For economy to revive, manufacturing must take off first

It has been over 20 years since economic reforms began in India, but the manufacturing sector has hardly moved.

Its contribution to the country’s gross domestic product (GDP) has stayed stagnant at around 15%, leading to a scenario of inadequate employment as the sector had generated jobs at a snail’s pace of 10-20 lakh annually since the 1970s.

In fact, during 2005-10 manufacturing lost 70 lakh jobs, according to a report by investment bank Espirito Santo, which quoted the 66th National Sample Survey.

Curiously, the job loss in manufacturing sector happened in a period (2005-10) when India’s GDP grew at an average annual rate of 8.74%.

Madan Sabnavis, chief economist at CARE Ratings, said, “During the period under review, average manufacturing growth was around 10%. It was primarily a technology-enabled growth, which basically came from large manufacturing companies. The companies economised on labour and leveraged technology in order to generate superior results.”

“The small and medium enterprise (SME) segment was left out over the years and the focus was on the large-scale industry. However, for more comprehensive growth in manufacturing it has to spread to the SME segment,” he said.

Keki Mistry, vice chairman and CEO of HDFC, said the problem is fresh investments are not happening in the industry for a while. “New facilities are not being created and hence there are no new jobs. Regulatory approvals are taking time, and on top of that a high interest rate regime is adding to the woes,” he said.

Also, the situation has become worse in recent years with falling investments in the country. Foreign direct investment (FDI) slid by about 21% to $36.9 billion in the last fiscal as compared with $46.6 billion in 2011-12.

And regulatory hurdles galore.

In July this year, South Korean mining giant Posco cancelled plans to construct a steel plant in Karnataka. Similarly, after waiting for seven years, ArcelorMittal scrapped plans for a steel mill in Orissa. Both companies cited similar reasons for pulling out: Weak market conditions and problems in securing land and mining licences in the country.

The government is conscious of the challenge. To expedite decisions on approvals or clearances for implementation of major infra projects, it set up the Cabinet Committee on Investment (CCI) in December 2012 headed by Prime Minister Manmohan Singh.

As on August 5, the CCI cleared or issued direction for 171 projects entailing a total investment of Rs1.69 lakh crore.

 However, looking at the employment-based break-up across sectors, manufacturing employs only 10.2% of India’s labour force. In contrast, services sector which contributes the maximum of 60% to the GDP, accounts for 27% of employment. Moreover, agriculture and allied activities which account for nearly 51% of employment, contribute 13.7% to the overall GDP.

When compared with countries including China, Thailand and Malaysia, India’s manufacturing sector accounts for a small portion of its GDP. While, in the case of China, manufacturing constitutes 30% of the country’s GDP, manufacturing accounts for 35% of Thailand’s GDP. For Malaysia, the figure is 24%.

Despite being a communist nation, China is among the top destinations for FDI investments. M S Unnikrishnan, managing director and CEO, Thermax, said, “While the contribution of China’s manufacturing sector to its overall GDP is about 40%, the contribution of India’s manufacturing to the GDP is nearly 15%. India is good at making plans but very poor at implementation. China is good at both. It is extremely good at disciplined implementation. Moreover, they have the money to implement the plans ($2 trillion of forex reserves).”