An Overview of Indian Manufacturing Sector Pranav Kumar Policy Analyst, CUTS-CITEE

Presentation Coverage Three distinct phase since independence Three distinct phase since independence Policy changes during the three phases Policy changes during the three phases Growth trends and the sector’s contribution in national income Growth trends and the sector’s contribution in national income Mfg. contribution to exports Mfg. contribution to exports Employment generation in manufacturing Employment generation in manufacturing Major challenges Major challenges Major constraints Major constraints Steps required Steps required

Three Distinct Phase Since Independence Phase-I : Main Policies Focus on large and heavy industries Focus on large and heavy industries State control and central planning State control and central planning Import substitution Import substitution Rigid price controls Rigid price controls Severe restrictions on private initiatives Severe restrictions on private initiatives WIDELY ACKNOWLEDGED TO HAVE BEEN UNSUCCESSFUL

Three Distinct Phase Since Independence (Contd.) Phase-II : Main Policies Reduction of barriers to entry and expansion Reduction of barriers to entry and expansion Beginning of simplification of procedures Beginning of simplification of procedures Providing easier access to better technology and intermediate material imports Providing easier access to better technology and intermediate material imports INTRODUCTION OF PIECEMEAL REFORMS

Three Distinct Phase Since Independence (Contd.) Phase-III 1991 Onwards: Main Policies Reduction in and/or abolition of some restrictions, such as high tariff rates, import licensing, and QRs Reduction in and/or abolition of some restrictions, such as high tariff rates, import licensing, and QRs Reducing the barriers to entry for FDI Reducing the barriers to entry for FDI Abolition of industrial licensing Abolition of industrial licensing Private sector participation in sectors reserved for public sector Private sector participation in sectors reserved for public sector Fiscal and monetary reforms Fiscal and monetary reforms HIGH GROWTH IN TOTAL MANUFACTURING

Growth Performance of Indian Manufacturing (Phase-I) State-led import-substitution policy framework had helped create a diversified manufacturing sector in Phase-I State-led import-substitution policy framework had helped create a diversified manufacturing sector in Phase-I Industrial stagnation since the mid-1960s increasingly blamed on the policy framework Industrial stagnation since the mid-1960s increasingly blamed on the policy framework This led to some tentative steps aimed at liberalising these regimes in the late 1970s and early 1980s This led to some tentative steps aimed at liberalising these regimes in the late 1970s and early 1980s

Growth Performance of Indian Manufacturing (Phase-II) Index Numbers of Industrial Production (Growth Rates) to Year Mining & Quarrying Mfg.ElectricityGeneral Source: Reserve Bank of India Base: =100 CAGR:

Growth Performance of Indian Manufacturing (Phase-III) Index Numbers of Industrial Production (Growth Rates) to YearGeneralYearGeneral Source: Reserve Bank of India Base: =100 for years and =100 for remaining Remarks: Industrial sector growth in India has fallen sharply in the later seven years ( to ) as compared to the first seven years after the reforms ( to )

Manufacturing Share in GDP Source: ICRIER Working Paper No. 211, page no.1

Sectoral Contribution to India’s GDP Growth Source: ICRIER Working Paper No. 211, Page no. 2

Manufacturing Contribution to Exports Share (Per cent) CAGR to Growth rate (%) Mfg. goods Tex. Incl. RMG Gems & jewellery Eng. Goods Chemical & related prod Leather & leather mfg Handicrafts (incl. carpet handmade) Petroleum, crude & products (incl.coal) Total Exports Source: Economic Survey

Employment in Manufacturing Sectoral Employment Shares by CDS Basis Agri Mfg Source: Various rounds of NSSO survey on employment and unemployment/Planning Commission Empt Year-wise Employment in the Organised Manufacturing (In Lakh) Source: Rajya Sabha Unstarred Question No. 1978, dated

Main Challenges Facing Indian Manufacturing Sharp deceleration in manufacturing sector growth Sharp deceleration in manufacturing sector growth Contribution in GDP remains constant Contribution in GDP remains constant No significant contribution in employment generation No significant contribution in employment generation Share in total exports is falling, though still the dominant export sector Share in total exports is falling, though still the dominant export sector Labour-intensive manufacturing not performing well Labour-intensive manufacturing not performing well

Major Constraints Facing Indian Manufacturing Major Constraints: I. India’s crumbling infrastructure II. Labour regulations III. High cost of finance and high transaction costs IV. Deteriorating quality of labour, skill mismatch, skill shortage V. Cascading effect of indirect taxes on selling price of commodities

Steps Required Increase investment in infrastructure from 5 percent of GDP to 8 percent of the GDP by the end of 11 th FYP Increase investment in infrastructure from 5 percent of GDP to 8 percent of the GDP by the end of 11 th FYP Reform labour laws as rigidities introduced by unchanged regulations are holding back the mfg. sector growth Reform labour laws as rigidities introduced by unchanged regulations are holding back the mfg. sector growth Financial sector need further revamping Financial sector need further revamping

Source: ICRIER working paper no. 211, Page no. 8