Manufacturing in India
Kartavya Desk Staff
Source: TH
Subject: Economics
Context: India’s manufacturing slowdown has resurfaced in public debate following economist Arvind Subramanian’s analysis linking weak industrialisation to wage structures, technology stagnation, and the Dutch Disease framework.
About Manufacturing in India:
What it is?
• Manufacturing refers to the transformation of raw materials into finished goods using labour, capital, technology, and energy, forming the backbone of employment-led structural transformation.
• Historically, manufacturing has enabled countries to move from agrarian economies to high-productivity, export-driven growth.
Trends and data:
• Manufacturing contributes ~13% of India’s GDP, while services account for about 64%, indicating premature deindustrialisation.
• Between 2011–2023, India’s manufacturing GDP share declined by 3.2 percentage points, though less than China (6 pp) and South Korea (4 pp).
• Industrial growth remains uneven, with recent PMI expansion but limited long-term wage and productivity gains.
Successes of India’s manufacturing sector:
• Electronics manufacturing boom: Targeted incentives under the PLI scheme reduced cost disadvantages, encouraged scale economies, and integrated India into global electronics value chains.
E.g. Mobile exports surged from USD 0.18 bn (2014) to USD 15+ bn (2024), reflecting rapid capacity creation.
• Improved FDI inflows: Geopolitical diversification under the China+1 strategy positioned India as a preferred manufacturing destination for global firms.
E.g. Apple’s contract manufacturers crossed 20% domestic value addition in India by FY25.
• Import substitution achieved: Domestic production reduced dependence on critical electronic imports, strengthening trade balance and supply-chain resilience.
E.g. Mobile phone imports fell from USD 5.7 bn (2014-15) to below USD 1 bn (2023-24).
• Defence and aerospace gains: Strategic indigenisation reduced import reliance and built domestic technological capabilities in high-value manufacturing.
• Renewables manufacturing growth: Policy push aligned manufacturing with climate goals, creating green industrial capacity and export opportunities.
Challenges associated with manufacturing in India:
• Dutch disease-like wage distortion: High public-sector wages raised economy-wide wage expectations without parallel productivity growth in manufacturing.
E.g. Manufacturing firms struggled to compete with government salaries, discouraging factory employment expansion.
• Low technological upgrading: Easy access to cheap labour reduced incentives for automation, capital deepening, and productivity enhancement.
E.g. Many apparel units continue manual stitching instead of adopting automated cutting and sewing technologies.
• Weak skill ecosystem: Mismatch between formal education and shop-floor skills constrains industrial efficiency and scale.
E.g. MSMEs report shortages of CNC machine operators despite high youth unemployment.
• MSME fragility: Limited access to finance, technology, and standards prevents MSMEs from integrating into global value chains.
E.g. Numerous Indian MSMEs could not meet Apple’s supplier quality benchmarks.
• Rising inequality: Capital-intensive growth concentrated gains at the top, weakening wage growth and mass consumption demand.
E.g. IT unicorn valuations soared while entry-level software salaries stagnated for over a decade.
Way ahead:
• Technology-driven industrialisation: Manufacturing must shift from labour dependence to innovation-led productivity growth.
E.g. Germany’s Industry 4.0 demonstrates how automation sustains competitiveness despite high wages.
• Labour-intensive manufacturing push: Sectors with high employment elasticity should anchor India’s industrial strategy.
E.g. Bangladesh’s garment exports crossed USD 45 bn, generating large-scale female employment.
• Skill–industry integration: Vocational education must be aligned with real-time industry requirements.
E.g. Japan’s dual training model integrates classroom learning with factory apprenticeships.
• MSME value-chain integration: Cluster-based support, standardisation, and export credit can unlock MSME scale.
E.g. Vietnam linked MSMEs to global electronics chains, boosting exports and productivity.
• Stable trade and policy regime: Long-term policy certainty is essential to crowd in private manufacturing investment.
E.g. South Korea’s consistent industrial policy produced globally competitive manufacturing champions.
Conclusion:
India’s manufacturing lag is rooted not only in policy choices but also in insufficient technological upgrading and labour absorption. Recent gains show promise, yet employment-centric industrialisation remains incomplete. A technology-enabled, MSME-driven, labour-absorbing manufacturing strategy is essential for inclusive growth.
Q.Briefly discuss the problems of India’s manufacturing sector. (200 Words)