Manufacturing matters

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Bikky Khosla | 19 Aug, 2014
Can India become a manufacturing powerhouse? In his maiden Independence Day speech, PM Narendra Modi highlighted the urgency to revive Indian manufacturing. "Come and make in India," he exhorted the world, and stressed on channelizing the strength of the youth through manufacturing. The address, which is one of the best I have watched, undoubtedly sounds encouraging. In recent years, the state of the Indian manufacturing industry went from bad to worse. Last year, the sector contracted 0.7 percent, the first time since 1991-92. This situation certainly demands urgent attention. The government must act to bring in reforms.

Investor sentiment has improved considerably since the new government took office. Some recent measures introduced by it -- including further opening up of some sectors for foreign investment and those introduced in the Budget such as incentives for manufacturers -- can certainly be viewed as welcome steps, particularly considering that the government has been there only for two months, but at the same time it is clear as crystal that it will never be possible for us to make manufacturing the main engine of the economy without prolonged commitment. Reforms must begin now, continue for many years to come, and all challenges facing the sector in terms of labour law, taxation, land acquisition and ease of doing business must be addressed.

The economies of India and China were almost similar during the 1980s, but China overtook us by choosing a manufacturing-led growth model. In contrast, India's focus remained heavily on services. For over a long period, our manufacturing-GDP ratio has been around 15-16 percent, contributing only around 1.8 percent to world manufacturing. In contrast, China's manufacturing sector contributes over 30 percent to the GDP and is around 13 percent of world manufacturing, up from 2.9 percent in 1991. During the recent years, however, the advantage of Chinese manufacturers has fast slipped, primarily due to rising labour wages, and we must take advantage of this, and to start with, we must have well-directed industrial policies to promote the sector.

When it comes to manufacturing exports, we are lagging miserably. A major part of our manufacturing export basket is constituted by products from some labor-intensive sectors like textiles and gems and jewelry, and if we want to end our dependency on imports, we must focus on manufacturing-led exports. In addition, as the Indian MSME sector accounts for around 45 percent of the manufacturing output and around 36 percent of total value of exports, this sector must be promoted to explore its full potential both in terms of manufacturing as well as exports. I hope the MSME committee to be set up as proposed in the Budget and the forthcoming FTP would bring some relief to the sector.

I invite your opinions. What do you think the government should do to take the manufacturing sector to the next level?