India cannot sustain its 9 per cent annual rate of growth over the long term without a larger, wider and deeper industrial base. A bigger manufacturing sector is also required to absorb non-farm, semi-skilled labour and the growing number of first-generation educated high school students coming out of rural areas and small towns. There is no gainsaying that Indian manufacturing is yet to develop the solid foundations that would lead to consistently high growth rates witnessed in East Asia in the 1970s and 1980s and in China since the mid-1990s. While country-specific factors played a role in the spectacular success registered by the manufacturing sectors in those countries, a conceptually sound manufacturing policy is still very much a work in progress in India. The recent revival of industrial growth offers a ray of hope, but far more sunshine is needed for the sector. Shipbuilding, capital equipment mainly connected to the power sector and consumer durables like cars, two- wheelers and televisions sets were the star performers. However, if consistency were the yardstick, the auto and auto ancillary sectors would be the standout performers over the past year. The inability of industries like chemicals and metals to register more consistent performances is puzzling, given the close links these industries enjoy with the rest of the economy. Clearly, a new “industrial policy”, closely linked to the financial sector, is needed for the manufacturing sector to emerge on a firm footing in the next decade.
True, the cost of capital has started going up, with monetary tightening by the central bank, but the accumulation of large, untapped funds with big corporates and the difficulty of access to credit for small and medium enterprises (SME) suggest that improved access and greater risk-taking by financial institutions are more important than tinkering with rates. With public investment also declining, Indian manufacturing still lacks the scale economies to become globally competitive. The SME sector, which accounts for 40 per cent of manufacturing output and over 80 per cent of sector employment, is expectedly hit the hardest. Revitalising this sector is the key to sustained manufacturing growth and above all it could play a vital role in poverty alleviation.
Putting the manufacturing sector on a firm footing would require a single-minded vision that would include sustained investment in infrastructure, particularly power, roads and port-handling facilities where India is still sorely lacking, developing human capital, creating agglomeration economies through cluster formation, more energetic government procurement policies to stimulate demand, among others. The role of FDI in stimulating domestic manufacturing has been marginal, in stark contrast to China. There is no reason why India cannot attract significantly higher volumes of FDI in manufacturing, given its rapidly growing economy, quality of institutional capital and internationally competitive wages. However, better infrastructure and regulatory environment, and simpler labour laws would help. The National Manufacturing Competitiveness Council Report, submitted to the PM in 2008, provided a road map to achieve annual growth rates of 15 to 16 per cent with a view to increasing the share of manufacturing in GDP to 25 per cent by 2022. While some steps have been taken to develop a “national manufacturing policy”, a more focused strategy, including opening up the defence production sector to private investment, could create new investment opportunities in the manufacturing sector. India needs a new burst of industrial growth in the new decade.
