Long-term prospects look bright for manufacturing

In the past several quarters, India’s economic growth rate has tumbled down to 4-5 per cent after posting robust growth rates in the 7-9 per cent bandwidth for close to 10 years.

Both investments and consumption have slowed down and the growth environment does not look too bright.

However, all agree that the country’s long-term growth prospects remain strong.

The economic slowdown is a matter of deep concern for India, which despite figuring prominently among the list of developing countries, is still a low income group economy.

According to the International Monetary Fund, the country in terms of gross domestic product per capita ranks 139th among 182 countries considered.

It has a long way to go at least to attain the global average gross domestic product per capita income.

Only robust increase in the per capita income will improve the economic status of its people and empower them to indulge in discretionary spending.

A World Bank Report ‘The State of the Poor: Where are the Poor and where are the Poorest’, points out the grim reality that India accounts for almost 33 per cent of the world’s poorest people.

Only long-term job creation and availability of rewarding livelihood opportunities can result in empowering the population to overcome widespread deprivation in terms of quality of life and improve their access to basic needs and aspirations.

For India, a country whose vast majority are engaged in the agricultural economy, which is not the most productive sector, and are not yet ready to move over to the service sector, manufacturing industry holds the highest promise.

Manufacturing industry can create jobs and disposable incomes, draw people from less to more productive economic activity, and produce consumer goods for which a growing demand exists, in turn propelling the economic growth cycle.

Significance of manufacturing

In a country such as India, which after many decades of waiting has witnessed significant economic growth only in recent years after the opening up of the economy and initiation of some reform measures, it is natural for fulfillment of pent-up demand to spur growth during the initial phases of economic development.

Excellent performance of the software industry and the resulting job creation and hot money inflows due to the euphoria that the country could emerge as a global growth engine alongside China and others have also played their part.

However, the absence of a robust manufacturing industry has contributed, on one hand, to supply side constraints and on the other significantly increased dependence on imports to meet expanding demands. This has resulted in ballooning and unsustainable trade deficit.  
 
India has taken the unique path of moving directly from an agrarian society to a service-oriented economy without leveraging the benefits of industrialisation.

That the country’s domestic consumer demand has largely provided the impetus for growth is yet another distinguishing feature of India’s economy.

While the expansion of the service industry, especially information technology, has so far helped the economy to expand, create jobs for the educated, and earn foreign exchange, moving forward, India’s manufacturing industry has to show even more robust growth if India is to witness sustainable economic revival.

According to a McKinsey report titled ‘From poverty to empowerment: India’s imperative for jobs, growth, and effective basic services’, India needs 115 million new non-farm jobs over the next decade to accommodate a growing population and reduce the share of agriculture in employment.

“The manufacturing and construction sectors can form the backbone of this effort, as these sectors are well suited to absorbing lower-skilled labour moving out of farm jobs,” the report notes.

Triggering a growth cycle

Sadly, manufacturing presently contributes little more than 12 per cent of the national GDP and most of the aspirations of the people are met through imports.

Even industries where sufficient production capacity exists, lag behind their global peers in terms of technology, productivity, and operational efficiencies, and thus, are globally uncompetitive. Recessionary pressures in developed countries further restricts the ability of industry to increase its export earnings.

Indian consumers are playing their part which is borne out by the fact that the share of private consumption expenditure, despite the economic slowdown and high inflation, continues to remain at around 60 per cent of India’s GDP.

This indicates healthy discretionary spending, which typically includes industrial output of almost every conceivable description, such as consumer durables, electronic gadgets including personal computers, cellphones, and set-top boxes, among others.

The long import list also includes chemicals, fertilisers, machinery and other capital equipment, among others.

On the energy front, the country depends on import of crude oil to the extent of 80 per cent.

Despite having vast coal reserves, the country has resorted to importing coal to meet the requirements of its fossil-fired power plants.

Reuters, in a report headlined ‘Bewildering Indian policies fuel needless coal imports’ highlights how absurd policies have made India the third biggest coal importer after China and Japan even though it has the world's fourth largest coal reserves.

The current coal import bill is close to $14 billion and this would most likely to double in the next 3-4 years.

The country, fighting to tame a current account deficit, can ill-afford this.

According to available reports, the country’s electronics import bill alone may touch $400 billion by 2020 and exceed estimated oil imports.

This leads to the conclusion that the manufacturing industry’s output did not expand in tandem with increasing consumption.

In some cases, the production infrastructure does not exist due to lack of technology, while in others, the industry is not competitive.

According to the RBI’s annual report for 2012-2013, the industry’s contribution has declined, particularly since 2009-10.

Inability to meet this demand due to the absence of adequate production capacity within the country, has led to demand-supply mismatch, which on the one hand, constrains the country’s economic growth, while on the other, contributes to high trade and current account deficits.

The growth of the manufacturing industry in India will set in motion a virtuous cycle of economic development: job creation, expanding consumption, demand fulfillment, wealth creation and distribution, improvement on the country’s fiscal position, and curtailment of the trade deficit which otherwise would balloon.

These in turn would spur further consumption.

Only a robust manufacturing industry, which produces the goods that meet the basic and aspirational needs of people emerging out of poverty can create jobs in large numbers and generate disposable income in the hands of the consumers.

Additionally, a strong manufacturing base can help India reap the demographic dividend.

Its share of contribution to the country’s economy must expand.

On its part, the government must initiate serious policy changes to encourage the growth of the manufacturing industry.

The present merchandise import binge resulting from the absence of a strong manufacturing industry in the country is unsustainable in the long-term.