Revive manufacturing as a top priority

For the new government, there is a long list of ‘things to do’ on an urgent basis to revive the sagging economy. On top of the list is the need to revive the manufacturing sector.

The sub-5-per cent GDP growth in the past two years was almost entirely due to the steeply falling growth in this key sector. From 11.5 per cent growth in Q1 of FY2012, the manufacturing sector has slipped into a technical recession, courtesy general apathy and policy paralysis.

The National Manufacturing Policy (NMP, 2011) that had aimed at increasing the share of manufacturing sector from 15 per cent in 2010-11 to 25 per cent in 2022, and increasing employment to 25 million (from 9 million), has not been implemented seriously.

The share of manufacturing in GDP declined from 14.8 per cent in 2011-12 to 14.1 per cent in 2012-13 and to 12.7 per cent in 2013-14, implying that this sector is steadily losing its relevance in the economy, and that the real economy is weakening.

Poor growth of the manufacturing sector has resulted in joblessness. This can be gleaned from the performance of two sub-segments of manufacturing — capital goods and consumer durables.

Both segments are highly intensive in the use of components and ancillaries, and thereby encourage growth of large number of small and medium scale industries as they grow.

Any crisis in these two sub-segments affects the supporting SMEs and gives rise to unemployment.

Growth in capital goods and consumer goods sectors suffers due to lack of investment and consumption demand. In the case of basic and intermediate goods, however, growth is hampered by lack of governance and excessive regulatory hurdles and interventions.

The way out of the crisis is becoming increasingly difficult, as manufacturing and rest of the economy are intertwined in a negative spiral. We cannot expect sustained growth in the manufacturing sector without growth support from rest of the economy, and vice versa.

To achieve higher economic growth, the government start with measures to turn around manufacturing. The new government must remove regulatory hurdles and delay in clearances, so that a huge number of projects in the pipeline can be released for implementation.

Once a project is cleared and all permissions granted, it should be ensured that there are no undue socio-political obstacles to implementation of projects.

There should be a system of investment protection, particularly for projects of ₹5,000 crore or more. Infrastructure projects in particular must be guaranteed investment protection by the state government concerned.

Rapid implementation of the NMP will ensure that every state comes up with a plan to set up at least one national manufacturing zone (NMZ). In fact, it should be incumbent on the state governments to assume ownership of the NMP; without that the NMP may not work. To facilitate development of efficient NMZs, the state governments should encourage public-private partnerships and issue clear guidelines.

In order to attract investment in the NMZs, the central government could introduce an investment subsidy for all units in the zone with an investment size of up to ₹1,000 crore, so that SMEs that come with this investment size are also encouraged to set up units.

The interest rate must be brought down to internationally competitive levels. But for the purpose of large projects this may not be enough. The idea of development finance, as in the past, may again be considered, and at least one development bank should be established.

Advanced countries such as Japan, West Germany and South Korea, and Brazil among the EMEs, still maintain development institutions. It is important, therefore, that we reconsider our earlier decision to do away with development banking and recapitalise some of these banks to create institutions dedicated to industrial development.

Progress on industrial corridors, such as Mumbai-Delhi-Kolkata should be seen as a priority. This will attract huge investments in railway and road infrastructure as well.

Our archaic labour laws must be updated, addressing the the aspirations of young workers.

I am sure the new government will accord a high priority to revive manufacturing, a crucial sector for GDP growth and employment generation.

The writer is Chairman and Managing Director, JK Tyres. The views are personal

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