30 per cent and 40 per cent of GDP. India’s share in world manufacturing is only 1.8 per cent. The transformation of the agrarian economy in India directly to one dominated by services, bypassing manufacturing, has been a matter of great concern for policy-makers.
Manufacturing enterprises are operating in the country in a large variety of sectors — they are competing with one another and with enterprises abroad.
The first category is the sector of strategic alliance like industries in defence equipment, capital goods and ship building — essential for the country to develop domestically for security measures and self-reliance. The second category is for basic inputs like steel, cement, fertilisers, exploration and development of minerals, and these depend on availability of high quality raw material. This sector is in a position where a sustained effort can put India in the forefront in the coming years.
The third category sector for depth and value addition are knowledge and technology-based industries with high growth potential. This comprises automobiles, drug, pharmaceutical, petrochemical, electronics, chemical, paper and medical equipment. India has developed good technological capabilities in this sector and can become among the top five countries in this sector.
The fourth category sector is for employment generation like textile, food processing, leather, gems and jewellery. The maximum growth in employment will come from this sector due to its labour intensive character.
India’s central and state governments must eliminate five barriers that slow down the efforts of the country’s manufacturers to improve their capital and labour productivity.
Product market and ownership barriers
More than half of India’s employees in the organised sector (regulated by labour laws for hiring and firing) still work in government-owned institutions — for example, in the base metals, petroleum, and power generation industries. Product market barriers and government ownership tend to lower productivity and distort markets significantly
Yet, receding levels of government ownership have dramatically improved the productivity of labour and capital in other parts of the economy. India’s automotive sector, for example, was among the first to be liberalised, in the early 1990s, and the entry of multinational and domestic players sparked a competitive transformation. Subsequently, between 1995 and 2005, the automotive sector’s GDP per manufacturing employee grew by a factor of 15. Today, India produces nearly three million small cars a year, of which about one-quarter are exported. Yet for a majority of sectors, greater private and multinational participation in India can help unlock productivity structurally.
Land market problems
Distortions in the land market (including high stamp duties and cumbersome regulations) are a huge barrier to productivity improvements in India.
Currently Indian industry utilises only 3 per cent of land in India, however there are some critical issues that pose challenges to obtaining land for industrial development which include small land holding, inaccurate outdated land records and restrictions of land use.
The land acquisition bill is another blow to the manufacturing sector’s attempts to grow and contribute in employment generation, with more than 30 million unemployed.
Stringent labour laws make it difficult for Indian companies to restructure and, thus, to increase their productivity and expand output.
Firing under-performing workers is difficult in India, and this ongoing problem translates into high levels of unproductive labour at many companies there.
India’s government should consider liberalising its labour laws by encouraging re-skilling programmes that could help workers become more productive and prepare them for new jobs. Encouragingly, India’s National Skill Development Corporation (NSDC) is experimenting with ways to use public–private partnership to strengthen vocational training.
Coupled with sensible labour laws, such moves could quickly begin to make a difference.
Urgent attention is needed to create more railway lines, roads, ports, and power-generating capacity across India. Poor infrastructure saps industrial productivity and leaves the country at a huge disadvantage compared with others.
GST, environment clearances, cost of money, investment in research and development are the key barriers in improving productivity. The implementation of GST will add approximately 3 per cent growth in the manufacturing sector.
The manufacturing sector has not developed uniformly across India. Some states have achieved a high level of industrialisation whereas others are lagging far behind. According to a CSO report of contribution to industrial sector (GSDP, 2010-11), Gujarat’s share was 41.3 per cent while Bihar’s was 16.1 per cent.
In Bihar, of the total industrial sector output, the manufacturing sector of GSDP at constant prices (2004-05) declined from 5.8 per cent between 2002-05 to 5.2 per cent between 2009-12 (as per the economic survey of the Bihar government, 2012-13).
According to an annual survey of industries 2009-10, Bihar contributes only 1.21 per cent in terms of number of factories with fixed capital of 0.33 per cent on a national scale.
The new manufacturing policy (NMP) with national manufacturing investment zone (NMIZ) as a major component is targeted at reducing regional disparity with incentive on a par with special economic zones. It also proposes added incentives like exemption in capital gains tax and other targets to achieve 25 per cent share of Gross Domestic Product (GDP) growth from manufacturing by 2022 and is expected to create 100 million additional jobs.
The new manufacturing policy broadly addresses issues pertaining to flexibility in labour rules, reducing the burden of compliance by simplifying business regulations, providing faster clearances by proposing a single-window system, simpler and expeditious exit mechanisms for closure of units while protecting the interests of labour. The policy also aims at capturing benefits arising out of clustering manufacturing activities by proposing national investment and manufacturing zones.
These zones will be spread over 5,000 hectares each with world class infrastructure and clean technologies and skill centres. They will have production units, public utilities, logistics, environmental protection mechanisms, residential areas and administrative services. As it stands, investors in the different sectors stand to benefit with every aspect of production and service being represented in these regions. The central government has already approved more than 15 NMIZs in western and southern states facilitating their lead in the field of manufacturing sector.
After the approval of the Delhi-Mumbai industrial corridor, the IMG approved the Amritsar-Delhi-Calcutta industrial corridor. This will cover the states of Punjab, Haryana, Uttar Pradesh, Uttarakhand, Bihar, Jharkhand and West Bengal. This is one of the most densely populated regions in the world and houses about 40 per cent of India's population.
The key to success will be policy implementation, but there are several challenges. Firstly, contiguous land required for setting up NIMZ will not be available due to the size of the requirement. Moreover, acquiring land of this scale will be a major challenge in India, especially in states such as Bihar, Bengal and Odisha. Limitation to acquire newer land parcels for industrial development has pushed up the cost of industrial land.
A more appropriate approach would be to focus on creating opportunity for incremental growth in such existing clusters or brownfield regions, identifying existing clusters (even though they will be non-contiguous) and extending benefits of NIMZ to these regions. Interventions in the brownfield regions will have far-reaching consequences in terms of growth and employment creation and, thus, will lead to overall development of the region.
Poor implementation due to inadequate consensus among stakeholders for policy changes and poor coordination among agencies in execution is the root cause of India’s poor performance in manufacturing. The state governments have a crucial role to play since the actual activity of manufacturing takes place in the state and the state political leadership with their political ideology cannot be divorced from economic philosophy and social outlook.