Wipro Chairman Azim Premji has rightly warned that a balance should be maintained between services and manufacturing sector.
“India surprisingly has a component of services industry contributing 58 per cent of the GDP, which is equal to developed nations. Unfortunately, it has come at (expense of) displacement of manufacturing,” he recently said. “We require more depth in manufacturing as we excessively depend on imports,” he added.
Any possible deceleration of growth in services sector in our country, caused by the West’s anti-offshore policies or scaling up of off-shore services business in East Asian and Latin American countries, can lead to stagnation in employment growth. Hence, it is important in our country that we give a thrust to manufacturing that is equally employment generating.
The electricity sub-sector arguably presents the most critical infrastructure bottleneck in manufacturing. It is estimated that up to a third of India's power generation capacity, both thermal and gas generators, is lying idle due to fuel scarcity. Further, a number of thermal power plants have less than a week's fuel stock.
Coal India Limited (CIL) is unable to rapidly increase coal output, constrained by land acquisition issues and pending environmental clearances for both new mining projects and capacity-expansion in old mines, as well as for laying rail transport lines.
Another well-known constraint to growth in manufacturing is its crumbling infrastructure in roads, ports, rail network, cold chain and urban infrastructure. India needs to increase its investment in infrastructure from the present 5 per cent of GDP to 8 per cent of GDP. Besides infrastructure bottlenecks, labour market reforms have not been undertaken. This is holding back the manufacturing sector in general and its labour-intensive sub-sectors in particular.
Rigid land use and land ownership regulations seem to block any green field industrial project in India, whether it is Tata Motors’ experience in Bengal or a Posco project in Odisha. The huge increase in land prices in recent years is a detriment to sale of land, and encourages non-use in anticipation of a further increase in land prices.
MULTIPLE RULES
Complex business regulations have been adversely influencing the investment decisions of firms and potential investors. The World Bank's Ease of Doing Business surveys of business regulations across the world have found that the procedures and costs for starting and, especially, closing a manufacturing business in India are among the most cumbersome. There are multitude of taxes imposed by the State and central governments. The introduction of GST (Goods and Services Tax) , required for the unification of India as one marketplace, has been held up due to lack of agreement between Centre and some States.
On the finance side, the diminishing role of development finance institutions, risk-averse behaviour of banks, lacklustre performance of the new issues market and the minuscule size of the corporate debt market have increased the effective cost of debt for corporates in capital-intensive manufacturing.
Until these bottlenecks are removed, investments will not flow into India's manufacturing sector.
(The author is a finance and management professional. Views are personal.)