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Business News/ Opinion / Manufacturing sector can be India’s golden goose
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Manufacturing sector can be India’s golden goose

Despite having the necessary resources, India missed out on developing a strong manufacturing setup

Madhu Kapparth/MintPremium
Madhu Kapparth/Mint

Through time, manufacturing industries have helped nations attain high economic growth and sustainability. Industrial nations have participated and benefited from the rapid spread of globalization—a key driver of economic growth, prosperity and rising standard of living. The UK, Germany, North America, Taiwan, South Korea, Japan and China have all, at some point of time, emerged as global manufacturing leaders, which put them as prominent economies on the world map.

Dominance in manufacturing, however, has navigated geographies as developed nations have struggled to keep manufacturing intact due to rising costs and lack of competition, creating opportunity for other economies to emerge. In today’s global scenario, manufacturing is an essential step not only towards self-reliance, but a road to national development and economic empowerment.

India, in its road to development, has moved from being primarily an agrarian economy to a tertiary service dominated one. Despite having the necessary resources, India missed out on developing a strong manufacturing setup—the sector contributed 15% of the gross domestic product (GDP) in financial year (FY) 2014. This is not substantial, especially when compared with Asian peers such as China and South Korea (31% each), Thailand (30%), Malaysia (25%) and Indonesia (24%).

India’s manufacturing sector contribution to GDP peaked at 16.6% in FY97, and has been a static contributor at around similar levels since the start of the liberalization era in 1991.

A manufacturing boost will help India address one of its biggest problems—a large work force with unmet employment needs. Historically, India has generated seven million jobs a year vis-a-vis 23 million people that are eligible to join the work force each year now. Secondary sectors (industries including manufacturing) in FY12 employed 25% of India’s work force against its 20% contribution to GDP, while tertiary sectors (such as services) employed just 28% of the work force as against its 66% contribution to GDP.

Manufacturing will also help reduce import dependence, increase export revenues, sustain the services demand and will make GDP growth sustainable.

It’s not that India is new to manufacturing. Select sectors such as pharmaceuticals, chemicals, auto and auto ancillary, and textiles have thrived on the limited ecosystem and done well both in the domestic and global arena. India has the right ingredients in place; resource reserves with large cultivable land, inland water bodies, moderate weather conditions, fourth largest coal reserves, fifth largest iron ore reserves among other raw materials and a vast coastline. A growing domestic market along with ample import substitution opportunity ensures a ready demand scenario.

India’s competitiveness, too, has received a boost from a mix of internal and external factors over the past few years. China’s high wage inflation and rising power costs have helped India close the competency gap with it.

However, there are few critical areas such as skill development, infrastructure bottlenecks and regulatory framework where we need to pace up. Roads, ports and railways have lagged demand, choking the current system. India ranks a dismal 142 out of 189 countries in the World Bank’s Ease of Doing Business Index.

Apart from these, there’s an urgent need for clarity, consistency and transparency of regulatory framework along with speedy decision making to make the environment conducive to manufacturing sector growth.

The good news is that change has already begun with the new government working to resolve regulatory hurdles related to labour laws, resource allocation, foreign direct investments, land acquisition and taxation, among others. States such as Rajasthan and Madhya Pradesh have taken a step forward by amending their labour laws and rationalizing land management rules, making them industry and investor friendly.

With a large internal and external market to cater to, necessary resources, right leadership and regulatory change is underway to tap the potential. Now is the right time to harness the long impending manufacturing potential of the nation. With the government’s intent and impetus on reviving the country’s manufacturing sector, India has a good chance of witnessing a trend of high manufacturing growth over the next decade. Foreign fund inflows have been healthy, and the current developments reinstate India as an investment destination for global capital seeking long-term sustainable growth.

The government has stated its aim to increase manufacturing’s share in the GDP to 25% by 2022. Assuming 7% GDP growth on a compounded annual growth rate (CAGR) basis, over the next eight years, ending 2022, the target of 25% outlines a staggering 14% CAGR for manufacturing GDP over the same period.

The target is an uphill task and the pickup will be gradual given our ways of democratic functioning. There are a lot of right things happening for the country now. A favourable opportunity size in manufacturing and a clear focus from the Centre will drive both private and state entities to empower the economy for the leap ahead to the next league of growth.

Mahesh Patil, co-chief investment officer, Birla Sun Life Asset Management Co. Ltd.

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Published: 22 Dec 2014, 12:15 AM IST
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