The curious story of Indian Manufacturing

India’s GDP grew by 7.2% in FY22, more than double the global growth rate. However, Indian Manufacturing grew only by 1.3%, less than half the global average for Manufacturing growth at 3.8%. We seem to be losing ground in Manufacturing, though overall, we are climbing the world ranking. Should we ignore this as an annoying anomaly or worry about it?

A few years ago, we were living in an apparently unipolar world focused on profitability, growth, and standards of living. We did well by these measures and celebrated. We are already the fifth largest economy by GDP and will soon become the third! However, China did better and is global Number 2, contesting for leadership. Resultantly, we are now witness to the dynamics of the US-China Trade war.

Read | 'Make in India does not mean manufacture in India'

Currently, our imports of manufactured goods are higher than the total value of our domestic manufacture. This makes us hugely vulnerable. Illustratively, post-Galwan massacre of our soldiers, despite government efforts, our imports of manufactured goods from China actually rose, rather than fall, crossing the $100 billion mark. Our imports are mostly essential items. The major bulk are critical equipment, vital components and ingredients which in a way drive our manufacturing. Also, though we are a large importer, our share in Chinese exports is not strategic for them as it is a small fraction of their global totals. So, we have a one-way relationship. We must understand why this is happening.

In 1951, Manufacturing contributed 9.5% of GDP. It received strong State support and grew over time, touching a high of 18.85%, overtaking Agriculture earlier this century. Subsequently, however, the NPA crisis intervened, and the Manufacturing growth rate started falling. This slowdown continues today. In the last four years, Manufacturing grew 13% in aggregate while Agriculture grew 19%. As a result, Agriculture now generates a larger share of GDP than does Manufacturing -- almost 25% higher. Our Manufacturing to GDP ratio now hovers around 15%.

This is despite the government’s efforts to promote Manufacturing. It has not held back any form of support, be it corporate tax cuts or ‘production linked incentive’(PLI) schemes to attract new manufacturing investment, or industrial land acquisition, and the like. But Manufacturing does not seem to be responding.

It needs to be noted that several manufacturing companies are showing strong performance. They are not only growing but also investing rapidly and their stock prices are rising. MSMEs also seem to be doing well, as per government pronouncements. Large value FDI is also getting attracted. In the mobile phone sector, for instance, exports have more than doubled this last year after Apple started making phones in India.

Yet, these are the exceptions. Manufacturing as a whole is slowing. What could be the reason for this wayward behavior in a booming economy with a booming stock market attracting large-scale FDI? No simple answer usually exists for most complex questions.

However, clues could come from our competitors. These are, apart from China, mostly small-sized countries. Illustratively, Vietnam is global Number 2 in mobiles. Further, while Textiles has always been an extremely important sector for us and is promoted by several states and spread over 50 industrial parks and clusters, we have lost ground. Vietnam and Bangladesh lead us in ‘Apparels and Textiles’. We used to be the second largest exporter for several years, but are now ranked fifth with $38 billion, trailing China ($319 billion), Bangladesh ($57 billion) and Vietnam ($52 billion). We need to examine how they succeeded, though they do not have any fiscal space to offer attractive subsidies to attract FDI. Also, how did China retain its status?

Can the answer be that the ‘non-super-large but non-MSME-sized’ companies find countries like Vietnam/Bangladesh more attractive than ours because they are smaller than us? In a small country, clustering is automated by geography. Clusters are few but often easily reach global size. China too has very few but super-large clusters.

In India, we have deliberately created a very large number of clusters, each of which is not large by global standards to create geographical equity. An accusation often levied against us is of ‘poor ecosystem’. Should we not now debate de-novo on how to create a good ecosystem, instead of relying only on subsidies/custom duty shelters, etc., to create competitive advantage?

Also, though we cannot uproot existing clusters to start afresh, should we still continue with policies that promote dispersal rather than strengthening existing clusters? Should we allow factory creation outside authorised clusters, or should we introduce locational policies though it restricts entrepreneurial choice? A new opportunity to catch up with China in Manufacturing is presenting itself. Seizing it may need critical thinking and re-envisioning, rather than a business-as-usual approach.

(The author is the former chairman of the Export Import Bank of India and a banker with a theory of everything. @tcartca.)