India’s Manufacturing Sector: Challenges, and Opportunities

Syllabus: GS3/Economy

Context

  • Recently, the Annual Survey of Industries (ASI) for 2022-23 was released showcasing a positive correlation between Production Linked Incentive (PLI) scheme incentives and sectoral performance that have been pivotal in revitalizing the manufacturing sector, positioning India as a potential global manufacturing hub.

Current Status of India’s Manufacturing Sector

  • The manufacturing sector is emerging as an integral pillar in the country’s economic growth with 17% of the nation’s GDP and over 27.3 million workers.
  • Growth and Performance: According to the Annual Survey of Industries (ASI) for 2022-23, the manufacturing sector registered a robust growth rate of 21.5% in output, with a Gross Value Added (GVA) growth of 7.3%.
    • Key sectors such as basic metal manufacturing, coke and refined petroleum products, food products, chemicals, and motor vehicles collectively contributed 58% to the total manufacturing output.
  • Employment Generation: The manufacturing sector has also been a significant source of employment, adding approximately 22 lakh jobs in 2022-23.
    • It has surpassed pre-pandemic levels, indicating a steady recovery and expansion.
    • Major states like Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Uttar Pradesh have been leading contributors to the sector’s GVA and employment.
  • Foreign Direct Investment (FDI): FDI in India’s manufacturing sector has reached US$ 165.1 billion, a 69% increase over the past decade, driven by production-linked incentive (PLI) schemes.
    • In the last five years, total FDI inflows amounted to US$ 383.5 billion.

Future Prospects

  • According to the National Manufacturing Policy (NMP), India aims to have 25% of the economy’s output come from manufacturing by 2025.
  • India has the capacity to export goods worth US$ 1 trillion by 2030 and is on the road to becoming a major global manufacturing hub.
  • As in the Confederation of Indian Industry (CII)’s estimations, manufacturing sectors share in the GVA has a potential to rise from the current 17% to over 25% by 2030-31, and to 27% by 2047-48 if sustained efforts to boost domestic manufacturing capabilities and domestic value addition continue.
    • It helps to transform the Indian economy into a developed economy by 2047.
Annual Survey of Industries (ASI)
– It has been conducted since 1959 under the Collection of Statistics Act, 1953.
1. Presently, the survey is being conducted under the Collection of Statistics Act, 2008 as amended in 2017 and Rules framed there under in 2011.
– It provides information on important characteristics of the registered manufacturing sector for objectively evaluating the industrial scenario of India.
– It covers the factories registered under the Factories Act, 1948 and establishments under Bidi and Cigar Workers (Conditions of Employment) Act, 1966.
– It also covers all electricity undertakings engaged in generation, transmission and distribution of electricity, not registered with the Central Electricity Authority (CEA).

Challenges and Concerns Related to India’s Manufacturing Sector

  • Infrastructure Deficiencies: It includes not only physical infrastructure like roads, ports, and power supply but also digital infrastructure.
    • Poor connectivity and unreliable power supply increase operational costs and reduce efficiency.
  • Skilled Labor Shortage: While India has a large workforce, there is a significant gap in the skills required for modern manufacturing processes.
    • It is partly due to inadequate vocational training and education systems.
  • Regulatory Hurdles: Land acquisition laws, labor laws, and environmental regulations can be cumbersome and time-consuming, deterring investment and slowing down project implementation.
  • Access to Finance: Small and medium-sized enterprises (SMEs), which form the backbone of the manufacturing sector, often face difficulties in accessing finance.
    • High-interest rates, stringent collateral requirements, and lengthy approval processes make it challenging for these businesses to secure the necessary funds for expansion and modernization.
  • Global Competition: India’s manufacturing sector faces stiff competition from countries like China, which have more developed manufacturing ecosystems.
    • Lower production costs and better infrastructure in these countries make it difficult for Indian manufacturers to compete on a global scale.
  • Policy Implementation: While the government has introduced several initiatives like ‘Make in India’ and the Production-Linked Incentive (PLI) scheme, the implementation of these policies has been inconsistent.
    • Bureaucratic delays and lack of coordination between various government departments often result in suboptimal outcomes.
  • Technological Adoption: The adoption of advanced manufacturing technologies such as automation, artificial intelligence, and the Internet of Things (IoT) is still in its nascent stages in India.
    • Limited investment in research and development (R&D) and a lack of awareness about the benefits of these technologies hinder their widespread adoption.
  • Environmental Concerns: Issues such as pollution, waste management, and sustainable resource use are critical concerns that need to be addressed to ensure the sector’s long-term viability.

Key Recommendations for Sustained Growth in India’s Manufacturing Sector

  • Expanding the Scope of PLI: The PLI Scheme has been instrumental in boosting manufacturing in sectors like electronics, pharmaceuticals, and automobiles.
    • Extending PLI incentives to labor-intensive sectors such as apparel, leather, footwear, and furniture, as well as sunrise industries like aerospace, space technology, and maintenance, repair, and overhaul (MRO), could unlock new growth frontiers.
    • Additionally, sectors with high import dependency but untapped domestic capabilities, such as capital goods, should also be considered for PLI incentives.
  • Female Workforce Participation: Enhancing female workforce participation is an untapped opportunity for boosting manufacturing growth.
    • The World Bank’s latest South Asia Development Update estimates that India’s manufacturing output could rise by 9% if more women join the workforce.
  • Focusing on MSMEs: MSMEs contribute around 45% of India’s manufacturing GDP and employ about 60 million people.
    • Tailoring PLI incentives to accommodate MSMEs, by lowering capital investment thresholds and reducing production targets, would empower these enterprises to scale up, innovate and integrate more effectively into value chains.
  • Addressing Structural Challenges: These include improving infrastructure, enhancing skill development, and ensuring ease of doing business.
    • Strong reforms are essential to create a conducive environment for manufacturing to flourish.
    • Investments in transportation networks, warehousing, and port facilities can enhance efficiency and reduce the time and cost of moving goods.
  • Skill Development and Labor Reforms: Initiatives like the Skill India Mission aim to equip the workforce with the necessary skills to meet the demands of modern manufacturing.
  • Promoting Sustainable Practices: Ensuring environmental sustainability through green manufacturing practices is vital.
    • Policies that promote energy efficiency, waste reduction, and the use of renewable energy sources can help achieve long-term sustainability goals.
  • Encouraging Foreign Direct Investment (FDI): Attracting FDI through favorable policies and a stable business environment can bring in capital, technology, and expertise.
    • It can enhance the competitiveness of India’s manufacturing sector on a global scale.
  • Leveraging Digital Technologies: Adopting digital technologies can improve efficiency and productivity.
    • The Digital India initiative aims to integrate these technologies into the manufacturing process.

Way Forward

  • The revival of the manufacturing sector is a testament to the effectiveness of strategic policy initiatives like the PLI scheme.
  • The need for strong reforms to fully capitalize on its potential is evident. Extending PLI incentives to labor-intensive sectors as well as sunrise industries like aerospace and space technology, could unlock new growth frontiers.
  • Additionally, addressing high import dependency in sectors with untapped domestic capabilities, such as capital goods, is crucial.
Daily Mains Practice Question
[Q] Discuss the key challenges and opportunities India faces in its endeavor to become a global manufacturing hub. Highlight the efforts to overcome these challenges and capitalize on these opportunities?

Source: TH