On India's Manufacturing Sector: Make, or Break

3 months ago 11

Manufacturing can be a powerful growth engine. In India, compliances, policy uncertainty and low innovation have the sector stuck in low gear.

Modern tech: A Mahindra & Mahindra production facility at Chakan, Maharashtra (Photo: Getty Images)

India's industrial history, in which manufacturing is prominent, is marked by three post-Independence phases-planned development till the end of the 1970s, limited liberalisation in the 1980s and the post-reform period after the early 1990s.

Following Independence, early governments had the tall task of rebuilding India's industries after centuries of British rule. The planned development period focused on increasing production and ensuring equitable distribution by stressing the role of the state. At this time, private business owners required licences to set up/ expand operations in most major industrial sectors, with a specified schedule of industries subject to licensing. In the 1980s and later, India's industrial controls were gradually relaxed, with efforts being made to modernise various sectors through technology imports and foreign capital. However, it was the New Economic Policy of 1991, which, following an unprecedented balance of payments crisis, brought real change to India's industrial landscape. Under this, the approvals required for manufacturing units were progressively loosened. Foreign direct investment (FDI) and technology transfers were sought and sectors formerly reserved exclusively for PSUs (public sector undertakings) were opened up to the private sector. A group of 34 tech-intensive sectors were granted an automatic (but conditional) approval route for FDI. Simultaneously, government equity holdings in PSUs were restricted to 51 per cent.

In recent years, the Narendra Modi government's Make in India drive has also sought to promote domestic manufacturing, but success so far has largely been confined to mobile phones. Still, there are many hopes for the government's production-linked incentive scheme, which was recently expanded to more sectors. Under this, the government hopes to boost domestic production by offering incentives to companies on incremental sales of products from domestic units. And in terms of attracting FDI, according to the UNCTAD (United Nations Conference on Trade and Development), India ranked among the top 10 recipients of FDI in South Asia in 2019, with $49 billion (about Rs 3.5 lakh crore)-a 16 per cent increase from the previous year.

However, much more needs to be done. Indian manufacturing has long been stuck at around 15 per cent of GDP. To change this, Indian firms need to do more to become part of global supply chains. Some success has been found in automotives and pharmaceuticals, but that needs to be replicated in other sectors. And rather than just being factories for foreign players, Indian manufacturers need to be much more innovative in product design, manufacture and distribution.

At the regulatory level, the government protections that Indian manufacturers enjoy have weakened their drive for innovation. At the same time, MSMEs (micro, small and medium enterprises) have long been ignored, despite forming the backbone of Indian industry. The labyrinthine legal environment also discourages growth-Indian laws impose drastically higher compliance costs on large companies. Factors like these need to change if domestic manufacturing is to grow from its current 15 per cent to 25 per cent of the GDP, a government aspiration.