Since the 1990s, the growth of India’s manufacturing sector has declined relative to the economy’s growth. From the 1960s through the 80s, the manufacturing sector had grown faster than the overall economy: it was an engine pulling the economy. However by the end of the 1990s the overall economy had overtaken the manufacturing sector. Some may argue that if the overall economy is growing well—it has demonstrated the capability of growing at 9% per annum—there should be no concern with the slower growth of a particular sector. After all, other sectors must be growing much faster to compensate. This could be the view of economists who believe that policy-makers should not pick ‘winners’ for growth. They would say that the right macro-economic conditions should be created for growth, and let winners emerge. In India’s case, the service sector has emerged a winner, and so be it such economists may say.
Nevertheless there is concern with the relatively poor performance of the manufacturing sector. A principal concern is with the need for creating more jobs in which the manufacturing sector should have a larger role to play at our stage of development. It is estimated that an additional 200 million Indians will enter the job market by 2025, with overall population growth and the large numbers of young people who will be joining the workforce. Moreover, with desperately needed improvements in agricultural productivity, there will be a shift towards manufacturing and services for jobs. Therefore manufacturing must pull its weight and contribute more for inclusive growth of the country. There is also concern that India’s manufacturing sector is not developing sufficient depth. Comparisons are made with China from whom India imports not only large volumes of consumer products but also capital goods in strategic sectors such as telecom and power. The Chinese have created not only scale in manufacturing but also deep capabilities.
India needs a strategy for its manufacturing sector, not only to increase its rate of growth, but also the shape of that growth. The organized manufacturing sector must create more jobs, which it has not since the 1990s, and also create more depth with more value addition in the country. Therefore India must develop an effective manufacturing strategy to achieve its goals. Strategy is about making choices about what to do to achieve the desired results. Choices must be made about which manufacturing sectors will be more important for inclusive and sustainable growth in the next 25 years. Choices must also be made about the best ways to stimulate that growth.
Manufacturing is more complex than services. Manufacturing has many internal and external linkages that must be understood and then addressed by a ‘national Manufacturing strategy’. Many sectors within manufacturing depend on each other: assemblers on parts producers, parts producers on equipment providers; and all on technology development. Policies that suit one sector may harm another. The weakest links need nurturing to grow healthy and sustainable Manufacturing in the country.
Several constraints must be eased to attract more investments in manufacturing in India and create an enabling environment for the growth of competitive enterprises. The condition of the physical infrastructure to support manufacturing—transportation and power—is clearly one. The efficiency of the administrative infrastructure, and reduction of the number of permissions and bureaucratic delays, is another. The labor relations environment to enable enterprises the flexibility they need while ensuring fairness and reasonable security for employees is a third. A fourth is the availability of skilled workers. India has masses of people, but insufficient numbers of them are trained and employable. Other complications presently slowing down investments are availability of land and implementation of environmental regulations.
Technology development is a key to grow competitive Manufacturing that has depth, and is not limited to low value adding assembly operations. An institutional and policy infrastructure is required to facilitate development of indigenous technology. Policies relating to FDI, FTAs, and IPR are essential components of technology development strategies. While opening India’s markets to the world, the question of which flag investors and managers of industrial enterprises fly will come up in matters of national strategy. 21st century global corporations hire the best talent from everywhere, sell wherever they can, buy from wherever it is best for their business, and invite investors from everywhere to whom they promise good returns. In this paradigm of global business, what is an ‘Indian’ company? On the other hand, governments are accountable to the citizens of their own countries. They have to produce growth for them, and ensure their economic and physical security too. Which are the ‘Indian’ companies the Government can rely on in matters of defense production and acquisition of strategic energy and mineral assets abroad, to serve Indian national interests?
The making of a strategy to accelerate growth of Indian manufacturing with scale and depth cannot be left entirely to the market. Policy-makers have a vital role to play. However, policy-makers cannot shape strategy within an ivory tower cut-off from reality. The task of shaping industrial policy is to elicit information on significant externalities and their remedies. As it advances and grows, the productive sector bumps into the constraints in the economy: it feels the stones underfoot, or the ‘pinch in the shoe’. In a world in which not only companies, but countries too, are rated on their competitiveness by international agencies, and a world in which all must strive to climb that scale, the only sustainable source of competitive advantage can be a company’s or country’s ability to learn, change, and improve faster than any potential competition. Therefore a country’s competitive ability lies in the capability of the collaborative process between producers and policy-makers to produce effective strategies and policies.
India cannot copy the collaborative processes between policy-makers and domestic producers used by Japan, Korea, or China, whose rapid industrial growth in the last 50 years has contributed to the rise of Asia within the global economy. Those countries may have set aside labor rights and environmental concerns—by today’s standards—in their pursuit of industrial growth. Moreover those countries protected and deliberately promoted domestic companies. India, in the 21st century has to be even more conscious of environmental and human rights and has to also operate within a more open global trade regime. Therefore processes of consultation in India must involve not only industrialists but also those who represent labor, land users, and concerns for the environment. Even foreign companies whose investments and technologies can help India must be consulted.
In summary, growth numbers suggest that the panoply of reforms so far has been better for the overall economy than for manufacturing. The country needs a strategy for manufacturing to become a powerful engine for inclusive and sustainable double-digit economic growth. The challenges are many: in choices of priority sectors, architecture of consultation processes between policy-makers and producers, design of policies, and governance of agents for the strategy’s execution. The Mid-Term Appraisal of Industry in the Eleventh Plan is pointing to such fundamental issues that must be addressed to put manufacturing on to a higher growth trajectory now onwards.