By R.P. Gupta
In the fiscal year 2022-23, the share of the Manufacturing Sector in GDP increased to Rs. 26.17 Trillion from Rs. 25.82 Trillion in 2021-22 at constant prices, registering a modest growth of 1.3%. This growth rate might be the lowest in the past two decades, except in 2019-20 (pre-pandemic), when it was negative. This indicates some structural problems in the macro-economy that must be identified and resolved through policy interventions. Failing to do so may jeopardize the ambitious GDP targets set for 2030 and 2047 by Niti-Ayog in its “Vision document.”
The manufacturing sector has a long economic chain, procuring various goods and services produced elsewhere. On the finished-goods side, services like transportation, distribution, and trade services are generated. The financing requirements for the manufacturing sector are high, generating financial services. Therefore, manufacturing growth is essential for propelling the service sector and overall GDP. It also contributes to increased exports of manufactured goods, which form a significant part of total exports.
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In 2011, the National Manufacturing Policy (NMP) was announced, followed by the “Make in India” scheme in September 2014. Both policies emphasized the need to increase the share of manufacturing in GDP to 25%. However, in the past decade, its share has mostly remained below 17%. The crucial question arises: why is manufacturing progressing slowly?
I believe that business risks in manufacturing are relatively higher due to higher fixed costs (including interest) compared to the service sector. Banks are hesitant to provide liberal credits to the manufacturing sector, particularly to MSMEs, due to stringent NPA norms and associated risks. During the developing phase, NPA norms must be relaxed. Units with long-term viability but trapped in a cash-flow mismatch should be allowed loan restructuring. Even additional working capital may be considered, subject to adequate security coverage. Moreover, interest rates must be moderated.
Regulatory risks for the manufacturing sector are also high in India due to multiple and complicated laws that are difficult to comply with. Interim support during a bad cycle is missing, even for genuine entrepreneurs. The role of Industry ministries at the state and center in resolving regulatory hurdles is crucial. After the repeal of the SICA Act and the introduction of the IBC law, the risks for genuine promoters have increased. It’s high time to review business laws, rekindle entrepreneurial spirit through regulatory easement, and reduce compliance burdens.
I believe that the aims and objectives of any law must be stated in its preamble, and the fine print of the law must not violate the same. The provisions of criminal prosecution for delay in compliance and non-compliance discourage entrepreneurs from entering manufacturing. Business and taxation laws in India are complicated and numerous compared to any developing nation. Hence, laws and regulations must be simplified, especially for MSMEs. Ways and means must be designed to overcome this crucial problem to encourage new entrants and business expansion for existing entrepreneurs. India needs a large team of job providers through business-friendly policies to unlock India’s growth potential.
In the decade 2002-12, manufacturing growth was satisfactory. In that period, India achieved a 376% growth in GDP at current prices in USD terms, compared to a 174% rise in 2012-22. During the 2002-12 decade, the decadal growth of exports was 734%, as opposed to 154% in the 2012-22 decade in USD terms. This facilitated high manufacturing growth vis-à-vis GDP growth.
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At the same time, spending on research and innovation must grow at a faster rate for a gradual transition from a developing to a developed nation. Private-sector spending may be incentivized to give an initial push. Budget provisions for Research Institutes and Universities engaged in research must be increased, and achievers may be rewarded.
I believe that the benefits of the 1991 reforms have been mostly attained until 2012. Now, India needs a second series of structural reforms for faster GDP growth, particularly for the manufacturing sector. More importantly, to improve export competitiveness, the cost of basic inputs such as capital, energy, logistics, and minerals must be reduced through policy intervention. Eventually, this will stabilize the Rupee exchange rate, as witnessed during the 2002-12 decade.
With appropriate policy intervention for structural reforms, the long-term growth target, as set in vision documents, can certainly be achieved.
(The writer, R.P. Gupta, is the author of the book: Turn-Around India. Views expressed are the author’s own.)