Reviving manufacturing growth: Balancing govt and corporation roles

By Nitin Desai

Ensuring manufacturing growth consistent with our development aims requires the government becoming less entrepreneurial and the corporations becoming much more entrepreneurial.

Is manufacturing in India developing at a pace and pattern desirable for reaching the goal of the country becoming a developed economy by 2047?

In 2023-24 the share of manufacturing in gross value added (GVA) was 14 per cent at current prices. The accompanying chart presents five-year averages of the share of manufacturing in GVA, going back to the beginning of planned development. If we look at the five-year average trend in current prices, the 2020-21 rate of 16 per cent is only modestly above the five-year average of 13 per cent in 1955-56. This current account series also shows a steady rise to around 18 per cent by 1980-81, a continuation of this level till 2010-11 and a decline thereafter. Note that the annual average for 2023-24 is down to 14 per cent.

Since the pace of price changes varies across sectors, to get a sense of quantitative changes an alternative is to look at sector shares with prices adjusted to a fixed year. The constant 2011-12 price series five-year average shows a rise from 9 per cent in 1955-56 to 14 per cent by 1980-81 and acceleration after liberalisation in 1990-91 to reach 18 per cent by 2020-21. However, the share at 2010-11 constant prices dropped to 17 per cent in 2022-23 and 2023-24.

An important issue is the available information on employment in manufacturing. The KLEMS database for 2024, issued by the Reserve Bank of India (RBI), includes economy-wide estimates of employment by sector and shows that the share of manufacturing in employment rose slowly from 10.4 per cent in 1980-81 to 11.8 per cent by 2011-12 but has fallen steadily since then to 10.6 per cent by 2022-23. The big change in employment after liberalisation has been in the services sector, whose share rose from 20 per cent in 1990-91 to 33.8 per cent in 2022-23. Note also that the KLEMS estimates of growth in annual total factor productivity in manufacturing in 1980-81 to 2022-23 imply a decline of about 10 per cent over these four-plus decades.

How does the share of manufacturing in gross domestic product (GDP) in India compare with that in other countries? For comparability using the World Bank database, in India the share in 2023 was 13 per cent, which was less than that in Bangladesh, Sri Lanka, or even Pakistan. What is even more striking is that it is 10 percentage points lower than the 23 per cent in Southeast and East Asia, where China showed a 26 per cent share in 2023. One must also note that the proportion of export of manufactured products fell from 18 per cent in 2012-13 to below 7 per cent in 2022-23.

Is this acceptable for the ambitious goal of becoming a developed country in another two decades or so? I believe India’s manufacturing is not keeping pace with the growth process, not just in terms of any quantum measure but also in product and process advances. This is reflected in the rising dependence on imports of manufactures for inputs required for infrastructure and a wide range of industries. Even pharmaceuticals’ success in growth and foreign trade depends heavily on imports of key inputs because the companies that had been set up to produce the ingredients failed to develop a capacity for competitive supplies.

What should we do to accelerate growth in manufacturing and employment? I believe the answer lies in measures that will free manufacturing corporations and small enterprises from government oversight, broaden the entrepreneurial base, persuade companies to be more focused in their investment efforts, accept the importance of innovation in products and processes, and become more capable of participating in the global economy.

Industrial policy in India has a certain tradition of the government and its bureaucracy exercising their judgement on the desirable choice of sectors and even technologies. This was built into industrial licensing, which had gone through some liberalisation earlier, but was abolished in 1991. The logic of this abolition was to leave to companies and entrepreneurs the choice of sectors in which to develop, and the technologies to opt for.

This was a free-market development that was perhaps not welcome in the political hierarchy and perhaps even among bureaucrats. Hence, we now have the government exercising influence on manufacturing choices through schemes like the production-linked incentive (PLI) scheme, which was presented in the 2021-22 Budget. This provides subsidies for production above a specified base level in 14 sectors selected by the government. The interface of recipients with the bureaucracy is very tight; for instance, the PLI guidelines issued for large-scale electronics have been set out in 49 pages!

The government picking specific companies as eligible receivers of the incentives can distort competition with companies in the sector that are not receiving the incentives and reduce the development of those not included. Government policy must focus predominantly on strengthening market competition and creating an environment that encourages starters that may start as small or medium and grow to size if they are competitively effective.

Substantial growth in the services sector’s share in GVA and in employment that we have experienced since the liberalisation of 1991 has been led by many first-generation enterprises focusing on information technology; software trading; and digital transaction development, which did not have to depend on government subsidies and were oriented at benefiting from the trends in the global market. That is what we need in manufacturing — more first-generation enterprises capable of playing a major role in global markets. We also need a financial system that is more supportive of starters in manufacturing — small, medium, and large.

Broadening the base of entrepreneurship is crucial, particularly if manufacturing growth is to spread out more. At present it is heavily dependent on family-owned conglomerates whose investment ranges widely across sectors. The range of investment over time is rarely based on in-house technology advances and is generally designed to take advantage of emerging market prospects. If it were based on in-house product and process development, one would not see the expansion of conglomerates into areas like retail trade, which is what we are seeing now. The simple fact is that conglomerates are too diverse for a future that will be dominated by technology development.

This has been recognised and in the United States it seems that the sectors in which American manufacturers were active fell by half between 1977 and 2017. Similar changes have been observed in Europe. Note also that the Asian companies which are prominent as suppliers and major players in global markets, like Samsung or Taiwan Semiconductor Manufacturing Company, or new Chinese companies like Huawei, have clear identities linked to specific products.

Growth in domestic demand for manufactured products is important. But manufacturing growth that is faster than the overall GDP growth requires a rising share of global trade. Our manufacturing conglomerates have not established their status as major suppliers in global markets like, for instance, Samsung or Huawei. To become a major player in the global economy, they must undertake much more innovation in products and processes.

A policy environment for tariffs and foreign direct investment that is now under way may well improve the global connection of manufacturing.

To put it simply, ensuring manufacturing growth consistent with our development aims requires the government becoming less entrepreneurial and the corporations becoming much more entrepreneurial in aiming at becoming global players. This will deliver not just higher growth in production and exports but also more diverse employment.

desaind@icloud.com
KLEMS stands for Kapital, Labour, Employment, Materials and Services.

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of Business Standard.