The manufacturing muddle(Hindu Summary-7th Feb 2018); 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.

The result: 

  • 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.

  1. As population growth fell from 1990 onwards, entrants to the labor force fell.
  2. 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.

Looking ahead:

  1. GST 
  • 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).
  1. 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.
  1. Exports
  • Manufacturing exports (labor or capital intensive ones) are unlikely to take-off if the rupee continues to strengthen against major foreign currencies.
  1. 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.


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