Context-

As Prime Minister Narendra Modi enters his third term, now heading a coalition government, the focus on economic reforms, particularly in manufacturing, is critical. India’s continued urbanization will require hundreds of millions of agricultural workers to move to cities to find formal employment in the coming decades. Failure to generate low-skilled employment could place immense stress on India’s governance structures. Success in manufacturing will aid India’s domestic trade and employment goals.

Manufacturing Base Must Improve

• Initial Goals and Current Status : When the Modi government first took office in 2014, it committed to increasing manufacturing as a percentage of gross domestic product (GDP) from 15% to 25% by 2025. Significant economic reforms, most notably the approval of the Goods and Services Tax (GST) in 2017, were expected to facilitate this target. However, World Bank data indicates that manufacturing is in relative decline, making up only 13% of GDP in 2022. This is unfavorable compared to markets such as Vietnam (25%), Bangladesh (22%), Malaysia (23%), Indonesia (18%), Mexico (21%), and China (28%).
• Domestic Compulsions for Improvement : India faces powerful domestic compulsions to enhance its manufacturing base:
  • Employment-Creation Requirement: About half of Indian labor remains in low-productivity agriculture. Successful farming reforms could lead to a rapid transition of employment out of agriculture, but these workers are ill-suited for India’s skilled services sector.
  • Goods Trade Deficit: Despite a perception that India is “anti-trade,” it had over $1 trillion in goods trade in the last 12 months, with a $250 billion deficit during that period. Hydrocarbon imports account for over one-quarter of India’s imports, but manufactured goods such as electronics are substantial components. While India enjoys a large surplus in services trade about $160 billion in the last 12 months on $518 billion in total services trade the services sector employs relatively few workers.
• International Stake in India’s Success : The United States has a stake in India’s success in building a robust manufacturing base for two reasons:
  • Regional Security: Improvements in India’s industrial base will directly and indirectly impact its ability to support its emerging role in regional security, increasingly important given China’s rising aggression.
  • Supply Chain Viability: Some manufacturing will not return onshore. Having this manufacturing based in friendly countries like India improves the viability of U.S. supply chains.

State-Level Challenges and Opportunities

• Factors of Production : India’s success in manufacturing requires attention to various factors of production such as electric power, water, sanitation, labor regulations, land acquisition rules, and environmental regulations, primarily controlled by State governments. The central government needs to provide much higher policy attention in these areas.
• States' Business Environments : The Modi government’s early attempts to stimulate competition among States have fallen by the wayside. The Business Reforms Action Plan (BRAP) rankings of States’ business environments have not been updated since the COVID-19 pandemic and were considered weak as they focused on States’ self-reporting, often at odds with actual investor experiences. The central government’s plan to craft model industry laws for States has been underwhelming.
• Political Landscape and Industrial Policies : The Bharatiya Janata Party (BJP) controls almost half of India’s States, with the remaining States controlled by numerous regional parties, varying in cooperation levels with the central government. Encouraging more States to adopt thoughtful, transparent industrial policies requires an improved toolkit of incentives and penalties. The government should also emphasize job-creating manufacturing sectors such as textiles, paper mills, and furniture, rather than focusing almost exclusively on capital-intensive sectors like semiconductors and robotics.

Government Initiatives

1. National Manufacturing Policy: Aims to raise manufacturing’s GDP share to 25% by 2025.
2. National Infrastructure Pipeline (NIP): Focuses on infrastructure development to support economic growth.
3. PLI Scheme for Manufacturing: Introduced in 2022, this scheme aims to elevate India’s core manufacturing sector to international standards.
4. Make in India Program: Seeks to position India as a global manufacturing hub and boost its economy, to create 100 million new jobs in the sector by 2022.
5. Atma Nirbhar Bharat Campaign: Launched in 2020, this campaign aims to enhance local manufacturing and make India economically self-sufficient.
6. PM Gati Shakti – National Master Plan: A multimodal connectivity infrastructure project designed to streamline logistics and transportation.
7. Mega Investment Textiles Parks (MITRA) Scheme: Plans to create seven world-class textile parks over three years to foster global industry champions through economies of scale and agglomeration.
8. SAMARTH Udyog Bharat 4.0: An initiative by the Ministry of Heavy Industries & Public Enterprises to increase the competitiveness of the manufacturing sector through advanced manufacturing and rapid transformation hubs.

The Way Forward

India is an attractive destination for foreign manufacturing ventures, with numerous companies from luxury, automobile, and mobile phone industries already established or planning to set up operations in the country.

Potential and Market Size

• Revenue Potential: India’s manufacturing industry has the potential to generate $1 trillion in revenue by 2025.
• Market Attractiveness: With a GDP of $2.5 trillion and a population of 1.32 billion, India represents a significant market. The implementation of the Goods and Services Tax (GST) creates a unified market, enhancing its appeal to investors.

Industry-Specific Growth

• Electronics Manufacturing: According to the Indian Cellular and Electronics Association (ICEA), regulatory changes could increase India’s capacity for producing laptops and tablets to $100 billion by 2025.

Infrastructure Development

• Industrial Corridors and Smart Cities: The government is focusing on developing industrial corridors and smart cities to support advanced manufacturing techniques and create a conducive environment for industrial progress.
• Quality and Accessibility Improvements: Enhancing the quality and accessibility of infrastructure such as ports, highways, and power supplies can attract more investment and enterprises. This includes constructing new infrastructure and upgrading existing facilities.

Export-Oriented Growth

• Supporting Export-Oriented Manufacturing: Encouraging the growth of export-oriented manufacturing can help Indian companies expand into new markets and become more competitive globally.

Conclusion

India’s national election offers an opportunity to reassess and redirect policy. However, the core needs driving the current manufacturing push jobs, trade, and security remain unchanged. The size of the market and current growth rates are attractive to investors, but more work is needed, especially at the State level, for the “Make in India” initiative to accelerate further. The new Indian government must provide a higher degree of policy attention to factors of production controlled by State governments, encourage thoughtful industrial policies, and ensure a broader engagement beyond major cities to achieve greater success in manufacturing.

Source- The Hindu