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Manufacturing Productivity in India

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July 24, 2023

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.

manufacturing

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%.

Steps Taken to Promote the Manufacturing Sector

  • Make in India - It was launched in 2014 to facilitate investment, foster innovation, build best in class infrastructure and make India a hub for manufacturing, design and innovation.
  • Industrial Corridor Development Programme- It is to develop Greenfield Industrial regions with sustainable infrastructure.
  • As part of National Industrial Corridor Program, 11 Industrial Corridors are being developed in 4 phases.
  • Ease of Doing Business- The key focus areas of the initiative are simplification of procedures, rationalization of legal provisions, digitization of government processes etc.,
  • National Single Window System- Announced in Budget 2020-21, it is envisioned as a one-stop shop for investor related approvals and services in the country.
  • PM Gati Shakti- It is a transformative approach to facilitate data-based decisions related to integrated planning of multimodal infrastructure, thereby reducing logistics cost.
  • National Logistics Policy- It was launched in 2022 that aims to reduce the logistics cost, which stands at 14% of GDP to 9-10%.
  • Production Linked Incentive (PLI) scheme- It has identified 14 key sectors with an outlay of Rs. 1.97 lakh crore to enhance India’s manufacturing capabilities and exports.
  • National Manufacturing Policy- It is launched in 2011 which works on the principle of economic and industrial growth in partnership with states

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

 

 

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