Relevance: GS-3: Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment. Inclusive growth and related issues.

Key Phrases: Vibrant and Growing Manufacturing Sector, Engine of Growth, Industrial Policy Reforms, Agglomeration, Strong Forward and Backward Linkages, Forming Alliances and Networking, Collective Efficiency, Make Local Products Global

Context:

• Share of the manufacturing sector in the Gross Value Added (GVA) in the Indian economy has stuck at 17-18 per cent for the decade 2011 to 2021 whereas it was 27 per cent, 25 per cent and 18.5 per cent in China, South Korea and Bangladesh respectively for the year 2020.

Key Highlights:

• Higher growth of the manufacturing sector is important for two reasons:
  • provides employment and can absorb workers of varying skill-sets.
  • has ability to export manufactured products which plays a crucial role in maintaining the external balance of an economy and influences global trading capacity.
• In India the emergence of the manufacturing sector as the engine of growth, with higher share in the GVA or national income, is hampered by the preponderance of a large number of small firms, enterprises and factories.

What are the factors which hamper the growth of small firms?

1. Skewed nature of share in output and employment:
   • Data published by the Central Statistical Office for 2017-18 reveal that 86.5 per cent of factories correspond to the definition of Micro and Small Enterprises with shares in employment and output, at 40 and 14.4 per cent, respectively.
   • The big factories (output of more than ₹500 crore annually), account for just 1.89 per cent of the total factories, but have 22 per cent share in employment and generate 54 per cent of the total output.
2. Low Capital Investment:
   • 66 per cent of the factories have a capital investment of less than ₹0.25 crore, and contribute to 13.5 per cent of the total output.
   • Only 11 per cent of factories have a capital of more than ₹10 crore and their share in output is 73.5 per cent.
   • In other words a large number of small factories contribute only a small share to the total output of the sector and less than 2 per cent of big factories account for more than 50 per cent of the output of the sector.
   • This skewed structure needs to be addressed for the sector to grow at a faster pace.
3. Low Value addition:
   • Micro, Small and Medium Enterprises (MSMEs) occupy, an important segment in terms of absorbing workers, however, their share in the overall value added is only one-third.
4. Non-availability of Data:
   • Non-availability of data also hampers realistic assessment of the extent of linkages that MSMEs have within the economy.
   • In a manufacturing ecosystem, MSMEs have crucial linkages with large firms through subcontracting arrangements and provision of inputs.
   • Encouraging and supporting such linkages is an important ingredient in the models of business development that can change the landscape of the manufacturing sector.
5. Integration of MSMEs:
   • Integration of MSMEs with the larger firms has been the focus of industrial policy reforms in many industrialising economies for some years.
   • Case Study: In Malaysia in 2019, as part of its aim to increase the contribution of SMEs to reach 41 per cent of the national GDP, new strategies were devised to drive SME growth, particularly in key industries with high multiplier and linkages.

   In this context, the efforts were intensified to further enhance and strengthen the business linkages particularly between SMEs and large firms.

   • With the availability of relevant data pertaining to SMEs in Malaysia it was found that in terms of output consumption by other industries and final consumers, 48.5 per cent of the total output of SMEs flows back into the economy as intermediate input, indicating that SMEs are highly domestically integrated with other industries.
   • Given the multitude of activities MSMEs undertake in India, similar strong linkage between MSMEs and other firms can be assumed, which underscores the need to view MSMEs in conjuncture with the large firms and that their growth is influenced by the growth of large firms.

6. Strengthening links and Agglomeration:
   • There are ample research evidences to confirm that forming alliances and networking help small firms to grow, cooperate and compete with big firms.
   • The policy approach needs to focus on facilitating firms working together so that they can reap the benefits of collective efficiency.
   • The key to success would be the ability to develop a mutually supportive approach with cumulative effort and continuous improvements rather than viewing the small and big differently.

Conclusion:

• While these small and medium firms are contributors in providing employment, their growth and transition to big firms is hampered by a variety of factors. Addressing these factors needs a comprehensive policy approach which also takes into account the links between the small and large firms.
• Perceiving small and large firms in separate silos might prove costly in the long term, as slower growth of large firms would then be transmitted with an amplified effect to the small firms.

ADDITIONAL MATERIAL FOR BETTER UNDERSTANDING OF TOPIC

Recent initiatives by government to Strengthen MSME Sector:

• Raising and Accelerating MSME Performance (RAMP) Scheme:
  • It is a World Bank assisted Central Sector Scheme.
  • It has been launched to support various Resilience and Recovery Interventions of the Ministry of Micro, Small and Medium Enterprises.
  • In addition to building the MSME’s capacity at the national level, the RAMP program will seek to scale up implementation capacity and MSME coverage in States.
  • The scheme resolves to make local products global.
  • The effort is to create a local supply chain for Make in India, which can reduce India's dependence on foreign countries.
• Capacity Building of First-Time MSME Exporters(CBFTE) scheme:
  • The scheme aims to encourage MSMEs to offer products and services of international standards for the global market which will enhance the participation of Indian MSMEs in the global value chain to improve export.
• Revamped Scheme of Fund for Regeneration of Traditional Industries (SFURTI):
  • The scheme aims to regenerate traditional industries, emphasize traditional skills, and ensure long-term sustainable income for rural artisans.
  • Under this scheme, artisans are to be clustered with emphasis on enhancing product development, productivity, competitiveness, product intervention, and even packaging and marketing.
  • Local artisans and entrepreneurs are provided with sufficient training and improved tools to face the upcoming challenges to optimize their income.
  • Depending on the number of artisans, the clusters are classified as:
    • Heritage cluster which includes 1000-2500 artisans
    • Major cluster which includes 500-1000 artisans
    • Mini cluster which includes up to 500 artisans
• ZED Certification Scheme:
  • The aim of the scheme is to inculcate Zero Defect & Zero Effect (ZED) practices in manufacturing done by Indian MSMEs.
  • It provides financial support to MSMEs in supporting the ‘Make in India’ initiative with the Government of India providing up to 80% subsidy to MSMEs.

Source: The Hindu BL

Mains Question:

Q. Discuss the need for integration of the manufacturing sector in India so as to increase the Gross Value Added (GVA) of the sector in the Indian economy.(250 words).