www.iasinsights.in; www.iasgyaan.com posts Hindu Summary-7th Feb 2018 about The disorganized state of manufacturing sector in India.
The manufacturing muddle
- The Union Budget has reinforced the correction of the inverted duty structure (IDS) which has adversely impacted manufacturing for decades.
What is IDS?
- An IDS means higher duty on intermediate as opposed to final/finished goods, with the latter often enjoying concessional custom duty under some schemes.
Advantage of China:
- China followed a strategic industrial policy which has an impact on India in labor-intensive manufacturing exports.
- But India’s policy structure failed to utilize its labor advantage to grow labor-intensive manufacturing exports.
- While China reduced the absolute numbers and percentage of the poor in the population by absorbing surplus labor in manufacturing, India’s poverty reduction was much slower.
A major reason:
- While China’s agricultural and rural income growth was much higher as it sustained consumer demand, it also generated industrial jobs much faster.
- While India grew construction jobs very fast since 2000 to 2011-12, manufacturing output and employment growth left much to be desired.
- The growth of manufacturing jobs not only first slowed after 2011-12 but also became negative.
- The share of manufacturing in GDP and employment has not risen since 1991.
Rise in customs duties and its benefits:
- Customs duties have been raised on capital goods and electronics, and silica for use in manufacture of telecom grade optical fiber.
- These have been among the sectors adversely impacted by the IDS in the past 10 years or so.
- Duties have also been raised on labor-intensive manufactures such as food processing, footwear, jewelry, furniture, toys and games.
Not a pre-1991 ‘protectionism’:
- Indian manufacturers, unreasonably protected till 1990, were suddenly exposed to competition.
- A slower reduction would have enabled them to adjust to import competition, upgrade technology, and compete.
- The sudden onslaught of lower-priced imports decimated many domestic enterprises, although it benefited domestic consumers with an array of consumer products.
- From the early 2000s, free trade agreements with East/South-east Asia reduced tariffs further, flooding Indian markets with Chinese and other country products – consumer (durable and non-durable) and capital goods.
Slower job growth:
With GDP growth picking up from 2003-04 onwards, non-agricultural jobs began to grow at 7.5 million per annum.
- As population growth fell from 1990 onwards, entrants to the labor force fell.
- As school education access grew rapidly, post-Sarva Shiksha Abhiyaan, children remained in school.
- The government’s Annual Labor Bureau survey and the Centre for Monitoring Indian Economy indicate that job growth is lower than entrants to the labor force.
- The youthful labor force, between 15 and 29 years, saw a very sharp increase from 147 million to 187 million between 2011-12 and 2015-16.
Fall in agricultural jobs:
- The pace of non-agricultural job growth slowed after 2011-12 along with GDP growth.
- Between 2004-05 and 2011-12, the numbers in agriculture had been at a rate of 5 million per year.
- The non-agriculture jobs grew slowly since 2011-12.
- However after 2011-12 there was a significant increase of youth in agriculture.
- A retrogressive development since education levels have risen, while the aspiration of such youth is for non-agricultural jobs.
Fall in manufacturing sector:
- As GDP growth slowed after 2011-12, youth who had benefited significantly from jobs in manufacturing have suffered.
- Of all youth employed in manufacturing had risen decreasing the share of all employment in manufacturing between 2011-12 and 2015-16.
Focus on service sector:
- The only sector with a significant increase in labor absorption, especially the young, has been services.
- Employment rose from 36 million in 2011-12 to nearly 52 million in 2015-16 for them, and for all labor from 127 million to 141 million.
- The GST, especially its inter-State component, has resulted in a neutralization of the IDS.
- It has led to a formalization of some informal firms, and hence workers (by registration in the Employees’ Provident Fund Organization).
- Twin balance sheet
- The resolution of the twin balance sheet problems together with the Insolvency and Bankruptcy Code should now open the floodgates for new manufacturing investment.
- Manufacturing exports (labor or capital intensive ones) are unlikely to take-off if the rupee continues to strengthen against major foreign currencies.
- Demand and supply
- Policy must attempt to close the loop between rising demand and supply through consumer demand, which the Budget attempts through its agriculture and rural infrastructure focus.
- Without closing the loop of consumer demand and supply, neither GDP growth nor job growth will quicken.
- More manufacturing policy initiatives, such as an Industrial Policy by the Department of Industrial Policy and Promotion, must be sustained over 2018.