Revamping India’s Manufacturing Sector

by Sarthak Kejriwal

Introduction


The Honourable Prime Minister of India Narendra Modi addressed a reeling nation on May,12 2020 with the objective of not only assuaging the long awaited concerns over the release of an economic relief package but also instilling in the Indian population a promise for a renewed vigour: making India self-reliant.


The 20 lakh crore economic stimulus was laid out as a series of reforms for infusing liquidity in the economy by providing collateral free loans to MSMEs, special liquidity schemes for NBFCs and cash relief for DISCOMs.


However, these reforms aimed to provide financial assistance to cash strapped institutions will may at best restore than lift off the manufacturing industry. They come at a time when the Indian economy has experienced an unprecedented situation in 70 years and is expected to contract to 3.2% according to the World Bank.


What amplifies the problem is that the Indian economy was performing poorly even prior to the Covid-19 pandemic with the GDP falling to a 11-year low of 4.2 per cent in 2019-2020.


Given the decline in contribution of the manufacturing to the nation’s GDP and a growth of merely 0.03 % in FY 2019-20 compared to 5.7 per cent in the previous year, it shall be chasing a fleeting dream unless it takes revolutionary yet cautious measures to make India a competitive player in global trade which shall not only allow it to meet domestic demand but also increase its share in global exports which stands under 2%.


For India to truly be ‘Aatmanirbhar’, not only will it face a challenge of mobilizing internally displaced workers back to urban industrialized areas to ramp up production but also have to revise its labour and land policies whose fractures have been magnified by the crises and left the manufacturing sector vulnerable. Such fractures have not only led to the miserable conditions of workers but have also led to India’s manufacturing success a far-fetched reality.


Historical Overview


In 2014, the ruling NDA government announced the ambitious ‘Make In India’ scheme with the aim of increasing India’s share in global exports by making its manufacturing sector robust.


It aimed to increase the share of manufacturing in gross domestic product (GDP) to 25% by 2022 (from 16%) and create 100 million jobs in manufacturing.


However its current situation seems to be gloomy as the share of manufacturing in the GDP has been consistently decreasing, the industrial production falling and share in global exports under 2%.


While there has been an increase in the FDI inflow to India, the FDI directed towards manufacturing has remained stagnant.


With the success story of electronic equipment standing out in the Make In India scheme( the exports of electronics has increased from Rs. 38,263 crore in 2014-15 to Rs. 61,908 crore in 2018-19) the rest of the sectors particularly automotive and textile sectors have seen a huge decline in industrial output and value generated in the economy.



While Make in India was a promise to make India a global manufacturing base, it is in fact ironic that its share in the GDP has declined. It is hence imperative we examine the underlying factors behind our current position before we can claim ourselves to be truly “Atma-Nirbhar”.


Labour Reforms

Since , there has been a massive exodus of workers back to rural regions, manufacturers are facing a shortage of manpower to restart production.


Moreover, workers will also be reluctant to migrate back to urban areas because they might have adopted alternative forms of occupations such as farming or other employment generated by public works like MGNREGA whose purview the government has expanded to increase rural employment.


Therefore industries will be inclined to automate their processes and reduce the reliance on labour. However, automation is an expensive affair in India where most capital goods are imported, and labour is relatively cheap.


This will lead to industries and government having a moral responsibility to facilitate better worker conditions and salaries to attract workers.


However, it does not explain why Uttar Pradesh, Gujarat and other successive states have abolished basic worker protection laws - the Minimum wages act or the Factories Act etc.


These laws have often been viewed as a hindrance to the ease of doing business because of the sophisticated legal requirements that discouraged new labourers from being hired because terminating their employment required government approval.


Due to poor execution, it led to corruption and a decrease in the formalization of contracts.


However, outrightly stripping these laws would deprive workers of social protection shall lead to poor worker-manager relations. Consequently, it shall lead to poor profits and hence bleak investment prospects, completely counterring the objective with which the government slashed these worker protection laws: to boost investment.


Land Reforms


India's ranking in the Ease of Doing Business Report of the World Bank was 154th out of 190 countries when it came to "registering property.


The moment seems ripe for introducing bold land reforms to promote acquisition of property and investment. The current laws require landowners to be compensated at twice the price of the land in urban areas and two to four times the price in rural areas.


Another provision mandates the consent of 70% of landowners for acquisition of land for public-private purposes and 80% of landowners for acquisition for private purposes. Since these laws have been extremely stringent, they have often been flouted by crony capitalists and politicians and have neither protected landowners nor promoted investment in manufacturing.



Moreover to boost immediate investment the government has to relax urban zoning laws and environmental regulations temporarily. Lastly, the government will have to ensure the development of more habitable residential communities in urban areas to discourage labour mobility in the future.


Further Government Measures


During the crises, many industries realized the importance of localization of supply chains.


Out of the total consumption of automobile components, 27% of it is imported. Moreover, the mobile handset industry imports 88% of its components from countries like China, according to the Confederation of Indian Industries.


While 100% localization is impossible, the government will have to provide incentives to companies to produce these components locally to ensure that India has a comparative advantage in the manufacturing of these parts.


India will have to actively invest in a research and development framework to ensure that designing as well as engineering is indigneous.


The government must also promote special economic zones which will not only provide tax reliefs to companies but also reduce transportation costs, increase research and development and reduce intra-state compliance costs.


What Caused The Collapse?


Distortion of supply chain due to the pandemic has increased the logistical costs. Given the highly geographically distributed supply chain of India, several parts of it have faced the threat of being in a containment zone as a result of which production has stopped and many operations have ceased to exist.


Moreover, trucks will have to take longer routes (because of containment zones) and hence cost will increase due to more expenditure on fuel and increased time.


Roads account for 60% of the logistical needs of India and thus the government will have to emphasize on shifting India’s logistical mediums from roads to rail and inland waterways which have been relatively less impacted.


All of these measures shall ensure conducive conditions for economies of scale by reducing average costs,consequently boosting investment by making India more competitive on a domestic and international stage.


Is Aatmirbhar Bharat still possible?


The path down the road of becoming the world’s workshop and self reliant is mired with obstacles which the government can't remove by infusing 20 lakh crore in the economy.


With the number of covid cases rising exponentially, India is making a trade-off everyday between keeping the society healthy and keeping the economy robust.


However, this adversity has created an opportune moment to anticipate a brighter tomorrow as companies seek to diversify their manufacturing bases out of China. However, we can only anticipate a self reliant India if she adopts bold and revolutionary reforms.



References


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Created by Yashvardhan Sharma and Amogh Narain Agarwal.