Over the last 30 years, successive Central governments have strived hard to raise the share of manufacturing in India’s GDP to 25 per cent. It currently stands at 17 per cent, which is a slight improvement since 2014 when it had been stagnating at 13-15 per cent.
China has been able to increase the share of its manufacturing sector in its GDP from 17 per cent in 1992 to 28 per cent in 2021. Consequently, China has emerged as the world’s largest manufacturing economy. Its share in global manufacturing has increased from mere 4 per cent in 1992 to an overwhelming 30 per cent in 2021, significantly higher than Germany, which for long was the biggest manufacturing economy.
This is a propitious time, both externally and domestically, for India to achieve this objective. In an attempt to reduce country risk, global companies are now trying to diversify away from China. With the sharp rise in domestic wages in recent years, Chinese companies are under pressure to relocate capacities overseas. They are vacating low technology sectors as they seek to raise productivity levels in line with rising wages.
At the same time, the quality of governance and of the investment environment has markedly improved in India. This is principally a result of States competing with one another to attract investments and a concerted effort by both the Centre and States to cut red tape and regulatory burden.
Industrial policy
If India wants to achieve its desired goal of manufacturing contributing about 25 per cent of its GDP, policy attention should focus on raising the share of Indian manufacturing in carefully selected sectors in world markets. This in effect is the pursuit of the ‘industrial policy’ advocated by several prominent economists like Dani Rodrik and Alice Amsden.
This approach is for the first time since Independence being tried in India through the implementation of the Production Linked Incentive (PLI) scheme. This has been announced for 13 manufacturing sectors, which are either sunrise sectors or in which import dependence is very high.
Under the PLI scheme, the Centre has committed to pay ₹2 trillion ($27 billion) as direct cash incentives to select firms but only after they have achieved the targets stipulated. It was estimated by NITI Aayog that, if successful, the PLI scheme can generate about $500 billion of new manufacturing output and 200,000 quality jobs. It will also reduce vulnerabilities in sectors such as strategic equipment, electronics and advanced pharmaceutical ingredients. Early positive results in the mobile phone sector inspire optimism about the PLI scheme.
To succeed, the PLI scheme requires careful and continuous monitoring and active coordination between the Centre and State governments. Care has to be taken to ensure that a PLI scheme does not slip into becoming a set of tariff and non-tariff protection as this will defeat its primary objective of creating globally competitive manufacturing capacities. Tariff and/or non-tariff protection for each sector must therefore come with a clearly defined sunset clause.
The PLI scheme will also depend rather critically upon ensuring that domestic capacities created under the scheme embody frontline technologies to remain globally competitive. An expanding share in world markets by firms covered by the PLIS would be the clearest evidence of their acquisition of frontline technologies and achieving global competitiveness. From past experience, we should expect multiple push-backs and inertia from firms in this regard. These will have to be resisted to ensure PLIS’ success.
The other end of the manufacturing spectrum is occupied by medium, small and micro enterprises (MSMEs). These account for more than 80 per cent of manufacturing employment, contribute about 35 per cent of exports and account for nearly 25 per cent of the sector’s output. But MSME units suffer from inadequate access to technology, commercial credit and regional and/or global production networks.
India’s manufacturing sector will not attain global competitiveness unless this marked dualism between the formal and informal segments within the manufacturing sector is not eliminated. The expanding coverage of GST will help in reducing the dualism. But sector-specific measures are needed
The FDI factor
The present government has demonstrated its intent to use FDI as a means for ramping up manufacturing capacity by its bold approach in opening up nearly all manufacturing sectors, including defence production to foreign direct investments. This is beginning to show positive results and the inflow of FDI is expected to exceed $100 billion in FY23. To achieve even better results, we need to distinguish between new capacity creating FDI from inflows of private equity capital that take over existing capacities.
There is a new tendency to even combine inflows of finance capital with FDI and private equity inflows. This creates confusion.
All three are distinct categories of foreign capital and should be reported and treated differently. This will help in ensuring foreign capital inflows are not used predominantly to take over domestic innovations and capacities created by Indian start-ups and entrepreneurs.
It will also be useful to annually compare India’s performance with other FDI recipient countries. Inter-State comparisons of FDI inflows will encourage State governments to focus their efforts on attracting FDI inflows that create export oriented manufacturing capacities and generate quality employment.
Globally competitive manufacturing and resultant exports will lead the way for India to achieve true Atmanirbharta. Consistent efforts in select sectors can help India successfully expand its share in world trade from the present level of less than 3 per cent (taking merchandise and services trade together) to at least 12 per cent by the time we celebrate the centenary of our Independence in 2047. Such an achievement while achieving true Atmanirbharta will also enhance our national security in multiple ways.
The writer is the former Vice-Chairman of NITI Aayog and the Chairman of Pahle India Foundation, Delhi