Govt must support India's manufacturing sector

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Anurag Singh | 01 Nov, 2020
Though India has emerged as the fastest-growing major economy over the past few years, its growth has primarily been driven by its services sector which contributes close to 55 per cent to the country's GDP compared to the manufacturing sector whose share in the GDP has stagnated at around 16 per cent. The government has also shared its intention of turning India into a manufacturing powerhouse and raising the share of manufacturing in India's Gross Domestic Product (GDP) to 20 per cent by 2025.

Traditionally, manufacturing has been given higher importance when compared to the Services and Agriculture sectors as a large manufacturing base generates large scale employment opportunities and helps distribute wealth among the workforce in a better and more equitable manner. Many of India's Asian peers with a higher contribution of manufacturing to GDP have been able to address the issue of poverty and unemployment better than India. These include Indonesia where manufacturing has a 20 per cent share of GDP, Malaysia with 22 per cent, Thailand with 27 per cent, and China with 29 per cent.

Though many successive governments have tried to raise the share of manufacturing in the country's GDP, they have been unsuccessful in doing so and while manufacturing forms an integral part of the industrial sector, its sectoral growth has ranged around 7 per cent. The Covid-19 pandemic presents a unique opportunity for India to present itself as an attractive destination for manufacturing as more and more companies look to diversify their supply chains away from China.

For India to become a manufacturing powerhouse, it needs to concentrate on sectors that have contributed greatly to the success of manufacturing in India and still hold immense growth potential. These sectors include Chemicals, Pharmaceuticals, Electronics manufacturing, Steel, and especially Automobile which has served as a shining example of success in India's manufacturing story. With proper government support, these sectors can drive India's manufacturing growth and provide employment to millions in future.

The Automobile Industry in India contributes 7.1 per cent to the country's GDP and around 49 per cent to India's manufacturing GDP as of 2019. It became the fifth-largest auto market in 2019 with sales reaching 3.81 million units. The automobile industry is one of the largest employment providers in the country and employs close to 29 million people across the country.

The automotive sector has a large economic multiplier impact and is one of the most critical sectors of the economy. In the United States, the auto industry boasts one of the highest "employment multipliers" of any industry in the US which means it helps create jobs beyond the realm of manufacturing. In the US, the multiplier effect is 8, meaning there are seven additional jobs in the US economy for every automaker job across manufacturer operations and while the structure of the automotive industry in the US and India would differ significantly, the Indian automotive industry too has a large multiplier effect as massive amounts of raw materials such as steel, aluminium, plastics, and other minerals and resources are used in the production of a car.

Despite its huge growth in the country, the automotive sector does face some challenges which contributed to the slowdown in the sector.

Affordability has become one of the main hindrances to the growth of the automobile sector in India. Prices have increased due to several factors like the shift to the stricter Bharat Stage-VI emission norms as well as new safety regulations.

Automobiles in India are taxed at a very high rate. In addition to a GST of 28 per cent, another cess on cars is imposed and state road and registration tax are also added which may be hiked regularly by states to earn more revenues, driving up the costs of automobiles.

The need for more global players to invest in India

The overarching element that could propel the growth of the sectors would be greater investments by foreign players. Foreign automobile companies have contributed immensely to the development of the industry ecosystem leading R&D activities, exports, and new product introductions, and introducing latest technologies into the sector through technology transfer.

Hyundai Motors has led in the exports of passenger vehicles exporting 1.45 lakh units during the period of April-December 2019 and Toyota plans on investing close to Rs 2000 crore for the development of electric components and technology. Daimler has invested heavily in R&D and has achieved 90 per cent localization of the products it manufactures in India under the Indian brand Bharat Benz.

The success of these foreign companies also helps in building a favourable reputation of the country as an attractive investment destination and resonates with the government's call of 'making in India for the world'.

In addition to the automobile sector, other sectors such as steel, chemicals, electronics manufacturing, and pharmaceuticals contribute more than 2 per cent each to the country's GDP with the electronics industry employing close to 13 million people, directly and indirectly, and the steel industry having a large employment multiplier effect of 6.8x. All of the above-mentioned sectors also hold immense export potential.

Some of the common challenges faced by these industries include the lack of investment in R&D, high taxation, and low innovations leading to Indian products being incompetent in the global scenario and the Indian market being flooded with imports. The sectors also require more comprehensive and sector-specific policies in line with Atma Nirbhar Bharat with a push towards exports.

The government has introduced measures like the production linked incentive (PLI) scheme which gives incentives of 4-6 per cent to electronics companies for electronics manufacturing, a nearly Rs 1 lakh crore fund to encourage companies to manufacture pharmaceutical ingredients domestically by 2023, initiated reforms in the chemical industry to become self-reliant, and encouraged and incentivized the adoption of digital tools for improving efficiency in the steel sector.

While the steps taken are worthy being appreciated, the government must further handhold and support these sectors during this difficult time. Together these sectors contribute to the majority of the manufacturing GDP and play an extremely important role in exports and with proper government support, can help with import substitution while paving the way for India to become a global manufacturing hub.