Manufacturing Productivity in India

Why in news?

The growth rate of manufacturing productivity in India is in negative trend which got accelerated during COVID-19.

What is the significance of manufacturing sector?

• Agriculture contributes only about 20% of India’s Gross Value Added but still employs close to 55% of India’s workforce.
• The fact that agriculture is not as remunerative is made worse by the fact in India there are just too many people dependent on agriculture (disguised unemployment).
• The better solution is to pull people out of farms and get them employed in other sectors such as manufacturing which requires fewer soft skills.
• Having more people in manufacturing will make India the preferred factory of the world and will pull millions out of poverty.
• The Indian government hopes to have 25% of the economy’s output come from manufacturing by 2025.

What is the status of manufacturing sector?

India is the 3rd most sought-after manufacturing destination in the world and has the potential to export goods worth US$ 1 trillion by 2030.

• Contribution to GDP - Manufacturing sector contributes to 17% of GDP and employs 20% of the workforce in the country.
• Most of India’s GDP now comes from the services sector while millions continue to languish in the agriculture sector.
• The share of manufacturing both in India’s GDP or overall employment has largely stayed stagnant.
• Employment - The data from CMIE shows that employment in India’s manufacturing sector has fallen from over 51 million in 2016 to less 36 million in 2023, a fall of over 30%.
• Productivity growth - The growth rate of productivity fluctuated between 10 to 15 % in the 1990s and 2000s and began to stagnate after 2015.
• This negative trend accelerated into the several years preceding the pandemic.
• Regional disparity- Western and Central Indian states tend to have the highest average productivity in manufacturing, while the Southern and Eastern states have the lowest.
• This is in contrast to the GDP per capita ranking of states, in which Southern states tend to have higher incomes than their Western and Central counterparts.
• Investment in workers - Data shows that investing in workers (either as higher salary or better benefits) pays rich dividends for firms.

What are the reasons for low manufacturing growth productivity?

• Premature deindustrialisation - At a macro-manufacturing level, India experienced premature deindustrialisation.
• It observed a sudden fall in its manufacturing-GDP ratio before achieving an optimal rate of development resulting in a sub-optimal manufacturing scenario and a fragmented labour market.
• Jobless growth- It is an economic which refers to a situation where economic growth does not lead to job creation, but is due to quantum jump in service sector with minimal growth in manufacturing sector.
• Unskilled labour- The majority of the workers in India lack the proper skills to work in the manufacturing industry. Only 10% of the Indian workforce falls into formal economy.
• Lack of investment- Manufacturing sector is capital intensive industry, lack of entrepreneurial spirit and low investment leads to low growth rate.
• Low production capacity- In India, MSMEs contribute around 29% of GDP, but having large number of small enterprises lead to increase in the cost of production.
• Trade deficit- It is due to cheap imports and high import duty on raw materials which hikes the production cost.
• Further, exports is less than imports.
• Connectivity issues- India’s average logistic cost is 14% of the GDP whereas promote the global average is 8%.

What lies ahead?

• Improve capacity utilization- Government can incentivise industry focus on increasing capacity utilisation and lower the production cost.
• Focus on power sector- Power sector is the lifeline of manufacturing industry, power fluctuation and shortage must be checked for consistent increase in the production.
• Incentivise production- The coupled efforts of tax profit and production incentives will increase in the manufacturing capability of India which would also increase the job opportunities.
• Localize defence production- Defence production in India will leverage its Atmanirbhar Bharat vision and reduce the high military spending on imports.
• Skill development- Proper skill enhancement will have a positive impact on demographic dividend of the country.
• Increase investments- It needs a holistic approach of improvement in land, labour, entrepreneur and capital.
• Improve infrastructure- Reducing the infrastructure bottlenecks and improving the connectivity will play a major role in manufacturing sector.

References

1. Indian Express| Indian Manufacturing growth rate
2. Ibef| Manufacturing sector stats
3. PIB| Schemes for Manufacturing sector