The manufacturing sector’s share in the GDP has stagnated as per the National Accounts Statistics. In 2014-15, the share was 16.1 per cent at current prices. It fell by three percentage points by 2022-23. At constant prices (net of inflation), the share declined marginally to 15.6 per cent. Make in India, initiated in October 2014, was one of the first policy measures of the then-incoming government. It aimed to raise the manufacturing sector’s share in the GDP to 25 per cent and create 100 million jobs by 2022 (in addition to the existing 60 million at the time).
Achieving the goal required substantial investments. Policymakers reasoned that investors were wary of setting up factories and firms. India suffered from excessive capital and labour regulation, requiring a reduction of the “regulatory cholesterol”, to use popular policy jargon. The government sought to credibly and measurably reduce the regulatory burden by benchmarking them against the globally accepted yardstick of the World Bank’s Ease of Doing Business Index (EDBI) ranking. India’s EDBI rank improved from 142 in 2014-15 to 63 in 2019-20. Alas, it failed to boost industrial investment or output growth. The annual growth rate of GDP manufacturing plummeted from a peak of 13.1 per cent in 2015-16 to a negative 3 per cent in 2019-20.
What went wrong? India chased a technically dubious and politically motivated index whose ranks (improvements in them) were not associated with increased investments anywhere. Incidentally, WB scrapped the index in 2021, as it became a professional embarrassment.
The real gainers of the EDBI are perhaps the employers, as the reforms replaced state-mandated regulation with self-certification of labour law compliance. For instance, the boiler inspectorate’s annual mandatory certification of industrial boilers — a critical industrial safety requirement — is replaced by voluntary, private, third-party inspection. Its compliance is reportedly zero in Maharashtra as of 2023.
After the border clashes in Galwan in June 2020, India launched the atmanirbhar abhiyan (self-reliance campaign) to augment domestic production — with a budget of up to one per cent of GDP — to reduce dependence on critical industrial imports such as active pharmaceutical ingredients (APIs) or fertilisers for agriculture. In 2021, the government launched the Production-linked Incentive (PLI) scheme to boost the manufacturing of 14 highly imported and strategic industrial goods.
None of these have worked, at least as yet. The much-publicised boom in production and exports of mobile phones has merely shifted the imports from the finished good to its underlying components with modest domestic value-addition. India needs to invest in component manufacturing. The industrial (gross value added) growth rate, at constant prices, was a mere three per cent per year during 2014-22, as per the Annual Survey of Industries — credible estimates based on the production accounts of registered factories — compared to the GDP growth rate of 6-7 per cent. As industrial production was not growing fast enough to meet domestic demand, net imports, especially from China, ballooned to over $70 billion in 2021-22, and increased to over $100 billion in 2023-24, with China emerging as India’s largest trading partner.
According to national accounts data, policy efforts failed to augment the aggregate fixed investment rate (gross fixed capital formation), which hovers around 30 per cent of GDP at current prices. Its composition has shifted towards services (mainly telecom and infrastructure), with its manufacturing share stagnating at 18 per cent (or declining marginally).
However, the lack of industrial investment is far graver than the national account figures reveal. The manufacturing sector’s performance was overstated in the current series of NAS — as brought out in the unresolved debate on the GDP estimates. As the ASI data up to 2021-22 is available, it is possible to compare the NAS and ASI investment estimates for manufacturing to get a reality check.
As per the NAS, gross fixed capital formation (GFCF) and net fixed capital formation (NFCF) grew on average at 5.3 and 6.9 per cent annually from 2014-15 to 2021-22 at constant prices. The comparable ASI estimates are (-) 1.6 per cent and (-) 9.6 per cent per year. The Covid pandemic may have contributed to the high negative figure of NFCF. If we restrict the estimate to 2019-20, the NFCF growth is still (-) 1.6 per cent. Hence, the bottom line is that since 2014-15, there has practically been no expansion of the net fixed investment rate, thus leading to a stagnation in manufacturing capacity. India’s industrial imports have boomed to meet the demand-supply gap, mainly from China — a national strategic threat. Moreover, the share of labour-intensive exports has dwindled, hurting employment growth.
Why did policymakers fail to notice the abysmal investment growth? They seem to have followed the NAS’s estimates, whose fault lines are now well documented (“Revisiting the GDP Estimation Debate”, Economic & Political Weekly, October 30, 2021). Hopefully, the National Statistical Office will correct the shortcomings in the revised series, whose preparation is expected to commence shortly.
If the preceding arguments and evidence are valid, there is an urgent need for a well-designed industrial policy to address the problem of lack of net investment growth in manufacturing. Such a policy must prioritise productive investment over speculative property development promoted by physical infrastructure in metros and highways to nowhere. The government must align trade and industrial policies to augment domestic investment, improve domestic value addition and export competitiveness. Small industry requires localised, context-specific, and “last-mile” interventions to boost productive employment.
The writer is at Centre for Liberal Education, Indian Institute of Technology Bombay. Views are personal
