We often see people praise the contribution of the service sector of India in the domestic and global economies. There is no denying the growth of the service sector in India.
India’s service sector is growing at a rate of 60% making it the fastest growing service sector of the world. The contribution of the service sector to India’s Gross Value Added or GVA has been around 53-55%.
However, achievements in the service sector of India mask another sector’s shortcomings. The manufacturing sector of India is still small when compared to other developing nations like China.
Most developed and developing countries have had sustained growth due to their robust manufacturing sector. In India, the manufacturing sector has not realized its full potential.
In this article, we will discuss the meaning of the manufacturing sector, the National Manufacturing Policy, Issues in India’s manufacturing sector and its contribution.
What is the Manufacturing Sector?
There are three sectors in an economy. These are the primary sector, the secondary sector, and the tertiary sector.
The secondary sector is called the manufacturing sector. The manufacturing sector is where goods and services are produced with the help of labour, equipment or machinery tools. In manufacturing, raw materials are turned into finished products for consumption.
Does India have a Manufacturing Policy?
Yes, India does have its own National Manufacturing Policy. The National Manufacturing Policy was released on November 4th, 2011. This policy was introduced by the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry.
There are two main aspects of the National Manufacturing Policy of 2011. The first objective is to increase the share of the manufacturing sector to 25% in the Gross Domestic Product by 2022.
The second objective is to create nearly 100 million jobs in the sector by 2022.
The National Manufacturing Policy aims to make India a manufacturing hub. Currently, India is operating way below its potential in the manufacturing sector.
A look at the difference in the contribution of the manufacturing sector in the GDP of other developing countries and India will reveal that our country is falling in the race to increase the size of the manufacturing sector.
The important points in the National Manufacturing Policy are to give incentives to Small and Medium Enterprises, provide the labour force with the necessary skills and training, simplify business regulations, to set up two new institutions called the National Investment and Manufacturing Zones (NIMZ), and the Manufacturing Industry Promotion Board(MIPB).
MIPB will help in coordination of manufacturing projects between the center and the state government whereas NIMZ will allow businesses to have a single clearance window, exemptions from capital gains tax, and will provide a liberal exit policy.
What is the contribution of the manufacturing sector in India?
India’s growth story after its economic liberalization in 1991 has been mostly centered around its service sector. Unlike the manufacturing sector where goods are produced, the service sector provides services to the people in an economy.
This can include anything from consulting services provided by companies to teaching services provided by teachers in schools. Service sector can provide individuals with tangible (physical output like getting meals served on plates in hotels) or intangible services (not a physical good, like consultancy services, banking services).
The manufacturing sector is where goods are produced and more specifically, tangible goods are produced. Tangible goods mean physical goods like cars, furniture, clothes, etc.
The Manufacturing Sector contributed 17.4% to India’s Gross Domestic Product in 2020. Most people would call India’s manufacturing sector as small when compared to other countries that are on a similar wavelength as India when it comes to economic development and growth.
Countries like China, Vietnam and other Asian Tiger economies have had sustained economic growth due to their manufacturing sector. In 2010, the share of the manufacturing sector in India’s Gross Domestic Product was just 15%.
In the early 2000s decade, India’s manufacturing sector grew at an average of 9.5 percent per year. However, this percentage shrunk considerably in the 2010s decade with the sector growing at a rate of only 7.4 percent per year.
The manufacturing sector in India has not contributed to its fullest potential and has yet to achieve the status of a manufacturing powerhouse.
Why is India’s manufacturing sector lagging behind? What is the reason behind it?
There are many reasons that have hampered the growth of the manufacturing sector in India. Some of these reasons are transportation issues, infrastructure bottlenecks, low productivity, unskilled workforce, and strict labour laws.
- Transportation Issues
Transportation issues in India have hampered the growth of the manufacturing sector in the country. This is because in India for goods to travel between different ports, it takes around 10 days.
In similar countries like China, and Vietnam, the transportation time is between a day or two. Hence, companies find these countries more attractive when it comes to setting up manufacturing units.
- Infrastructure Bottlenecks
Infrastructure issues in India that make our country’s supply chain inefficient are also to blame for the weak manufacturing sector in India. There are many structural issues that make our country unfriendly for businesses.
Different taxes, and rules in every state, lack of basic transportation, lack of power supply, the longer time between initiation and completion of the production process have all created a never-ending cycle of costs when it comes to setting up manufacturing units in India.
- Low Productivity
In India, the productivity of labour in the manufacturing sector is less when compared to similar countries like China, Vietnam, and other Asian Tigers.
