Leapfrogging through Manufacturing
In order that the economy grows at 7-8%per annum, and poverty and unemployment are significantly ameliorated, we have to increase share of manufacturing in GDP to 25%. — KK Srivastava
Based on projection of actual GDP data as on March 2023, India is likely to become the third largest economy by 2027, up from 10th place in 2014. According to SBI research India is likely to add $0.75 trillion in every 2 years; thus, it will touch $20 trillion (in current numbers) by 2047. India’s global share in GDP will cross 4% by 2027. For this India needs to grow at nearly 11.5% nominally per annum in rupee terms; this is eminently achievable with a real 6.5-7.0% growth in GDP annually.
However, notwithstanding the relative success, India’s growth momentum has slowed down between 2014-2023 when compared with the 2004-2014 period; this was largely due to set back received on account of Covid adversities. Two, moving from rank 10 to rank 5 (in 2023) was relatively easier because the GDPs were closer for the countries holding these ranks. The gap between the third rank and the first two is far greater. In 2027, India’s GDP will be one-fifth of China’s (short by 20 trillion) and one sixth of the US (short by 26 trillion). Having said that, it is true that high rate of economic growth and the consequent economic size provide opportunities to better things. The outcome of four decades of brisk growth since 1980s has pulled millions out of poverty and allowed government to use the domestic market’s size as a strategic tool.
Modi government must be complimented for ensuring continuiting of economic growth without compromising macroeconomic stability by avoiding improvident fiscal policies. This has ensured durability and sustainability dimensions for India’s growth story. And yet we must not lose sight of the fact that India’s potential real GDP growth rate can rise to 7-8% a year, if proper reforms are introduced. If it happens, within a decade our economy size can double. China’s economy is already around five times bigger. Settling for a durable economic growth of anything less than 8% a year will not help in addressing India’s grave employment challenge.
But what could be the pathway to traverse if we wish to turn potential into real, leapfrogging into the era of 8% annual growth, or near about? We need to augment share of manufacturing.
Soft power is no good without hard power. According to S. Jaishankar, the Indian Foreign Minister, hard power means industrial and technological strength. However, India’s share of manufacturing in GDP remains around 15%. Indeed, over the last two decades, majorly due to the Chinese imports India has moved in the direction of deindustrialisation. However, the major culprit hides elsewhere.
We have lagged in realising our manufacturing potential because our rulers, decided to prioritize equity over efficiency. In contrast China has shown an obsession with achieving efficiency. In 1948 itself Indian parliament passed labour laws-favouring labour - the likes of which did not exist even in the developed West. From late 1950s the financial sector was sought to be governed by equity considerations. And in 2011 the government made land acquisition prohibitively expensive. Thus, all three major factors of production - land, labour, and capital - became expensive and difficult to access. Ofcourse to these difficulties were added the shackles of a choking regulatory regime overseen by highly corrupt and rule bound lower level of bureaucracy. And then there were always the political parties that wanted their own pound of flesh from the investors wanting to setup manufacturing units.
To its credit, the present regime has tried real hard to resolve these issues. It has tried hard to reduce the compliance burden, though with limited success. It has made capital cheaper, with somewhat more success. And it has tried to loosen up the ossified labour market via the labour codes. But here too most state governments have put roadblocks in adopting them since labour is a state subject. However, acquiring land still remains a very costly proposition. And without land no one can setup a manufacturing facility (except when the government hands over some of its land).
All in all, manufacturing in India is about 33% more costly than in most countries that are competing with it to attract investment. So it is cheaper to import than make in India. Then due to pact oversights India entered into foreign trade agreement with more efficient producers abroad. This has made imports and CKD assembly cheaper. That is why the Make in India is incompatible with the low tariff trading regime. Indeed that is why earlier Western manufacturing succumbed to Chines factories.
The important thing to note is that while manufacturing as a sector needs to leapfrog if we wish to grow at 7-8% (and thereby take care of employment and poverty issues as well) the experience elsewhere suggests that there are always some lead players within the broad sector that show the path.
When economic growth accelerated to around 5.5% in the 1980s, from about 2.5% in the crisis ridden 1970s, the birth of middle class took place in India. This created the demand for variety of consumer goods - consumables and durables. The beneficiary was the automobile industry as demand for latest two wheeler models and small cars (mainly Maruti) went through the roof. During 1990s, thanks to India’s non unionised low cost engineering work force and technological change, India witnessed an offshore focussed infotech boom. On the other hand due to favourable changes in patent regime and less restrictive trade policies, pharma industry could penetrate deep inside the US market by offering cheap generics. Together, these three sectors - automobiles, pharma, and infotech – promoted exports. Side by side, the reforms of 1990s provided legitimacy to the private sector; this fuelled demand for automobiles, housing and travel on one hand and provided support to the supporting Industries like aviation, banking, finance, etc. on the other.
But overtime, these sectors lost momentum due to different reasons. Pharma faced restrictions due to poor industry practices and regulatory failures. Info tech has now become a mature sector (as against earlier being in growing one. Consumer demand has stagnated due to Covid etc. So, two wheeler industry has suffered. In aviation there is only IndiGo (and now perhaps Air India) which is investing in future growth. Merchandise, exports have done poorly in last decade since we lack a competitive manufacturing base as against rivals like Vietnam and Bangladesh.
To be sure, government has decided to focus on manufacturing. Admittedly initial ‘Make in India’ initiative failed to deliver. Now the government has decided to change track: it has decided to offer financial incentives for both investment and production, with special emphasis on the electronics sector. Simultaneously the growth engine has been kept running by massive public investment in the physical infrastructure, which has in turn promoted large private investment in associate industries like metals, cement, etc. Lastly, in a slowing world economy India can easily hope inflow of foreign capital. The question begs answer is whether this will work.
Becoming the third largest economy should pose no insurmountable challenge if the government adopts the right policy frame work.
Share This
