The Indian economy has reported rapid growth in the last two decades, transforming from primarily an agrarian economy to a services-driven one. However, despite the super-normal growth, India’s manufacturing sector contributes 16% to the GDP; as compared to China’s 34%.
The manufacturing sector in India continues to struggle, pulling down the country’s overall growth. In 2013–14, the manufacturing sector’s output declined by 0.2% (compared to overall GDP growth of 4.4%) — its worst performance since 1999-2000. Some of the factors affecting manufacturing growth include policy inaction in infrastructure development, stringent labor laws, barriers in land acquisition and inefficient labor.
Fixing infrastructure bottlenecks key to revival
Lack of adequate infrastructure has led to declining productivity and competitiveness of the Indian manufacturing sector. Power and fuel shortage, poor transportation infrastructure (road and rail) and congested ports are major challenges that manufacturers face. A truck in India covers 250-400 km per day as compared to 700-800 km per day in developed countries.
To facilitate infrastructure development, India needs to have a single point ownership across different ministries resulting in timely execution of projects. The country can look at China which has a centralized agency in National Development and Reform Commission (NDRC), which coordinates and monitors policy implementation carried out by local provincial governments.
Simplifying land acquisition procedures to aid manufacturing growth
There is an urgent need to simplify and introduce transparency in land acquisition procedures. India ranks a low 91 in ease of registering property, in the World Bank’s Doing Business Report 2014,
Gujarat has led the way in reforming land acquisition policy, simplifying procedures and ensuring minimum direct government participation. Land allotment has increased four folds since 2010 and possession of land now takes just 45 days.
Flexible labor laws to increase productivity
In India, there are 47 central laws and over 200 different state laws that govern the employer-worker relationship. Liberalizing and simplifying these will be crucial in attracting investments and reviving the manufacturing sector in India.
Recently, Rajasthan government has proposed amendments to three major labor laws — Industrial Disputes Act, Contract Labour Act and the Factories Act. The amendment proposes that government’s permission will not be required for retrenchment of up to 300 workers (current law allows retrenchment of up to 100 workers).
Focus on skill development — echoing Modi’s mantra
By 2020, India will have 64% of its population in the working age group. But the existing annual training capacity in the country is only 4.5 million which is low compared to the required number.
Swift skill development of the Indian workforce can be achieved by adequately measuring the skill gap, acquiring requisite funding and integrating vocational training with school learning. Government’s proposed NETAP program aims to enrol 200,000 apprentices annually into real time training at the workplace for the next 10 years. India currently has only 250,000 apprentices compared to China’s 20 million and Germany’s 3 million.
Way forward: a robust manufacturing sector is important for sustainable economic growth in India
With China losing its cost competitiveness to rising labor and input costs, India can leverage the opportunity to strengthen its participation in the global manufacturing sector. However, there is a need to resolve fundamental challenges which would require equal commitment on the part of the industry and the government. Without this, India might miss out once again to capitalize on the global manufacturing restructuring.
(*The author Abhaya Agarwal is Partner & Leader – Infrastructure Practice at EY. Views expressed are his personal)