Manufacturing Sector in India: Past, present, and future

Image: Debajyoti Chakraborty/NurPhoto via Getty Images

Despite being the fastest-growing economy, India has not been able to become a global manufacturing powerhouse. While this national goal is now renewed with astute decision-making, enabling policies and corresponding incentives, a number of aspects need to be looked at to decipher the current metrics. There are a number of stated criteria for a thriving manufacturing ecosystem. They can be adequately summarised as infrastructure, skilled workforce, labour laws, power grids and their availability, logistics and communication network, ease of doing business by regulatory mechanisms and oversight, taxation, customs, certification, warehousing, and so many more. While a clear, segmented approach may appear very simplistic, juxtaposing several variables as part of a manufacturing ecosystem makes it esoteric.

While ancient India had a strong manufacturing base that included the artisanal production of goods, textiles, shipbuilding, and many other sectors in addition to trade centricity, the twentieth century was different. The Industrial Revolution in India was essentially delayed due to colonial rule and a complicated political and economic landscape. While many manufacturing entities were set up post-independence, there was scant emphasis on import substitution and scales of production. The system largely remained inefficient and failed to match global manufacturing standards due to state control, low metrics of skill development and lower domestic demand and consumption.

The economy opened with liberalisation in 1991 but not with corresponding political stability, which is the bedrock of any complex industrial endeavour. Unlike the services sector, the manufacturing sector cannot grow organically but requires hard political will in terms of land acquisition, labour laws, skilling initiatives, investment policies and incentives, which can be provided by sound political leadership. Ideally, this has to be a continuous process with policy centricity as the focus, regardless of the ideology and political dispensation, which is bound to change as per the democratic structure. In chronicling this major aspect, it is notable that in the period preceding the economic reforms and beyond, we had six Prime Ministers at the helm between December 1989 and March 1998. It is of importance that the time periodicity of the associated governments less one, during this period was in months and not in years.

On a comparative note, China opened its economy in 1978, and continuity was achieved due to a more centralised and different governmental structure. China's manufacturing industry was the first to open to foreign investors with competitive pricing and coordinated industrial division of labour. As per open-source data, the manufacturing sector in China contributes to around 27 percent of GDP, whereas it is 15 percent in India. It is significant that more than 45 percent of manufacturing output is achieved from the MSME sector in India. To energise this segment, which is the backbone of the Indian industry, will therefore be a game changer, and this aspect has been given adequate focus since 2007 when a separate ministry of MSME was instituted. While China has launched the strategic "Made in China 2025" with a central theme to move beyond labour-intensive manufacturing to cutting-edge sectors like semiconductors, robotics and aerospace, we need to focus on the same lines in this globalised and digitalised scenario.

While India has carved out its unique position in manufacturing automotive, pharmaceutical, steel, textiles and petroleum products, there needs to be a strong impetus in the digital domain, especially in the backdrop of the ITA-1 agreement, signed in 1996, which impacted competitiveness in the electronics sector with increased imports. This sector is the very core of all emerging technologies, and possibly the extent of the unfolding of technology was not appreciated by the majority of stakeholders in that time and space. Therefore, only some countries are net exporters of ITA products, and India is one of the biggest digital markets. India not joining the Regional Comprehensive Economic Partnership (RCEP) may have been a step in the right direction at this juncture in this context.

The government of India has initiated various schemes to cover the entire canvas of this critical sector since 2020, including Production Linked Incentive (PLI) schemes, changes in the Central Board of Indirect Taxes and Customs (CBIC), launching National Industrial Corridor Development Programme, availability of industrial power, creation of special economic zones, improvement in road and rail infrastructure, National education policy to cater for vocational training etc to name a few. There still needs to be more investment in infrastructure, which consumes a mere 3 percent of the national GDP compared to nearly 20 percent of China's GDP. Manufacturing schemes do not require relying on too much foreign capital, and dynamic state policies in addition to the centre will be a game changer.

India has the required political stability, superior leadership with pathbreaking policy reforms since 2014 and an enviable demographic dividend with the potential to be the 'Talent Powerhouse" for the world. A thriving manufacturing sector will serve as the lynchpin for India's economic growth and prosperity in the coming decade. There is a silent rebalancing of global supply chains all over the world, with diversification and de-risking as the core focus. These global value chains are crucial for manufacturing. Does India need to plug into these, especially in conjunction with the digital domain? The answer is undeniably affirmative, but there will be some time before our manufacturing sector can match the scale of our services sector dynamics, both in internal aspects and export. India needs to leverage its vast market advantage, focus on high-technology manufacturing, and create "Products" as its core focus to become a global power.