Manufacturing sector: Struggling to take off

Biswajit Dhar | Updated on July 08, 2019 Published on July 08, 2019

Sluggish growth   -  Bloomberg

Addressing the credit needs of MSMEs and hiking public investments are crucial for the revival of manufacturing

For the past decade and a half, revival of the manufacturing sector has been on the agenda of successive governments. After both UPA governments failed to increase the share of manufacturing sector in GDP from 16-17 per cent to 25 per cent within a decade, the Modi government made “Make in India” as its flagship programme in 2014, and adopting the same target set by its predecessor government.

With the share of the manufacturing sector in GDP remaining sticky during the past five years, a key challenge for Modi government 2.0 is to find credible ways of getting this sector on track. The Union Budget presented by Nirmala Sitharaman can, therefore, tell us if the government is geared to the task of manufacturing sector revival.

The manufacturing sector is critical for addressing the steep rise in unemployment growth in recent years, while ensuring that the economy grows at least at the rate as has been claimed by the Central Statistics Office.

However, India’s manufacturing sector is fighting an existential battle. Not only have key industries like textiles and clothing fallen behind in global markets, they are now finding it difficult survive in the domestic market in the face of import competition.

Several industries have been demanding additional doses of protection for a number of years, but it is only in the recent past that the government has begun responding to their demands.

Tariff hikes

In his 2018-19 Budget speech, Arun Jaitley had announced his decision to make “a calibrated departure” from the past policy by increasing customs duties on mobile phones and some electronic components. The reason, to incentivise domestic value addition and to further the objectives of Make in India.

Sitharaman has adopted the same policy of increasing customs duties to protect the interests of domestic players engaged in the production of cashew kernels, PVC, auto parts, synthetic rubbers and a range of electronic products, among others.

However, it needs to be pointed out that the government’s policy of import protection can provide only temporary relief to the industries; “domestic value addition” can be effectively incentivised by providing necessary conditions for the expansion of micro, small and medium enterprises (MSMEs). MSMEs can well act as the magic bullet, for this sector can help expand both manufacturing capacities and job creation. The irony is that despite understanding the value of MSMEs, successive governments have fallen short of meeting the critical needs of these enterprises, especially, availability of credit on favourable terms.

Sitharaman, too, has only announced the establishment of a Credit Guarantee Enhancement Corporation. India urgently needs development finance institutions geared to meeting the critical needs of MSMEs, which exist in several developed and emerging economies. Unfortunately, such an institution has not figured in the priorities of the Finance Minister yet again.

Availability of finance for putting the manufacturing sector on the rails is certainly a problem area and the government’s response has been to put the onus on private investment, both Indian and foreign. Like her predecessors, Sitharaman expects that foreign direct investment (FDI) to turnaround India’s manufacturing sector.

If recent evidences are considered, these expectations seem exaggerated. For instance, data on FDI provided by the Department for Promotion of Industry and Internal Trade shows that in 2018-19, manufacturing sector’s share in total inflows was just 20 per cent, while service sectors like information technology services, e-commerce and retail and wholesale trade accounted for most of the inflows. Moreover, it is by now clear that FDI did not meaningfully contribute to the implementation of “Make in India”, the flagship programme for manufacturing sector revival of NDA-I.

One piece of evidence that could have helped the Finance Minister to develop the financing model for revival of manufacturing is that in all successful countries, private investment has followed public investment.

Like Jaitley did on the issue of customs duties, Sitharaman should have carried out a course correction by going back to a public investment-led financing model for development. This would have also triggered the revival of investor sentiments in general, which has been at unacceptably low levels in the past few years.

The writer is Professor of Economics, Jawaharlal Nehru University, New Delhi

Published on July 08, 2019

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