
Time is running out to revive India’s manufacturing sector
Summary
- The sector had weakened in terms of the count of enterprises as well as factory-employed workers, despite government efforts. India requires structural reforms that go beyond cosmetic policy tweaks.
Gross domestic product (GDP) data released last month confirm fears of an imminent economic slowdown in India. While the decline in growth to 5.4% in the second quarter of 2024-25—part of a six-quarter downtrend—may have rung the alarm bells, signs of trouble have been visible for a while.
Among these was weak manufacturing, which grew only 2.2%. While the debate on whether this is cyclical or structural is likely to continue, there is certainly a cause for worry as far as the manufacturing sector is concerned.
Also read: A decade of ‘Make in India’: Why our factory sector is looking up
Detailed estimates from the National Accounts (NA) are available up to 2022-23. These suggest that the sector has grown at a paltry 2.5% annually during the years from 2017-18 to 2022-23. Since 2018-19, the last full year before the pandemic, growth has been just 1.8% per year.
The net result is that the share of manufacturing in national income in 2022-23 is lower than it was in 2017-18. However, national accounts present only a part of the problem.
Fortunately, there is now detailed data available, both for the unorganized and organized segments of the sector. Earlier this year, the National Statistical Office (NSO) released the Annual Survey on Unorganised Sector Enterprises (ASUSE) for 2022-23.
The last report on unorganized manufacturing was for 2015-16. Between 2015-16 and 2022-23, the number of unorganized-sector manufacturing enterprises rose from 17.2 million to just 17.8 million. Almost all of this increase was in the tiniest of enterprises that are characterized as ‘own-account-enterprises,’ which are basically small family businesses.
Slightly larger enterprises, which hire workers, witnessed a decline from nearly 2.8 million in 2015-16 to under 2.3 million in 2022-23. Total workers employed by them fell from 34.9 million in 2015-16 to 30.6 million in 2022-23. Worker-hiring enterprises employed 14 million workers in 2015-16, which fell to 11.5 million in 2022-23.
The situation is no better in the organized sector. Recently, the NSO released the Annual Survey of Industries and data for 2022-23. From 2017-18 to 2022-23, enterprises in the organized manufacturing sector increased at 1.3% annually. Compare this to a growth rate of enterprises of 5.4% each year from 2004-05 to 2014-15.
In fact, annual growth slowed since 2014-15 to just 1.2%. The number of workers in the organized factory sector increased at 3.5% per year between 2014-15 and 2022-23. It is lower between 2017-18 and 2022-23, at just 2.5%.
This represents a sharp decline in the growth rate of workers from 13.2% per year during 2004-05 and 2014-15. Estimates also confirm a trend of increasing contractualization of the workforce, with more than two-fifths of workers employed as contract workers in 2022-23.
Also read: Size matters: Decoding Indian manufacturing’s problem of scale
How did workers fare? For the unorganized sector, gross value added (GVA) per worker increased at 1.5% per year in real terms, whereas the emoluments for hired workers increased just 1% per year over the last seven years.
For the organized sector, wages per man-days worked increased at 0.42% per year between 2014-15 and 2022-23. The corresponding growth for the 2004-05-to- 2014-15 period was 1.3% per year. Both the organized and unorganized sectors saw their growth rate of GVA fall.
Problems in India’s manufacturing sector have been festering for a long time. It is also obvious that both the organized and unorganized sectors have seen their contributions decline as far as GVA is concerned, but also employment absorption.
The trends confirm the reversal of a structural transformation of the economy, with workers moving back from factories to farms, as seen in other data, such as from the Periodic Labour Force Survey. Also, the twin shocks of demonetization and the GST rollout worsened some of these trends.
It may be premature to treat these as signs of de-industrialization, but the prolonged nature of the crisis in manufacturing deserves more attention. That this has happened despite several government incentives, including the production-linked incentive (PLI) scheme and Make in India campaign, points to structural issues.
Demand deficiency in the economy may have contributed to the manufacturing sector’s woes, with the twin shocks of demonetization and GST worsening the situation.
India’s recent economic slowdown may well be cyclical. But a revival of growth is unlikely to be sustainable until manufacturing is revived. That will require an analysis of the structural factors plaguing the sector, and not just cosmetic changes in GST or other grand schemes.
Also read: Growing jobs, tepid output: Contrasting story of manufacturing industry in 5 charts