At the root of India’s manufacturing challenge – inherent challenges in the Indian economy | 2nd June 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the inherent challenges in the Indian economy which prevent the growth of the manufacturing sector.

Relevance:

• GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment; Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth;
• Essay;
• Prelims

Context:

• The first advance estimates of the national income for 2022–23 show manufacturing growth to be 1.3% for the year, less than that for agriculture and all other main segments of services.
• Generally, a country goes from the primary sector to the manufacturing sector and then to the service sector.
• But India’s case is uniqueleaped directly to the service sector from the primary sector, skipping the manufacturing sector. This was beneficial in the short term, but it hurts more if seen from a long-term perspective.
• Present socio-economic issues such as rising inflation, unemployment, rising sharp inequalities, etc. can be attributed to the lack of a strong manufacturing hub in India.

Analysis:

Steps taken to boost the growth of manufacturing sector:

• Economic reforms of 1991:
  • They had almost exclusively focused on manufacturing, but the significant scaling down of tariffs and the dismantling of the ‘licence-permit Raj’ did not lead to an increase in the share of manufacturing in the economy.
  • However, there are some positive outcomes such as enhancing the quality of India’s manufacturing sector.
• 2014 onwards:
  • In 2014 the government launched Make in India with emphasis on foreign direct investment. But as seen from the recent data, it fell short to achieve its stated goals.
  • More recently, there has been the Production-Linked Incentive scheme, which essentially subsidises production of certain products. But the record of these schemes has not been impressive.

Challenges to growth of manufacturing sector in India:

• Demand side challenges:
  • Despite the favourable measures undertaken by the government, it would be simplistic to expect industry leaders to achieve a manufacturing push on their own. There is demand to be reckoned with, and this is largely independent of the supply side, which the government has acted upon.
  • Household demand for manufactures inevitably follows the satisfaction of its demand for the necessities of life — food, housing, health and education, none of which can be postponed.
  • For a substantial section of India’s households, food occupies a large share. This constricts the growth of demand for manufactures.
• Limited exports:
  • Domestic demand alone cannot be sufficient to develop a strong manufacturing hub. Exports play a crucial role here. As seen in the economies of East Asia, to become an export hub, a country needs two things – infrastructure and a skilled workforce.
  • In the infrastructure segment, developments of quality roads/rails and ports are important.
    • Goods have to first reach the coast by road, and then exporters must deal with the relatively poor infrastructure and practices in India’s ports.
  • While transportation is a big factor, it is not everything yet. Inexpensive power, space and industrial waste disposal services all matter.
  • Skilled workforce and Indian educational system:
    • Evidence suggests there is a direct relationship between quality education and the growth of the manufacturing sector.
    • The ranking of countries by the Programme for International Student Assessment reveals this directly. In a group of about 75 countries, the countries of East Asia are at the very top while India barely manages not to be the last.
    • But it is with respect to education that India has fallen most behind the countries that are the manufacturing successes of the world.

Way Forward:

• The economic reforms of 1991 were undertaken with a view to raising the presence of manufacturing. To this effect, the trade and industrial policy regime had been overhauled.
• However, it overlooked the need for an entire ecosystem, including schooling, training and infrastructure for manufacturing to flourish. This has to be built.