While the recent sporadic performance of the Indian manufacturing sector has justifiably evoked both concern and comment, another well-documented facet has not received commensurate attention. Organised sector manufacturing in India turned capital intensive in the 1990s and the trend continues inexorably. Research by Business Standard indicates that India Inc added over Rs 13 trillion in fixed assets over the past decade, with over 80 per cent of this accretion since 2005. On the other hand, labour costs using “wages and salaries” as a percentage of gross sales as a proxy, have remained flat at about 6.5 per cent during the same period. Since wages and salaries have increased across the board, it implies that recruitment in manufacturing firms is either flat or may even have declined slightly. Capital expenditure by the private sector has contributed substantially to both manufacturing sector productivity and by extension overall economic growth for two decades. Large-scale investments in cutting-edge technology have helped Indian manufacturing firms ramp up capacity, gain economies of scale and rapidly move up the technology ladder. Increased firm-level productivity has led to a virtuous circle, wherein investment was largely driven by retained earnings, which allowed firms to be largely impervious to periodic interest rate hike in the past. However, the global slowdown has dented profits, which has considerably reduced this self-financed capacity expansion of 2003-2008. Higher cost of capital and the prevailing eco-political uncertainty has resulted in a drying up of non-infrastructure fixed capital formation.
Sharp increases in labour productivity has obviated the need for new hiring, though it is a cause for concern that the impressive capacity expansion in the organised sector has not resulted in economy-wide spillovers by way of forward and backward linkages. This largely pertains to the small and medium enterprises (SMEs) sector, which, barring a few notable exceptions, has been excluded from organised sector’s expansion. SMEs are the Cinderella of the manufacturing sector despite their substantial contribution to exports and employment. They are overwhelmingly undercapitalised, plagued by technological obsolescence and skill deficiency of workers.
Comprehensive labour reforms that include flexible labour laws, allow contract manufacturing and create a social security network to support those displaced are the way forward. Investments in human capital development will have to be accelerated. An uncomfortably large proportion of students in India barely make it past primary school. There is no dearth of empirical evidence that underlines the contribution of universal secondary school education to a robust manufacturing sector. The report by the National Manufacturing Competitiveness Council to the prime minister outlines a strategy to stimulate inclusive manufacturing growth in the country. A 12 to 15 per cent annual growth that it targets for the sector may seem a tad ambitious, but can be achieved if backed by relentless dedication. The automobile sector has shown the way by investing in the upgrade of the technological capabilities of the ancillary sector. It needs to be expanded to other sectors on a war footing.