Blog

Various challenges and issues associated with the manufacturing sector in India

Context

5. This article discusses the root causes of challenges faced by the manufacturing sector in India.

Introduction:

5. The issue of whether manufacturing or services should be the desirable path for India’s economy has been a topic of discussion in public forums.
5. Despite the economic reforms of 1991 that focused on manufacturing, the share of manufacturing in India’s economy did not increase significantly.
5. Even with the qualitative change in the manufacturing sector since then, with improved product quality and variety, the lack of proportional growth suggests a rising income inequality.

Poor growth records:

5. Manufacturing growth in India has been relatively stagnant since the economic reforms of 1991, with notable government initiatives such as ‘Make in India’ and the Production-Linked Incentive scheme failing to yield impressive results.
5. The government has also implemented various policy initiatives aimed at supporting the corporate sector and promoting ease of doing business. These include a substantial reduction in tax rates in 2019 and efforts to improve the overall business environment.
5. Additionally, public investment has been prioritised, with an 18.5% increase in capital expenditure in the last Union Budget.
5. Despite these measures, the manufacturing sector in India continues to face challenges. The sluggish growth can be partly attributed to the impact of demonetization in 2016, which had a detrimental effect on the manufacturing industry.
5. The first estimates for 2022-23 show that manufacturing growth was only 1.3%, lower than agriculture and other service sectors, indicating a structural issue hindering the manufacturing sector.
5. However, the persistently low growth rates suggest that there are underlying structural issues that need to be addressed.

Systemic Issues:

5. Despite government efforts, industry leaders alone cannot achieve a manufacturing push without considering demand from households.
5. Household demand for manufactured goods is closely tied to the satisfaction of basic needs like food, housing, health, and education.
5. The share of food in household expenditure is highest in India compared to other major economies, while its GDP per capita is the lowest.
5. Exporting can help overcome limited domestic markets, as seen in the success of smaller countries in East Asia, but competitiveness is crucial.
5. Infrastructure and workforce skill level are vital for successful exporting, with factors like transportation, power supply, space, and waste disposal services also playing a significant role.
5. Most manufacturing exports are transported by sea. However, companies in north India face significant challenges in reaching seaports due to poor infrastructure and practices, resulting in longer turnaround times compared to ports in Singapore.
5. The importance of ports for exports is highlighted by Kerala traders who have resorted to using ports outside the state due to lower costs.

Issues with education:

5. India’s education system lags significantly behind other manufacturing countries, particularly in East Asia, as evident from international assessments like the Programme for International Student Assessment (PISA) and findings from organisations like Pratham.
5. Indian children show low proficiency in reading and numeracy during their early years, as highlighted by Pratham’s assessments. Similarly, employers in India express concerns about the lack of employability among university graduates, even extending to institutions like the Indian Institute of Technology (IIT).
5. The focus on expanding universities to cater to middle-class aspirations has neglected the needs of those seeking vocational training and skilled labour jobs like carpenters, plumbers, and mechanics.
5. The state of vocational training institutes in India is limited, with only a small percentage of Indian youth receiving technical training compared to countries like South Korea.

Way Forward:

5. The economic reforms of 1991 aimed to boost manufacturing but overlooked the necessary ecosystem, including education, training, and infrastructure. Building this ecosystem is crucial and cannot be achieved solely through legislation.
5. Liberalising reforms in India have reached their limits and are insufficient to address the broader challenges hindering manufacturing growth.
5. Additional measures are needed to strengthen education, vocational training, and infrastructure to foster a conducive environment for manufacturing to thrive.