For growth, bolster the manufacturing sector

Updated on Dec 30, 2022 09:10 PM IST

While the service sector has delivered robust growth rates, it has failed to absorb workers proportionately, leaving agriculture to sustain 46% of India’s workforce with barely a 15% share of GDP

A priority should be to reverse this deindustrialisation trend and bring back this production for local consumption, besides other products (including defence equipment) that can be made in India competitively, given the size of local demand. Substitution of 50% of these imports over the next couple of years could enhance MVA by 30%. (ANI) PREMIUM
A priority should be to reverse this deindustrialisation trend and bring back this production for local consumption, besides other products (including defence equipment) that can be made in India competitively, given the size of local demand. Substitution of 50% of these imports over the next couple of years could enhance MVA by 30%. (ANI)
ByNagesh Kumar

Is India’s recent push to catch up with industrial powerhouses in manufacturing misguided? Some commentators, such as former Reserve Bank of India governor Raghuram Rajan, have argued against India’s manufacturing emphasis as there is “no place for a second China”, making a case instead for harnessing the potential of services.

I disagree. India should fully tap the potential of services, be it information technology and communication, education, health, accounting, legal, and tourism. But why ignore India’s manufacturing potential, which is key to realising its development aspirations? As economist Nicholas Kaldor has argued, few countries, if at all, have achieved prosperity without industrialisation.

The transformation of an agriculture-dominated economy into a services-dominated one has been an achievement for the past 75 years. While the service sector has delivered robust growth rates, it has failed to absorb workers proportionately, leaving agriculture to sustain 46% of India’s workforce with barely a 15% share of the gross domestic product (GDP). It has translated into low productivity, pervasive informality, and persisting poverty. Therefore, the structural transformation — where workers move from low-productivity sectors (e.g. agriculture) to higher-productivity sectors (such as industry and services) over time — has failed to take place in India.

This failure can be largely attributed to the country’s inability to harness its manufacturing potential. The share of manufacturing value-added (MVA) in India’s GDP has stagnated at around 16% compared to over 30% in the East Asian countries. The vision of a developed nation by 2047 will never be realised without providing decent jobs for everyone in India’s young workforce. This will require harnessing manufacturing’s potential to create millions of jobs directly and indirectly.

Furthermore, Covid-19 has exposed the risks of overdependence on a few sources for supply chains, leading to the trend of reshoring. In addition, industrial policymaking has seen a strong revival globally, with the $50 billion in semiconductor subsidies by the United States (US) becoming the latest example. Against that backdrop, India’s production-linked incentives (PLI) to revive 14 manufacturing sectors under Aatmanirbhar Bharat can be seen as a part of the global trend.

What are the key manufacturing opportunities for India?

The most important opportunity is strategic import substitution. In 2021-22, India’s merchandise imports totalled $610 billion, which included $300 billion of manufactured goods. What are these imported goods? They comprise machinery and other capital goods, electronics and semiconductors, and intermediate goods. They also include products earlier made in India but now outsourced to China to save costs, and low-technology and labour-intensive household electric goods such as toasters, wall clocks, electric irons, refrigerators and televisions.

A priority should be to reverse this deindustrialisation trend and bring back this production for local consumption, besides other products (including defence equipment) that can be made in India competitively, given the size of local demand. Substitution of 50% of these imports over the next couple of years could enhance MVA by 30%.

While tariffs and PLI schemes are helpful, India could also leverage non-tariff barriers and a competitive exchange rate in real terms. The protection should gradually be withdrawn to enhance competitiveness once the scale is built. The industrialised and newly industrialised countries have followed such sequencing in the early phases of their development.

The early results are impressive: India-made mobile handset exports crossed the $1-billion mark in September. Although these exports represent assembling, that is how the electronics industry begins anywhere. Once assembling achieves a particular scale, the deepening of the local production happens with the ecosystem taking shape. As a result, several semiconductor manufacturing projects are on the horizon.

A strategy of export-oriented industrialisation, as pursued by Southeast Asian countries, may be challenging in the context of global recession and rising protectionist trends. Yet even a marginal increase in India’s 1.7% share of global merchandise exports over the next two-three years could enhance MVA, and add $100 billion to India’s exports.

Consolidating India’s presence in traditional areas such as textiles and clothing, leather goods, gems and jewellery, processed foods, vaccines, generic pharmaceuticals, automobiles, and components, refined petroleum products, steels, and non-ferrous metals, some types of machinery and electrical equipment is vital while making inroads in new areas and markets. Moreover, India should fully harness the opportunity provided by the China+1 strategy adopted by global corporations to de-risk their supply chains.

Import substitution and export orientation are not antithetical to each other, as they are often posited, but complementary industrial strategies, as demonstrated by the East Asian countries. Building scales of production and leveraging domestic demand helps enhance competitiveness.

Green industrialisation also offers profitable opportunities in India. Manufacturing green hydrogen, solar panels, wind turbines, electric vehicles, and batteries, among others, provide promising industrialisation avenues while advancing the sustainability agenda. India can aim to become a global hub of compact EVs, batteries, and solar panels, among other sunrise industries. Translating these opportunities for strategic import-substitution, export orientation, green industrialisation, and other sunrise sectors can potentially double India’s MVA to $1 trillion by 2026, thus advancing the government’s $5 trillion economy target. Hence, India should move ahead with determination toward a manufacturing-led transformation.

Nagesh Kumar is director, Institute for Studies in Industrial DevelopmentThe views expressed are personal

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