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Past Issue • Jan-Mar 2012

A Plan To Grow Indian Manufacturing

India’s manufacturing sector needs to grow and contribute more toward the economy. In order to facilitate this growth, the Indian government has proposed a National Manufacturing Policy (NMP). Arun Maira, Member, Planning Commission, presents his views on the government’s new policy. 

Over the years, various policy initiatives and economic reforms have made India one of the fastest growing economies in the world. However, the performance of India’s manufacturing sector causes concern particularly when compared with the manufacturing sectors of other countries in similar stages of development. The increasing gap in both, the sectoral share of manufacturing and the productivity of the manufacturing sector in India, compared with such countries, including China, indicates that the country has not been able to fully leverage the opportunities provided by the dynamics of globalisation.

Today, the manufacturing sector contributes about 15% of India’s GDP, with estimated revenues of about Rs 30 lakh crore in 2008-09. While the recent growth of manufacturing makes India one of the better performers amongst the large and rapidly developing economies (RDEs), the sector’s share of GDP is among the lowest in this group. Manufacturing has not been the engine of growth for the Indian economy and needs to grow at a much faster rate to have a higher multiplier effect on the national economy. The manufacturing sector employed 58 million people or just about 12% of the workforce in 2008. This share is low compared not only to other developing countries, but even with more developed economies where there is a higher demand for services. Additionally, many studies have shown that over 90% of the manufacturing jobs in India have been created in the “informal” sector with hardly any growth in organised sector jobs.

India is a young country with over 60% of population in the working age group of 15-59 years. India will have to create 220-250 million jobs between now and 2025 if it has to exploit its demographic dividend. A large share of these jobs will have to be for the migrating labour from rural to urban areas, which will see rural population decreasing from about 70% in 2010 to less than 63% by 2025. This means about 50-60 million low skilled people will move out of agriculture and related jobs, and will be looking at alternate employment options. It is estimated that every job created in manufacturing has a multiplier effect of creating four additional jobs in related activities. Thus, job creation in the sector can be a major instrument for reaping the demographic dividend.

Labour productivity varies by sub-sectors in manufacturing. While some sectors like metals are capital intensive on account of the nature of production processes required and hence, inherently not labour intensive, other sectors like textiles and paper are employment intensive. At the same time, it is expected that labour productivity for all sectors should gradually improve over time. Looking at the disaggregated historical growth of the sub-sectors of manufacturing, a similarly distributed growth of approximately 11-13% would yield an additional approximate 80-120 million jobs by 2025, assuming an annual improvement of 3% in labour productivity. Thus, an improvement in the growth of the manufacturing sector would have significant benefits on employment as well.

Besides growth and employment, there is a third issue facing the manufacturing sector – the lack of depth that manifests itself in two ways: (i) the relatively low level of “value-addition” in the products manufactured in the country, and (ii) the growing imports of capital equipment – the building blocks of a country’s manufacturing competitiveness. Also, growth in resource-intensive manufacturing has led to high degree of impact on the environment. According to the National Productive Council, the total cost of environmental impact is estimated at $32 billion.

India will have to create 220-250 million jobs between now and 2025 if it has to exploit its demographic dividend.

The Goals of the Plan
India’s strategic objectives for the manufacturing sector in the next 15 years are to bring about a quantitative and qualitative change via a set of policy choices with the following five core objectives:
i. Increase manufacturing sector growth to 12-14% over the medium term to make it the engine of growth for the economy. The 2-4% differential over the medium term growth rate of the overall economy will enable manufacturing to contribute at least 25% of the national GDP by 2025.
ii. Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2025. Emphasis should be given to creation of appropriate skill-sets among the rural migrant and urban poor to make growth inclusive.
iii. Increase “depth” in manufacturing, with focus on the level of domestic value addition, to address the national strategic requirements.
iv. Enhance global competitiveness of Indian manufacturing through appropriate policy support.
v. Ensure sustainability of growth, particularly with regard to environment.

Industrial Policy as a Process of Learning
Against this backdrop of the country’s urgent needs and expectations, the new National Manufacturing Policy (NMP) is a welcome step. However, with it also comes the skepticism as the policy, by itself, will not produce the results. Implementation is vital. Moreover, many areas touched upon by the policy require further delineation and agreements. Therefore, the quality of the process for implementation, involvement of all stakeholders, and on-going evolution of the policy will be the key to achieving the policy’s ambitious goals.

For a nation to accelerate growth in manufacturing, it is important for the government to have a strategy that induces such growth. To ensure the development of a successful strategy (which is really an evolving set of policies rather than a single panacea), there needs to be an effective and on-going process of interaction, collaboration, and learning amongst producers and the government. The process of industrialisation is a process of learning and of developing increasingly complex capabilities. The essential features of a manufacturing ecosystem that has the capability to learn includes depth in terms of stages of value addition in manufacturing processes, a combination of human skills & embodied technology in hardware, knowledge and a large and demanding customer base to create a productive and competitive industry, and a range of sizes of firms, including small and medium-sized firms. There are five processes that enable a manufacturing ecosystem with the above features to learn:
• Fruitful interaction amongst diverse components of the system.
• An effervescent process of innovation.
• A responsive regimen of standards.
• A strong IP regime.

• Processes that enable system-wide learning and continuing improvement such as total quality management, business excellence, etc.

Thus the focus of industrial policy is not to “pick winners” but to create an ecosystem in which more winners emerge and, as they emerge, are enabled by the ecosystem to become stronger.

It is estimated that every job created in manufacturing has a multiplier effect of creating four additional jobs in related activities. Thus, job creation in the sector can be a major instrument for reaping the demographic dividend.

The Architecture of the Manufacturing Plan
The process for developing the plan has focused on ensuring collaboration between a diverse set of stakeholders including the government, industry, state representatives, experts, etc, creating alignment on national goals rather than silo-limited objectives, focusing on underlying root causes and developing recommendations appropriate to the level of maturity of various policy areas.

The architecture of the manufacturing plan has three components:
• Capabilities and processes that go across many, if not all sectors of manufacturing, and that incorporate into the ecosystem the processes for rapid learning and building of capabilities.
• Plans to strengthen performance of select sectors.
• The institutional ability for effective consultation and collaboration between producers and public policy-makers & implementers.

The constraints on India’s manufacturing sector that policy-makers must address now are fundamentally different to the constraints that were addressed in the policy reforms of the early 1990s. Then, the constraint was mainly government’s restrictive licensing policies. Bold, “stroke of pen” reforms could relieve industry of those constraints. The challenges to be overcome now – land acquisition, industrial relations, environmental clearances, etc, – involve many other stakeholders. They must be heard and satisfied that their interests will be served by the reforms, or they will block them. Better consultation is the essence of good democratic governance. Therefore, the quality of the process of interaction amongst stakeholders in the course of formulation of policies and their implementation is the key to achieve the ambitious objectives of the Manufacturing Plan.

ABOUT THE AUTHORS

  • ArunMaira

    Arun Maira

    Management consultant; Former Member of Planning Commission focussing on industrialisation, urbanisation and tourism policies; Former India Chairman of Boston Consulting Group.
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