There is a use of outdated machinery, lack of automation of the manufacturing process that creates a longer lead time between initiation and completion of the production process.
Low Productivity means that the cost of setting up a unit does not yield results that are equally good or profitable.
- Unskilled Workforce
Due to lack of vocational training, the labour force available in India is unskilled to carry out the work in manufacturing sectors. This is because vocational training is not considered as education by most people and hence, there is lesser enrollment for courses that train people to perform certain jobs.
Another reason is brain drain that has caused the number of skilled and trained workers in India to opt out of the country in order to work in the manufacturing sectors of other countries like the Middle East.
- Strict Labor Laws
India has not taken any advantage of its population due to which it has an increasing number of workers available. The complicated labour laws in the country have made investors and businesses wary of setting up their units in our country.
There are more than 25 labour central labour laws in India along with the labour laws present in different states making it an unfriendly country for businesses.
What is the current scenario of the Manufacturing Sector in India?
The Make in India agenda has been launched by the central government with the aim of making India a manufacturing powerhouse and creating at least 100 million jobs in the sector.
This initiative has led to global companies like Siemens, Toshiba, Boeing to set up their manufacturing units in India. India is also an attractive market due to its large population as there are enough consumers and working population available here.
The aim of Make in India is to increase the share of the manufacturing sector to 25% in the Gross Domestic Product. The share of the manufacturing sector in the last decade or so has hovered between 15-17% percent.
Covid-19 pandemic has also halted the growth of the manufacturing sector. The manufacturing sector that employed 5 crores of workers during the period of 2016-17, now employs somewhere around 2 crore workers in 2020-21.
It is said that increasing the number of jobs available in the manufacturing sector has a multiplying effect on the jobs available in the service sector. The manufacturing sector in India remains weak despite registering a higher growth in 2021. This jump in numbers is due to what is called the base effect.
The comparison of the growth in 2021 is done by taking a base year. Hence, to compare the growth of the manufacturing sector in 2021, the base year is 2020. Due to the devastating impact of the pandemic in 2020, the economy in general was weak.
Hence, when comparing to the base year, this year’s growth rate looks better.
Conclusion
Developing the manufacturing sector could change the fortunes of a developing country like India. If the economic growth of other countries due to its manufacturing sector are any indication, then India could achieve not only a sustained economic growth rate but also increase the number of jobs available in the country.
The development of the manufacturing sector could also reduce India’s reliance on the service sector which has suffered during times of global crises.
FAQs related to the Manufacturing Policy
What is the manufacturing sector?
The manufacturing sector is where goods and services are produced with the help of labour, equipment or machinery tools. In manufacturing, raw materials are turned into finished products for consumption.
What is the Manufacturing Policy of India?
The National Manufacturing Policy was released on November 4th, 2011. This policy was introduced by the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry.
There are two main aspects of the National Manufacturing Policy of 2011. The first objective is to increase the share of the manufacturing sector to 25% in the Gross Domestic Product by 2022.
The second objective is to create nearly 100 million jobs in the sector by 2022.
Which countries are ahead of India in the manufacturing sector?
Countries like China, Vietnam and other Asian Tiger economies have had sustained economic growth due to their manufacturing sector.
Why does India lag in Manufacturing?
There are many reasons that have hampered the growth of the manufacturing sector in India. Some of these reasons are transportation issues, infrastructure bottlenecks, low productivity, unskilled workforce, and strict labour laws.
What was the growth of the manufacturing sector in the last decade?
The yearly growth rate of the manufacturing sector in the 2010s decade was 7.4 percent per year.
What is the current scenario of the manufacturing sector in India?
The share of the manufacturing sector in the last decade or so has hovered between 15-17% percent.
Covid-19 pandemic has also halted the growth of the manufacturing sector. The manufacturing sector that employed 5 crores of workers during the period of 2016-17, now employs somewhere around 2 crore workers in 2020-21.
What transportation issues does India face when it comes to its manufacturing sector?
Transportation issues in India have hampered the growth of the manufacturing sector in the country. This is because in India for goods to travel between different ports, it takes around 10 days.
Why are labour laws a hindrance for the growth of the manufacturing sector in India?
There are more than 25 labour central labour laws in India along with the labour laws present in different states making it an unfriendly country for businesses.
Anagha has completed her B. A. in Economics and is currently a final year post-graduate student enrolled in an M.A Economics program at A.V College of Arts, Science, and Commerce which is affiliated with Mumbai University. Her final year research project is on the ‘Gendered Effects of Covid-19’ where she looks at the impact of Covid-19 on the job market for women and the increasing gender gap in the employment landscape of India.