All countries that manufacture their own goods tend to flourish, be it China, Japan or the US, owing to the immense importance of the manufacturing sector in shaping an economy. India’s prosperity, too, lies in increasing and diversifying its manufacturing industries. Thus, the government’s recent thrust on the manufacturing sector through its various initiatives and schemes seems fitting.
Moreover, with globalization, a larger, more competitive market has been established for all commodities. Gone are the days when Indian roads would be lined up with only Ambassadors and Fiats. Now, we as consumers have a plethora of options to choose from. A similar kind of explosion can be seen for various other goods, ranging from television sets to processed fruit juices.
The manufacturing sector is considered to be the backbone of an economy, and is often used as an indicator for its development, owing to the immense support it provides to the agricultural and service sectors in terms of tools and machinery.
Also, with the development of the manufacturing sector, the economy becomes more and more self sufficient, not having to import commodities. Additionally, due to a surplus of goods being produced, the economy can engage in large scale export, resulting in a positive trade balance and bringing in much needed foreign exchange.
The development of any sector of an economy creates millions of job opportunities, which would absorb the surplus labour from the agricultural sector and work towards emancipation of the poor.
However, despite the chance globalization provided, India’s manufacturing sector has not been able to fare well. It is safe to say, that India missed its train to becoming a manufacturing hub long ago, unlike China, whose GDP per capita used to be lower than India’s until 1990. Over the years, despite the government launching various reforms in the form of policies, campaigns, initiatives and schemes, they have not been able to help the manufacturing sector. The sector’s contribution to the GDP has been stagnant at a share of only 16-17%.
Yet, India’s rank in the World Bank’s ‘Doing Business’ report has jumped 23 positions, against its rank of 100 in 2017 to 77 in 2018 among 190 countries. However, the report seems to miss out on various essential categories which work towards facilitating business in a country. It is based only on two cities, Mumbai and Delhi in India’s case, which is a gross misrepresentation of the country’s actual condition.
The Modi government had urged the world’s manufacturing companies to “come and Make In India,” allowing 100% Foreign Direct Investment across 25 sectors of the economy in the year 2014, ranging from IT and automobile industries to business processing units. As a result, India emerged as the top destination globally for FDI, surpassing the US and China with FDI worth US$ 60.1 billion in the year 2015. Yet, in the very next year, FDI dipped 23%.
Simply allowing FDI does not attract investors. What multinationals really look for while diversifying investments across various countries is low cost of production, which is not the case in India.
India has an abundance of high quality raw material which it exports across the world. However, manufacturers prefer to import the same raw material after its processing as it is cheaper than the one domestically processed.
The domestic producers, due to the high cost of doing business, have to sell their products at a higher price than the rest of the market to prevent losses while imported goods are sold at a much lower cost despite the added cost of import duty.
This vicious cycle not only hurts the producer, but also the country’s economy as a whole. All foreign exchange India receives is wasted on importing goods already being manufactured in the country.
To take care of the same, the Modi government had launched the BharatMala Pariyojana in 2015, under which the development of roadways and railways is to be conducted. It aims at reducing the time and money consumed in transporting goods as well as providing connectivity to remote parts of the country, especially the North-Eastern region.
However, the project misses out one major mode of commuting.
Waterways is the cheapest mode of transportation, operating at half the cost of railways. And even though India has made excellent use of its coastline, laying it down with numerous ports, it has not yet explored the potential of its vast network of rivers. With the Ganga in the north, Bhramaputra in the east, Krishna and Kaveri down south and Namrmada and Godavari flowing westward, development of inland waterways would prove to be a boon, relaxing the load on the roads and railways, along with reducing transportation costs. While some initiative has been taken, there is a lot of potential here.
India offers cheap labour, which unfortunately is being eroded by the growing skill mismatch and low productivity of laborers. In a bid to overcome this challenge, the Modi government launched the Skill India campaign in the year 2015, with the aim of training over 40 crore people in varied skills by 2022. The government is also soon expected to deliver vocational courses in Artificial intelligence, Internet of Things and Machine Learning.
