BackIndia’s slow but sure de-industrialisation is worrying
India’s high GDP growth has got policymakers excited but we must not lose sight of our flagging manufacturing sector that needs a major revival for the sake of prosperity and employment
PremiumThe national accounts data released last month surprised everyone, with India’s gross domestic product (GDP) growth rate clocking a provisional 7.2% in 2022-23. This was higher than the government’s estimates and also that of the Reserve Bank of India (RBI). Buoyed by this data, the chief economic advisor to the finance ministry declared that the economy has fully recovered and that the final estimates may be higher than the provisional ones.
While the latest GDP estimates may have brought cheer to the government, the same GDP data also suggests that the structural reasons that contributed to the Indian economy’s slowdown before the pandemic are still present and may actually have worsened. The continued weakness of private consumption and investment suggests that the economy is suffering from weak demand. But a better indicator is the structure of the economy. The GDP estimates show that the manufacturing sector, which is the largest sector of the economy in terms of GDP share and the third largest in terms of employment, grew a paltry 1.3%. This is its second lowest growth in the last 25 years. The only year worse than this was 2019-20, when its output actually declined 3%.
Its weak showing incidentally is not isolated to this year, but is a continuation of a trend of its weakening over the past decade.
The manufacturing sector accounted for 15.5% of the economy’s output in 2003-04. This increased to 17.2% in 2012-13 and further to 18.4% in 2017-18, the year following demonetization and introduction of the goods and services tax (GST). After that, its share of GDP declined to 17.1% in 2019-20, which was just before the pandemic, before recovering to 17.7% in 2022-23. That, however, still is lower than the peak of 2017-18. Between 2003-04 and 2013-14, it contributed an average of 19% to the total growth in gross value added (GVA), higher than its share in GDP. This contribution increased to 22% between 2013-14 and 2017-18, but declined to just 15% after that, lower than its share in the national income. Manufacturing sector growth was 7.8% annually between 2003-04 and 2013-14, which increased to 9.1% between 2013-14 and 2017-18, but then declined to almost a third at 3.4% in the last five years.
Its worsening performance is not just a matter of worry for the overall growth prospects of the economy, but also for employment, given that this sector serves as a big source of jobs. Even by share of employment, manufacturing has seen a decline. According to the employment and unemployment survey of the National Statistical Office (NSO), manufacturing accounted for 12.6% of all workers in 2011-12. This declined to 10.9% in 2020-21, before recovering to 11.6% in 2021-22. The total count of workers in manufacturing increased from 54 million in 2004-05 to 60 million in 2011-12. It declined to 55 million in 2017-18 and has been lower than the 60 million level of 2011-12 until 2020-21, marginally increasing to 63 million last year. In other words, the entire manufacturing sector added just 3 million workers between 2011-12 and 2021-22, a period of 10 years, with almost all of this increase in just the last year. Even this paltry increase has been largely in the share of small and unorganized firms, with large corporations accounting for an insignificant part.
The declining share of manufacturing in overall economic output as well as employment is a worrying sign for the economy’s long-term growth prospects. But even as a standalone indicator, it suggests a gradual de-industrialization of India’s economy, which will have implications not just for output growth, but also employment and income growth. The fact that this has happened despite numerous policy interventions such as the ‘Make in India’ initiative, several production-linked incentive (PLI) schemes and the hefty corporate tax benefits extended to industry suggests a policy bias in favour of large corporates, as against the need to strengthen the country’s small and medium enterprises, which have suffered disproportionately from the twin policy shocks of demonetization and the hasty GST rollout.
This is also an indicator of a much larger problem of declining demand in the Indian economy. Despite the policy push and various state incentives, the manufacturing sector has been hurt by a decline in its consumer base, which has seen incomes come under stress.
The trend of gradual de-industrialization is confirmation of a reversal in the process of our economy’s structural transformation, as indicated by other data, notably the Periodic Labour Force Survey (PLFS). The observed movement of workers away from manufacturing to agriculture is a signal of distress, in particular in the non-agricultural economy. While agriculture has contributed a disproportionately larger share to the economic recovery from the pandemic, it is unlikely to play a similar role given rising input prices and the threat of El Niño looming large.
A revival of India’s manufacturing sector is necessary not just for the sustainability of economic growth, but also for income and employment generation, both of which have been under stress for some time now. While supply-side efforts and regulatory reforms will certainly help, the key to the manufacturing-sector revival we dearly need lies in reviving demand across the economy—particularly discretionary spending.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi
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