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Revving up the manufacturing sector

For a couple of years now, there has been interest on the part of the policymakers and industry associations to increase the share of manufacturing sector in the GDP. The idea has been gaining momentum over the last three years. Speakers at the national convention of CII referred to the need to increase this share to 25 per cent of GDP. Presently, it is in the region of 14 per cent.

The experience of China in building a very strong manufacturing sector was often cited as a shining example. In recent years, China emerged a large manufacturer of a variety of goods. This was aided by the country opening up investments in the manufacturing sector. China developed a number of special economic zones for exports. It opened up investments, especially from the US, through liberal incentives. Large multinationals from the US and Europe, Japan and Korea were attracted by these incentives offered.  The major attractions included the ease of setting up and operating businesses and, most importantly, cheap labour. China also took care building a strong infrastructure in terms of roads, transport, port facilities… and offered other liberal incentives.

In a very short time, multinationals rushed to China and helped the country build a massive manufacturing base. The booming Chinese economy followed.  In quick time China emerged a strong economic power next only to that of the US. Chinese products gained in quality as a result of such investments and the cheap labour enabled the country to win custom for a vast range of products at low prices.

An immediate fall out of this is the huge surge in exports. In recent decades,  it is common sight to find in the US department stores several goods offered, carrying the label Made in China. Particularly pervasive is the share of a vast range of consumer goods including appliances and other items of daily use. In quick time such an experience also helped China upgrading its skills and win custom for more sophisticated goods.

 Unfortunately, a similar wave has not struck India largely because of the slow pace of reforms. Investment policies do not still attract major corporates across the globe to set up shop to produce a vast range of manufactured goods. This is sad in the light of the existence of several multinationals working in India for several decades. The several restrictions in doing business in India and the various clearances still required from the government and most importantly, corruption at the high places, have been major deterrents. Unlike China, infrastructure is also extremely weak. Ports are still congested. Road infrastructure to carry goods from and to the port is still poor and the cost of basic requirements like power is pretty high, besides being uncertain. Tamil Nadu, which used to be in the forefront of attracting such investments for several decades, offers an instance of this deficiency: over the last two years, power shortages have been rampant forcing industry to take recourse to power generation through diesel gensets which shoots up the cost. Simultaneously, there has also been a huge increase in the cost of grid power. Cost of power in China is estimated to be less than half of that charged for Indian industry. Of course, there is also the uncertainty of supplies and unsteady voltage. While the government and CII have been stressing the need to take the share of the manufacturing sector to 25 per cent of GDP, the lack of skills, lack of a strong work culture and the absence of training facilities come in the way. Sadly, education even at engineering colleges and higher institutes of learning do not prepare the students for ready employment in industry.  

 The target for raising the share of the manufacturing sector to 25 per cent of GDP thus appears tall. Even for a highly developed country with a strong manufacturing base like Germany, the share is just around 23 per cent; for countries in south-western Europe like France, Spain, Portugal and Belgium, the share is less than 15 per cent of GDP.

IE has been suggesting serious efforts to improve the share of agriculture in the GDP. India has good natural endowments in terms of arable land and agriculture season extended round the year. By proper policy back up it will be possible to enable the agriculture sector to emerge strong which in turn can also support a strong industrial sector.

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