Even though the campaign is a great initiative, it is necessary to not just train the new workforce entering each year but the existing workforce must also be kept up-to-date to ensure efficient working on their part and enhancing the overall productivity of a firm as well as the economy.
Moreover, certain labour laws are also a cause of dissatisfaction among entrepreneurs. They make firing incompetent and unproductive workers difficult and complex. As a result, most industries hire workers on a contractual basis, stripping them off a number of benefits such as gratuity and provident funds.
Digitalization is often viewed as a catalyst for rapid economic growth. The government, aiming for the same, launched the Digital India (for a cashless economy) campaign in 2015. Its main benefit is the removal of black money, as transactions made digitally can be easily monitored. With restricted supply of cash, under the table transactions would be impossible as they could easily be tracked if made electronically. Similarly, online filing of income tax returns has ensured transparency in the procedure, eliminating middlemen and preventing corruption and bribery.
Another aspect where both the central and the state government needs to act is to cut down on bureaucratic delays and corruption in granting permission to start a business. At every stage of the clearance process, from the opaque land acquisition system to receiving permission from the factory inspectorate and pollution boards, nothing moves unless the businessman or company pays a bribe.
Special Economic Zones are being developed in various states where world class facilities of water, transportation, roads and electricity are provided. Any company setting up its office in SEZ is exempted from paying income tax on exports for the initial five years of its inception. Moreover, they do not have to pay the Goods and Service Tax (GST) and levies imposed by the state government. However, these benefits are not reaching the targeted audience. Most SEZs are used by the IT companies to set up their offices. Also, despite the project’s inception on April 1, 2000, a number of SEZ still lie vacant across the country due to their nonstrategic locations. They are more often than not located in areas with weak connectivity to even other parts of the same state, mostly due to the influence of local politicians in selecting the designated areas.
The Micro, Small and Medium Industries Development (MSMED) Act, which was adopted on Oct 2, 2006 proved to be a boon for small scale industries. It provided clarity on the vague laws that bound MSMEs and further provided them with a number of advantages. One of the most important benefits available to these enterprises is protection against delay in payment from buyers and right of interest on delayed payments. Apart from this, MSMEs also have access to easy finance availability from banks without collateral requirements.
However, these individually small but collectively large group of companies are among the highest defaulters across all credit classes. Despite the Pradhan Mantri Mudra Yojana, launched in 2015 to support the MSMED Act, the average loan package granted to the MSMEs is around Rs. 50,000, which is not sufficient to allow the MSMEs to continue with their innovative ideas and prosper. For these MSMEs, tailor made financial schemes are essential. Moreover, private banks usually shy away from providing loans to start ups due to the risk involved, and the ones that do charge high rates of interest.
The Technology Upgradation Fund Scheme was set up to provide funds specifically to the already flourishing textile industry to buy newer and better technology. Instead, the government could have spent the same money on research and development, whose share in the GDP is lower than 1%. This way, newer and better technology, domestically developed, could have been provided to various manufacturing industries instead of just one. Technological innovation would further help reduce the cost of production and improve the quality of the commodity.
In 1991, Manohan Singh, the then Finance Minister of India, issued the New Economic Policy (NEP), which lifted numerous trade barriers from the Indian economy. Foreign Direct Investment was permitted and import and export of goods was made easier. The NEP was implemented to create a more competitive environment in the economy as a means to improving the productivity and efficiency of producers. This policy has worked out brilliantly. Today, a number of Indian brands are flourishing in the global market, such as TATA and the Aditya Birla Group, due to their superior quality and finesse in execution.
The government still has a lot to do to fulfill its dream of making India the ideal destination for all entrepreneurial ventures. However, industrial revolutions don’t happen overnight. They require careful planning, policy interventions, regular upgrades, and innovation and investment at every stage of development.
Proper policy implementation is just the small push the Indian government needs to work towards a better developed manufacturing sector. A sector able to compete with its well developed peers.
By Arunima Pandey
Grade 11 student, Jayshree Periwal High School, Jaipur
This piece was written under our Writing Mentorship Program – June 2019.