National Manufacturing Policy

Industry

The 1991 New Economic Policy set the Indian economy into a journey of market oriented exponential growth in which the private sector assumed a vital role.  However, in the two following decades, a dedicated policy for the needs of industries remained missing. Considering that the manufacturing sector constituted merely 14 to 16 per cent of India’s Gross Domestic Product (GDP) since liberalisation in 1991, a new policy was urgently needed (Department of Economic Affairs, 2012). The urgent need to boost the manufacturing sector assumed a great significance in the backdrop of economies such as China where in 2010 the sector contributed more than 30 per cent to its total GDP (World Bank, 2018). Finally, in 2011, realising the potential of the manufacturing sector in terms of growth, trade as well as job creation, the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry introduced the National Manufacturing Policy (NMP 2011). The policy was formulated with six salient objectives:

  • Attaining a growth of 12-14 per cent in the manufacturing sector over the medium term to help bolster the economy. The 2-4 per cent differential over the medium term growth rate of the overall economy was envisaged to make the manufacturing sector’s share in the national GDP 25 per cent by 2022. The sector’s share for the financial year 2018-2019 was 16.4 per cent (Central Statistics Office, 2019).
  • Increasing employment in manufacturing to create 100 million additional jobs by 2022.
  • Creation of appropriate skill sets among the rural migrant and urban poor to make employment growth more inclusive.
  • Increasing domestic value addition and bettering technology used in manufacturing.
  • Enabling India’s manufacturing to compete internationally through appropriate policy support.
  • Facilitating sustainable growth, increasing energy efficiency, ensuring optimal utilisation of natural resources and undertaking restoration of damaged/degraded ecosystems.

In order to achieve the above goals, the policy welcomed foreign investments and technologies, proposed to capacitate enterprises to compete globally, reduce compliance burden on industry pertaining to the procedural and regulatory formalities, encourage innovation for augmenting productivity, quality and growth of enterprises. Needless to say, effective implementation greatly depended on good synergy between various Indian ministries and stakeholders.

The NMP 2011 also sought to give special attention to employment intensive industries, capital goods industries, small and medium enterprises as well as public sector enterprises. Moreover, industries having economic significance and those in which India enjoyed a competitive advantage were intended to be prioritised.

Role of manufacturing

Manufacturing has contributed to the affluence of nations such as the United States of America, Germany, Japan, South Korea and China. In 2017, China’s manufacturing sector added almost 29 per cent value to its GDP (Fig. 1). Growth in manufacturing sector invariably boosts trade through increase in import of  supplies and export of products. India suffers from both fiscal deficit and current account deficit (CAD), which are together termed as twin deficits. While fiscal deficit is an indicator of the total borrowings and liabilities of the government, CAD occurs in situations where a country’s expenditure on imports exceeds the amount it receives from exports of goods, services and capital. CAD in the third quarter of 2018-2019 was 16.9 billion USD which accounted for 2.5 per cent of the GDP. This was primarily owing to a higher trade deficit in the same year which was 49.5 USD billion while it was 44 billion USD the year prior to it (The Economic Times, 2019). Trade deficit is the largest component of the current account deficit as it indicates that the value of imported goods and services is more than exports. Thus, a favourable trade balance will help reduce CAD. Since manufactured goods constituted 70 per cent of all merchandise exported worldwide in 2017 (World Trade Organisation, 2018), manufacturing quality products would contribute significantly towards reducing CAD, a source of high debt and interest payments. Additionally, manufacturing units also have the capacity to create jobs which in turn enhances domestic consumption and fuels economic growth.

What is favouring India?

Certain features favour India’s future prospects in this sector. First, India consists of a large number of unskilled labour. In a population of 1.3 billion people, 767 million belong to the 15-64 age group (Make in India, undated). This would make 29 years—the youngest among all countries—India’s average age by 2025 (ibid). Moreover, India’s purchasing power parity (PPP)—a measure of currency exchange rate that compares the same basket of goods and services purchased in various countires—was valued at 10.4 trillion USD in 2018 (World Bank, 2019). The above factors combined with the country’s expanding middle-income class population and huge internet user base are helping India emerge as an important consumer market as internet supports the expansive e-commerce market.

Initiatives to support policy

The National Manufacturing Policy was announced under United Progressive Alliance (UPA) regime. In 2017, the then industry minister Nirmala Sitharaman termed the policy as ‘vintage’ and stated that the policy was being modified to include large initiatives such as Make in India (The Indian Express, 2017). Since 2014, the present government has taken a variety of steps  to boost this sector.

* Launched on September 25, 2014, the Make in India initiative focuses on infrastructural development, simplified procedures, job creation and skill development in relevant sectors and fostering innovation in select manufacturing sectors.

* Implemented on April 8, 2015, Pradhan Mantri Mudra Yojana aimed to extend the limit of collateral free loans.

* Start Up India was launched on January 16, 2016 for nurturing innovation and startup projects to drive India’s economic growth and generate greater employment.

