New Delhi: India’s agrarian economy leapfrogged into a services-dominated economy after the economic reforms of the early 1990s, skipping over industrial growth. A large share of the country’s labour force is still stuck in agriculture.

To provide gainful employment to a growing young population, India is pushing a national manufacturing policy—touted to be the policy that will bolster manufacturing and bridge the missing link in India’s growth story.

Setting targets: A Larsen and Toubro factory at Hazira, Gujarat. (Prashanth Vishwanathan/Bloomberg)

The new policy, cleared by the cabinet in October, aims to create 100 million jobs and increase the share of manufacturing in India’s gross domestic product to 25% by 2022, from 16% now.

Key to the policy is establishing national investment and manufacturing zones (NIMZs), proposed to be developed as greenfield industrial townships and benchmarked against the best manufacturing hubs in the world.

These zones will have at least 5,000 hectares each. Units in these zones will enjoy single-window clearance, a liberal exit policy, incentives including exemptions from capital gains tax, and incentives for green manufacturing and technology acquisitions.

While industry bodies and corporate houses have welcomed the move, economists say the policy is overambitious and poorly thought out.

“Manufacturing is a big problem in this country as we are not competitive in this field. But the new policy is a welcome step towards it," said Venu Srinivasan, chairman of TVS Motor Co. Ltd. “This is the first major step taken in this direction since 1990."

But he also pointed out that a poor business environment makes investors think twice before putting their money in India. “The government needs to get rid of such a sentiment. We have had problems related to land acquisition, water and electricity, and other regulatory issues related to labour," Srinivasan said. “We have to find permanent solutions to these problems."

R.C. Bhargava, chairman, MarutiSuzuki India Ltd, said the next phase of growth will come from manufacturing and people from rural areas will get a bulk of the jobs.

“But the irony is that the population is not trained and they will not go to IIMs (Indian Institutes of Management) or any other colleges for better qualification. So they will fall under blue collar jobs and the government needs to ensure their proper training," he said.

The proposed manufacturing policy has an elaborate plan to bridge the vast skills gap in India through public-private partnerships.

Bhargava said the government and industry have to facilitate quicker decision-making. “But the problem is everybody is afraid of taking such decisions as they will be portrayed as being sold out to the business houses," he said. “...we need to have a conducive business environment for such kinds of targets or else this policy will remain on paper and will never become a reality."

Ajay Dua, a former secretary in the industry department that formulated the manufacturing policy, said the government has to do more than create a few NIMZs to boost manufacturing. “We need a more elaborate manufacturing policy for the country as a whole."

Boosting manufacturing will indeed be a challenge.

Even Pronab Sen, principal adviser to the Planning Commission, says India cannot replicate the kind of industrial revolution European countries saw at this stage of economic development. “Typically in such countries, the share of manufacturing went up to 40% of GDP (gross domestic product) and then gradually came down to 20%. We are not going to go that far. A 20-25% share of GDP is what we are targeting now."

He finds even that target ambitious. “It is not realistic at all to achieve a 25% share of manufacturing over a period of 10 years. It would mean a 1 percentage point increase in manufacturing growth every year over the 9% growth rate at present. It seems almost impossible."

Dua, too, finds the target unrealistic. “This would mean 15-16% manufacturing growth every year. I don’t think this order of constant growth is feasible," he said.

Both Sen and Dua say the policy’s growth and employment-generation ambitions may not be feasible. “At present, the manufacturing sector employs 16-17 million people. To increase sixfold in 10 years is very difficult," said Dua.

The former industry secretary also said that though the idea of creating world-class manufacturing zones is good, it may be difficult to acquire the large areas required for these.

“One should also be careful in giving permission for far too many NIMZs. Otherwise it would lead to an SEZ (special economic zones that are essentially tax havens) kind of chaos," he said.

Sen holds the view that clusters make more sense than establishing small industries all over the country. “This minimizes the land requirement as industrial units share resources," he said.

Land acquisition remains the key hurdle in the process of industrialization. Many industries including South Korean steel company Posco and Indian business conglomerate Tata Sons Ltd have found it difficult to acquire land for setting up plants in recent times.

Dua also criticized the plan to limit fiscal incentives to the manufacturing zones. “If you want to give fiscal incentives to industries, you must give it to everybody and leave it to the units to decide whether they want to be close to the physical infrastructure or the markets."

Sen believes providing fiscal incentives only to units within the zones will not make a difference. “Units decide the location based on whether they want to be close to the market or economic resources. Many units may choose to be close to the market places even without incentives," he said.

Another criticism is that creating such zones will lead to the relocation of existing industries and, thus, a zero-sum gain in generating additional employment.

Sen, however, is for the relocation of units into industrial clusters. “There will be a fair amount of relocation initially. However, as things are in place, new units will come up, leading to net additional employment generation."