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Manufacturing activity, required for boosting employment and perking up economic growth, has taken a hit due to structural issues such as low returns on investment and infrastructure bottlenecks, say economists.
"There is adequate amount of investment, but the return on investment is poor and that is a problem," said Anis Chakravarty, senior director at Deloitte India.
He blamed the Reserve Bank of India's (RBI) tight monetary stance for raising borrowing costs and said the small and medium enterprises (SME) segment is the worst hit.
RBI has refused to go by industry's demand to cut the repo rate time and again. In its policy review last month, it raised the rate by 25 basis points while markets had expected a status quo.
Pronab Sen, chairman of the National Statistical Commission, said: "A lot of projects are operating at sub-optimal level and there are other supply-side issues as well. Once those constraints are removed, we will get back to the growth track."
Pointing out to the paradigm shift in growth cycle, Abheek Barua, chief economist at HDFC Bank, said: "In the early 2000s, services was the sector which led to expansion, now the burden has fallen on the manufacturing sector to push this cycle."
Barua said infrastructure issues have hit the sector the most. Lack of adequate supply of infrastructure facilities such as road and power has led to usage of more capital in order to produce a single unit of output, he pointed out.
Earlier, Prime Minister's Economic Advisory Council, had said that although the investment rate is still high, a lower incremental capital output ratio (ICOR) - the number of units required to produce a single unit of output for the economy - could have given a healthier growth. "Because investment rate is still high, ICOR of four could very easily have given 7-7.5 per cent economic growth. Delay in completion of projects was responsible for slowing of manufacturing growth," Rangarajan had said.
The ICOR for the Indian economy stands at 5.8 for 2013-14, according to the advance estimates. Historic data suggests when India's GDP grew around nine per cent, the ICOR stood at around four.
According to some analysts, merchandise exports have to be pushed up to spur economic growth.
"One of the solutions to boost the (manufacturing) sector is through exports," said Chakravarty.
Barua said with the emergence of quality issues in sectors such as pharmaceuticals, regulatory barriers have hit exports in this area, which was quite predominant before the global crisis of 2008.
Even as advance economies are showing signs of recovery, India's exports grew just in single digit for three consecutive months - November, December and January.
US economy, one of India's largest trading partners, clocked 4.1 per cent and 3.2 per cent growth in the third and fourth quarters of 2013, respectively. Also, the widely-tracked HSBC purchasing managers' index (PMI) showed that output in the Euro zone economy expanded for the seventh successive month in January. At 52.9 points, PMI posted its highest reading since June 2011.
Manufacturing production declined in six months out of nine months of the current financial year, for which data is available. In December 2013, it contracted 1.6 per cent, taking the total fall to 0.6 per cent in the first nine months.
In value terms, manufacturing is officially projected to contract this financial year for the first time in over two decades.
According to advance estimates by the Central Statistics Office, the manufacturing sector, which occupies the maximum share in industries, will contract by 0.2 per cent in 2013-14 against 1.1 per cent growth in the previous year. This is the first time since 1991-92 that the sector has witnessed a decline in output.
Earlier, Prime Minister Manmohan Singh had expressed concern at inadequate number of jobs being created by the manufacturing sector. According to the Planning Commission's 12th Plan document, employment in manufacturing fell by five million persons between 2004-05 and 2009-10.
