Acknowledging that a combination of rising interest rates and an appreciating rupee had triggered a slowdown in the economy and a negative impact on employment, Prime Minister Manmohan Singh is creating a high-powered group that will suggest immediate steps to reverse this decline.
V. Krishnamurthy, chairman of the National Manufacturing Competitiveness Council, will head the group that has been asked to submit its final report within three months, with interim recommendations “which require early action” before end-March.
PRODUCTION THRUST (Graphic)
The group will include the secretaries in the ministries of finance, revenue, commerce, textiles as well as industrial policy and promotion.
The group will meet as early as Friday and it appears quite likely the interim recommendations could find their way into the Union Budget, due end of February.
There could also be separate proposals before the end of the fiscal year, much as the recent measures on textile exports, said officials who did not wish to be identified.
The government has a sense of urgency as it heads into a series of key state elections in 2008 that will set up national elections in 2009, assuming the ruling Congress-led coalition lasts its full five-year-term. Any abrupt turnaround in the Indian economy could damage the coalition’s re-election prospects.
The group is also being asked to draw up a 10-15 year plan to ensure sustained high growth of manufacturing industries as well as jobs. In addition, it will analyse and recommend various policy measures to leverage foreign direct investment to help create a strong technological base for the manufacturing growth.
Member secretary of the council, V. Govindarajan, will serve on the committee. He conceded that the trigger behind the committee was the sharp deceleration in industrial production in the past few months.
The manufacturing sector had grown 12.5% in 2006-07. But, in the first seven months of 2007-08, growth in manufacturing, which has at least 79% weight in total industrial production, was down to 10.4% compared to 11.1% in the same period last year. Six core infrastructure industries, including power and cement, grew by 6% at the end of November compared to 8.9% in the year-ago period.
This has sparked off fears, even within the government, that industrial production for the current fiscal year will fall below 10%. Most forecasts in fact have pegged it below 10%, with some of them going as low as 8.5%.
“Though the council is already looking at the manufacturing sector on a regular long-term basis, the short-term setbacks in the export sector as well as in industrial production have been the immediate trigger behind this status review,” explained a senior official in the council, who didn’t want to be named.
Asked if the committee’s recommendations might be too late for this year, he said “the finance Bill is only passed in mid-May, so we have enough time to include the measures.”
The government is also worried about the export performance of some labour-intensive sectors, such as textiles, leather goods, handicraft and jewellery, due to the industrial slowdown as well as the rise of the rupee’s exchange rate against the dollar, and its fallout on employment. A lot of these jobs have been generated in the informal sector in the past decade.
Ajay Sahai, director general of the Federation of Indian Export Organisations, said the export slowdown might have resulted in the loss of four million jobs. “The future job loss could be far higher as many exporters have had to downscale their plans for expansion due to lack of orders,” he said.
The council itself was set up in October 2004, soon after the present government came in, to look at ways and means to raise industrial growth and employment.
The National Strategy Paper on Manufacturing, released in 2007 by the council, had argued that the near-stagnation in the share of manufacturing sector and its falling employment elasticity, spelt trouble in the medium term. To encourage growth and new employment, the strategy paper had also recommended changes in The Industrial Disputes Act, 1947 to allow free exit to companies without government permission.
In the preface to the strategy paper, the Prime Minister had written: “I am concerned that the share of manufacturing in national income has shown only a marginal improvement from 15.8% in 1991 to 17% in 2003. This should be somewhere in the range of 25% to 35%. This requires manufacturing to keep growing at 12-14% in the next decade.”
In fact, the share of manufacturing in gross domestic product has been declining yielding to a rapid growth in services. It was only 16% in 2005-06.
Economist Bibek Debroy, council member and principal author of the background paper for the strategy, said: “It is the first time post reforms that a 10-15 year plan is being hammered out for the manufacturing sector.”
Lamenting the lack of policies to generate work above the poverty line even in the 11th Plan (2007-12), Y.K. Alagh, former Union minister, said: “The increase in employment of late has been in informal and unregistered work, resulting in this sector accounting for two-fifths of total manufacturing jobs. Instead, policies have ensured that formal employment has gone down.”
There are also concerns, says Shashank Bhide, research head with NCAER, “that incremental employment is occurring in areas where productivity is lower.”