* The goods and services tax aimed to improve the efficiency of the manufacturing sector by reducing production cost and streamlining the supply chain.

* Government has initiated a slew of measures for easing business which has borne positive results—the position of India  improved from 142 in 2014 to 77 in 2018 in the ease of doing business index published annually by World Bank (Press Information Bureau, 2018 a).

* Further, the Foreign Direct Investment policy has been simplified and liberalised with most sectors now being on automatic route.

In addition, the central government approved a special package in the leather and footwear sector for employment generation, infrastructural development, additional investments and increased production. The special package involves implementing the Indian Footwear, Leather and Accessories Development Programme (IFLADP)—a central sector scheme—with an approved expenditure of INR 26 billion from 2017 to 2020 (Press Information Bureau, 2018 b). A special package was also introduced in the textile and apparel sector that included an array of labour-friendly measures to promote employment, achieve economies of scale and boost exports. The steps will lead to a cumulative increase of 30 billion USD in exports and INR 740 billion in investment over the next three years (Press Information Bureau, 2016). In November 2018, the government announced initiatives such as quick access to credit and market, technology upgradation and social security for growth, expansion and facilitation of micro, small and medium enterprises (Press Information Bureau, 2018 c).

The present situation

Despite a gamut of new schemes being introduced, the  contribution of the manufacturing sector to India’s GDP has remained almost steady since 2011 at 16 per cent of GDP (Fig. 2). A similar dismal situation can be observed in terms of job creation as India’s unemployment rate stood at 6.1 per cent in 2017-2018 as per the latest periodic labour force survey (Press Information Bureau, 2019). While the government claimed that this rate cannot be compared with the previous survey data as the methodology has changed, experts deduced it to be the highest level in 45 years (The Hindu, 2019). According to the 2018 Economic Survey, an excessive focus on small scale manufacturing industries—employing less than 100 workers—is one of the chief causes for limited job creation (Department of Economic Affairs, 2019). The survey stated that the proportion of small firms was approximately 85 per cent of the total firms in the organised sector. Despite being more in number, small firms accounted for merely 23 per cent of the total employment in organised manufacturing in 2016-2017. On the other hand, the employment share of large firms—having 100 or more workers—was 77 per cent of the total employment. The situation was reportedly the same in terms of productivity  as small firms from organised manufacturing added only 11.5 per cent to the net value while the rest was contributed by large firms in 2016-2017.

Therefore, the survey recommended shifting focus from dwarf firms that continued to operate on small scale over a decade to rapidly growing infant firms. Thus, the nation needed to foster infant firms that potentially promised a huge leap in recruitment and growth. Promoting high employment elastic sectors such as rubber, plastic, electronics, textiles and chemicals was also suggested as this would increase employment in the country. Employment elasticity is a measure of how employment varies with economic output (Saluja, 2019).

In the current scenario, prolonged slowdown in the automobile industry in the country has raised a crisis like situation in the manufacturing sector. The industry has witnessed a decline in sales for ten months in a row. This has not only impacted the economic growth but has also affected employment (Business Standard, 2019). According to the Federation of Automobile Dealers Associations (FADA)—which is the apex automobile retail industry body—the situation will remain unchanged unless problems like 28 per cent GST tax bracket and liquidity crisis  are resolved (Narasimhan, 2019).

One of the biggest reasons behind the consistent lag in India’s manufacturing sector is the lack of skilled and upgraded workforce. In fact, the 2018 Future of Jobs Report articulated that the increased use of machines, robots and algorithms in workplaces could create 133 million new job roles globally (World Economic Forum, 2018). This would make skilled workforce the real facilitator of a fourth industrial revolution.

Even on the trade front, the situation is less promising. India does not figure among the top ten merchandise exporters of the world. As per the 2016 Global Manufacturing Competitiveness Report issued by Deloitte Global, India ranked 11th among 40 countries in terms of manufacturing competitiveness (Deloitte, 2016). In contrast, China—a manufacturing powerhouse—ranked first and USA occupied the second place. However, the report also projects India’s jump to the fifth position in 2020.

Although India’s overall performance in the ease of doing business index has improved significantly, it still falls behind on two major parameters—commencing business and enforcing contracts where it ranks 137th and 163rd respectively (Shankar, 2018). This is bound to affect India’s capacity to attract investments in the manufacturing sector—an outcome highly desired in the manufacturing policy.

Way forward

The government is taking steps to further develop the country’s manufacturing sector. In fact, it is envisaged to become a 5 trillion USD economy before the year 2025 (Press Information Bureau, 2018 d). Out of this, the manufacturing sector is expected to contribute 1 trillion USD. In December 2018, the south Korean mobile manufacturer—Samsung established its largest factory in Noida, Uttar Pradesh. Still, a lot remains to be accomplished before we could start harbouring hopes of greater GDP contribution and employment generation. Improving business procedures, promoting start ups, enforcing contracts, building globally competitive domestic goods are few of the measures that must be undertaken for achieving national targets. Above all, the government needs to display a steady commitment to pursue reforms in order to make India business friendly.

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