Wednesday, 5 March 2014

Wake-up Call for Indian Economy: Policy Initiatives in Manufacturing Sector

Photo Credit: Rediff.Com
The interim budget of 2014 has made a series of significant policy announcements for India’s manufacturing sector, which would act as wake-up calls for its existing sluggish economy. It would wave all export related taxes on manufacturing sector and has announced 8 National Investment and Manufacturing Zones (NIMZ) along with Delhi-Mumbai Corridor. Three more additional industrial corridors like Bangalore-Chennai, Bangalore-Mumbai and Kolkata-Amritsar will be taken up along with the clearance of 296 projects worth of Rs 6,60,000 crores. It has reduced exercise duties in automobile sector to give a boost in production. Such positive policy steps are certainly encouraging to revive India’s investment ambience, especially in its manufacturing sector, which has seen a mere 1 percent growth in 2012-13 (as against 9.2% in service sector) having cascading effects on jobs, income, export and overall economic security of the country.

Manufacturing sector was not in forefront during India’s economic policy reforms in 1991. Rather India’s immense growth of 9 percent was largely driven by its service sector (sharing 58% of GDP). IT and ITES popularly known as ‘sunshine sector’ has made enormous contribution to India’s GDP growth and its skilled human capital has received world-wise acclamation. It has truly transformed India’s economic image, helping to reshape its conventional, traditional economy into a market driven, competitive ‘knowledge economy’. This high-skill sector provides 25 lakhs jobs with multiplier effect on future generation and has created a Nouveau riche Class in India with very high purchasing power. But such economic boom has neglected and sometimes marginalized many more lakhs in semi-skill, low-skill and no-skill category, creating huge economic disparity and a scenario of ‘jobless growth’. It is being argued by many scholars that such a situation has emerged because India has almost skipped its second stage of development, which ought to happen through industrialization and manufacturing, and which alone could create mass employment to this large section of population and could check such unmanageable disparity in the economy. Country therefore with 61 percent of working population of 15-59 years, and with additional about 200 million to enter job market in next 15 years necessarily needs to create opportunities for employment and entrepreneurship, mostly for semi-skilled and less-skilled workers. Sheer neglect of manufacturing sector also has affected India’s merchandise trade balance, and China whose manufacturing shares 34 percent of its GDP could easily grab this space in the world market. India’s share of manufacturing sector in GDP was stagnated at around 16 percent for last two decades.

Such rising challenges have forced India to revisit its policy initiative for manufacturing sector. The government has been  stressing the needs to increase manufacturing output on a number of occasions and in 2004, UPA I has set up a National Manufacturing Competitiveness Council (NMCC) with the objective to suggest ways to increase manufacturing competitiveness and to improve its share in GDP. Finally in 2011, UPA II has managed to implement country’s much needed National Manufacturing Policy. The policy vigorously envisages 25 percent share in national GDP and creation of additional 100 million jobs by 2022. It was initiated with an idea of having a robust manufacturing sector that can help to create jobs in mass scale and be one of strong pillars for economic growth in a sustainable way. The existing manufacturing capacity in India is not optimum and is heavily dependent on Micro Small and Medium Enterprises (MSME) which employs over 100 million people in around 4 million units across the country and contributes 45 percent to the total manufacturing output with 40 percent of country’s export. The current interim budget 2014 has notified Public Procurement Policy to establish technology and common facility centers and to launch Khadi-Mark, which is again a policy step to promote further the MSME in India.    

For expanding manufacturing sector per se, India needs to increase its supply chain through diversification, infrastructure management, flexible labour law, transparency in land acquisition and collaborations at various levels extending to multinationals. It is being argued that there exists ample scope for the manufacturing sector to return to high growth trajectory. The sharp depreciation of currency coupled with pick-up in growth revival of global economies in recent months has beckoned optimism to Indian manufacturing exporters. Thus sector like textile, petrochemicals can find more space now. But most importantly the roadmap for manufacturing sector needs cautious policy planning for a balanced growth with emphasis on various regions of the country. Multiple manufacturing sectors along with diversity, more cross-regional industrial corridors and region-specific endowments and interests needs to be promoted, as the potentials of mountainous Northeast India cannot be the same as coastal West of India. This can enhance productivity with more growth poles in laggard region and can restrain undue concentration of industrial expansion in advance regions, preventing another fresh challenge of core-periphery landscape in Indian economy.


1.      Economy Matter, Volume 19, No. 1, 2014, CII

2.      Economic Survey, 2012-13, GOI   

3.      India’s Continuing Manufacturing Drought, The Wall Street Journal, February 2014

Rakhee Bhattacharya

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