Transforming India's Manufacturing Sector

Abstract

Industrialization has historically been one of the biggest drivers of Economic Growth ever since the Industrial Revolution in the 18th century. India followed a path of planned self-reliant development after her Independence in 1947 like most countries in the developing world. India’s post-independence development plans emphasized industrialization as a very important instrument for sustained growth. The manufacturing activity has been considered to be the main engine of economic growth. Industrial sector plays a vital role in the development of Indian economy because they can solve the problems of general poverty, unemployment, backwardness, low production, low productivity and low standard of living etc. Before 1980, based on the perception of Soviet Union success, it was thought that the key strategy for development was to focus on large and heavy industries under state control and central planning. The strategy also involved import substitution, rigid price controls and severe restrictions on private initiatives. For a variety of reasons, lack of industrial demand, especially for investment goods, was widely accepted to be the principal reason for the relative stagnation since the 1960s. Reportedly, controls led to widespread inefficiency in resource use, as reflected in poor total factor productivity growth, or rise in incremental capital output ratios in the 1970s. The Indian Government had undertaken policy reforms since 1980, but the most radical reforms have occurred since 1991, after the severe economic crisis in fiscal year 1990-91. The Indian growth story has been unique. Unlike the transformation stories of many of the other developed economies, India's growth story was dominated by the service sector. In contrast manufacturing has been less robust; Manufacturing production recovered rapidly from negative growth of -0.8% in the crisis year of 1991-92 to a peak of around 14.1% in 1995-96. It has since declined rapidly to 2.9% in 2001-02 and remained around that level for the next 25 years except for a sporadic increase in 2010-11. The share of the manufacturing sector in the country’s GDP has remained stagnant, for almost three decades. Services alone are not sufficient to create growth to drive mass prosperity for a country the size of India. India's reform programme has emphasized gradualism and evolutionary transition rather than rapid restructuring or shock therapy and its growth has not been based on using cheap labor for labor-intensive exports, the development path taken by other Asian tigers including China. China’s has grown at a CAGR of 10% over the last three decades reaching per capita GDP (US$7,000) while India’s, growing at half that pace, is currently at ($1,500) In spite of similar population sizes and low-cost profiles with a per capita GDP of US$300 in 1981. China’s industrial sector at US$4 trillion (and still growing), now dwarfs India’s which is estimated at US$300 billion. But China is now trying to re-balance the economy towards the services sector and consumption rather than manufacturing and investment; its competitive advantage has eroded and is likely to continue to do so. That gives manufacturing India the potential to create a cost advantage, with its far more favorable demographics, a huge untapped labor pool. This calls for rapid expansion of the manufacturing sector on a priority basis like creating local supply chains. Scaling the Domestic Supply of Human Capital by revamping the education, R&D and skills development, Attracting Foreign Intellectual Property, Picking the Right Industries, Making it easier to do business etc. It need to focus around (i) streamlining administration, (ii) creating rapid infrastructure development (roads, ports, power), and (iii) mobilizing significant domestic and foreign capital. The paper would discuss these things in detail.