Relevance: GS-3: Indian Economy, mobilization of resources.

Key phrases: National Manufacturing Policy 2011, Make in India, Industry, Low Growth Trap, Subdued Investment, Chinese Import menace, Lower savings and investment, Gross Capital Formation, Demonetisation, Self-Regulation/Self-Discipline.

Why in News?

• Stunted capital formation, steady rise in Chinese imports and disruption in trade credit have hurt India’s industrial sector.

Context:

• Manufacturing works as a growth-engine when its growth is higher than GDP growth for example China. During the last 30 years, its high manufacturing growth drove a big jump in per capita income — five times more than India’s.
• India has undertaken a host of policy initiatives and reforms, besides fiscal and business-friendly measures for accelerating manufacturing growth. These include
  • National Manufacturing Policy 2011 (NMP)
  • Make in India (2014)
  • Startup India (2015)
  • Atmanirbhar Bharat Abhiyan
  • Production Linked Incentive Scheme (2020)
  • Concessional corporate tax
  • GST.
• The NMP and Make in India envisaged annual manufacturing growth of 12-14 per cent and its share in GDP rising from 16 per cent to 25 per cent by 2022. However, the growth in manufacturing IIP index was far below GDP growth during FY 2012-20. Its share in GDP declined to 13 per cent and share in exports declined from 80 per cent to 60 per cent. Persistently, the manufacturing growth and investment remain subpar relative to their potential.

Why is the industry in a low growth trap?

• Subdued Investment: The RBI’s Report on Currency and Finance highlights the declining share of electronics, computers and traditional labour-intensive industries like textiles in aggregate capex.
• The decline in invested capital in the case of top-listed companies in capital goods, textiles and food industries over FY 2016-19 is pronounced (see chart).
• All these developments go against the various credible policy reforms and pro-growth measures taken over the years to accelerate the sector’s growth.
• Chinese Import menace: Unequal and unhealthy competition from massive mis-invoiced/covert Chinese imports has destroyed Indian manufacturing: Surprisingly, this reality is grossly overlooked. Further, the information opacity relating to price, quantity and quality of these covert imports make a project’ risk assessment difficult. These imports encourage trading and assembling business at the cost of manufacturing investment.

• China’s predatory approach to trade as seen in dumping, currency manipulation, intellectual property theft, production of counterfeits of global and local brands, wide-range of export incentives and mis-invoicing. Economies of scale and cheap imports create colossal damage and entry barriers for Indian manufacturing.
• Lower savings and investment: Surge in trade deficit driven by import-intensive consumption leads to lower savings and investment (as percentage of GDP). Savings declined (35 per cent to 28 per cent) and gross capital formation (from 34 per cent to 28 per cent) over FY 2012-22.
• Following demonetisation and Covid waves, disruptions in trade credit (TC) or inter-firm credit and its repayment flows aggravated the manufacturing sector’s woes and contributed to the structural imbalances like excessive system liquidity, low credit demand and surge in corporate liquidity holdback.
• Other reasons include industrial sickness, generation of black money, underdevelopment of skill/technology, growing unemployment and loss of tax revenue.

Why India needs to focus on Manufacturing?

• The country needs to increase its focus on the overall manufacturing sector in view of the impact of the pandemic on its services-dominated economy.
• The services sector comprises high-contact jobs in sectors such as aviation, hospitality, entertainment and tourism - all of these sectors were the first to collapse when the government announced a nationwide lockdown in 2020 to contain the pandemic.
• Months of a stringent lockdown resulted in crores of job losses and some businesses were forced to shut operations. The rapid decline of the sector, which accounts for roughly 54 per cent of the country’s GDP, has rendered millions jobless.
• In the absence of a strong manufacturing sector, a sizeable number of affected citizens are still struggling to find jobs, even as India’s economy rebounds after tackling three deadly waves of the pandemic. Some who had joined the growing services sector were forced to go back to farming activities as the pandemic snatched their jobs.
• Jobs are not the only reason why India needs to focus on boosting the manufacturing sector. Focusing on boosting the sector is also important for the country’s future growth potential, which could face stagnation if it continues to depend on agriculture and exports besides services.

Way forward:

• The government should introduce targeted policies aimed at encouraging domestic manufacturing as part of its goal to make the country self-reliant.
• We need to take well-calibrated action against covert imports without creating sudden and large disruptions in the production structure. Make in India strategy needs to be synchronised with planned phasing out of these imports and spurring domestic capex and capacity. Random, surprise and thorough checks of illicit imports at the ports need to be intensified. More international cooperation is required to curb hawala dealings.
• The government has already introduced several measures to boost domestic manufacturing under its ‘Atmnanirbhar Bharat’ mission. Some plans include offering subsidies to manufacturers and simplifying tax rules to encourage global investors to come to India.
• While it may take years before India can establish itself as a global manufacturing hub, now seems the perfect time to lay the foundation as countless global firms look to invest in the country.

Source: The Hindu BL

Mains Question:

Q. What are the reasons behind the low growth of manufacturing/industry sector in India? Examine.