Laggard Indian Manufacturing Sector

Posted in Operations & IT Articles, Total Reads: 3609 , Published on 24 August 2013

India’s GDP grew at an average quarterly growth rate of 7.45% in the last decade from 2000 until 2011. However, India’s manufacturing sector which is crucial for employment generation has not been growing with the pace expected. Though a few reputed Indian manufacturing firms are competing at a global level in fields such as pharmaceuticals and automobiles, it’s not enough to increase the share of essential manufacturing sector in GDP which currently stands at 16%. The share of services sector in our country’s GDP is more than 50%. The growth of services sector before establishment of the manufacturing industry is not a good sign for the developing country like India.

image Courtesy of bugphai,

Service sector provides employment to a very small part of the population. Therefore, it’s very difficult to sustain for a knowledge based economy without the adequate growth of manufacturing sector. Around 60% of Indian population is working in agricultural sector which constitute only 16% of GDP. Some of these workers are migrating to urban areas for the work. Therefore they are ideal workforce to move to manufacturing jobs as our economy progresses. Services sector requires high level of education which is not possible in short term. Therefore, it cannot absorb influx of workers entering in the job market every year.

In comparison our neighbours, China, Taiwan, South Korea, had a successful expansion of manufacturing sector in the last decade which ensured healthy balance of employment generation and sustained growth of their economy in the long term.  So where the problem does lies for India?  In spite of a healthy GDP growth rate, why India is not able to expand its manufacturing sector which is crucial to absorb about a million young Indians entering the job market every month? If India wants to decrease its burgeoning unemployment rate, it will have to tackle this question. Let us look at some of the reasons why a large part of the India’s manufacturing is lagging behind.

Indian manufacturing industry consists of mostly unorganised small scale industries. They face intense competition from the multinational companies and are not competitive enough to grow due to several reasons such as:

  • They face problems in accessing capital requirement for their business due to their inability to provide collateral /third party guarantees required by the banks for approving loans. Only a little over 5% of these small scale industries are covered by institutional finance
  • A relatively high rate of interest on the credit facility provided by the lending institution compared to other loans.
  • Due to the globalization, competition in the market is intense and is characterized by continuous innovation. Today, product life has become very short and continuous improvement in the product, processes, design, technology, marketing, efficient supply chain management, and overall organizational structure if needed is essential to be ahead of others in the fierce globalized market which is posing varied diversified challenges to the MSE sector because of their small size.
  • MSE sector have disadvantages as they don’t have economies of scale and scope, access to new technologies, highly skilled manpower, procuring new sophisticated equipment, quality raw materials, capital and consulting services.  Most often they don’t have knowledge about the target market and thus cannot take advantage of the plenty of market opportunities for their finished product.
  • Most of the big companies require large volumes with consistent quality following similar standards and within a time frame which is difficult for the MSE sector to supply due to their small size and lack of capability to grow and thus they lose a potential client.

Infrastructure plays a major role in the economic development and the growth of manufacturing industry in the country. However, India’s transport infrastructure (road transport, port facilities, airports, railways etc.) is poor when compared to other countries. This adds to the plight of our industries which are already riddled with not-up-to-mark productivity. Realizing the importance of infrastructural development for the growth and development of economy of India, the planning commission of India has focussed on it in its 12th five year plan (FY 2013-17).

Cost of power is very high in India when compared to other countries such as China. In fact industrial power in India is among most expensive in the world. Many a time industries have shown their resentment over the increasing power tariffs. On top of that power cuts have nearly crippled this sector in many states of India. Manufacturing industries have a tough time due to inadequate power infrastructure and further increase in power tariff could threaten the very survival of many small units. Instead of increasing power tariff, Government of India should improve the efficiency of power distribution. It loses significant power during its distribution. Thus, shortage of power and high tariffs increase the cost of production which makes Indian manufacturing industry less competitive which in turn impacts its growth rate.

It is the responsibility of the Government of India to improve the transport infrastructure as well as well the power infrastructure and make the environment conducive for the growth of the Indian manufacturing industry. Though it has taken several steps such as providing institutional finance at an affordable rate of interest by setting up CGTMSE scheme, giving special focus to infrastructural development in 12th five year plan, it needs to implement them effectively to benefit intended sector and design fiscal policies which promotes accelerated growth of this sector.

Reform of antiquated laws: Indian government should pass key bills such as land acquisition, labour regulation, which are hanging in fire since long time, at the earliest. This has resulted in the corruption and slow clearance of the important projects.  Reforms are necessary to propel industry on the path of accelerated growth.

Manufacturing firm should also need to do their part.

  • They should enhance their technological capability and should focus on providing consistent quality.
  • Improve their standards and efficiency, reduce cost and attract and retain their clients.
  • They should be customer oriented and should exploit market opportunities in the export business.
  • They should upgrade their human resource and should attract and retain skilled manpower.
  • They should make continuous improvement in the product, processes, design, technology, marketing, efficient supply chain management, and overall organizational structure if needed is essential to be ahead of others in the fierce globalized market

In the long run manufacturing is critical for the future growth of our country. Laggard manufacturing sector could derail India’s growth story. In last decade India’s GDP grew at a promising rate on the back of the promising services sector. However, number of jobs added in the market remained stagnant. Therefore, it was a decade of jobless growth where though economy grew at brisk rate but could not absorb work force entering into the job market. Total employment grew at the dismal rate of only 1.6% according to the economic survey of India. India’s demographic dividend will turn sour if it doesn’t put its house in order. It should address regulatory logjams and policy paralysis mired in politics and focus on its manufacturing industry.

The Article has been authored by Arvind Vishnoi, TAPMI



India’s Manufacturing Sector: Policy framework

Internet Resources:

  1. Economic times
  5. The Hindu Business line
  6. Wikipedia
  7. Indian power
  8. Indian


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