India’s Manufacturing Sector: Challenges, and Opportunities

General Studies Paper -3

Context: Recently, the Annual Survey of Industries (ASI) for 2022-23 was released showcasing a positive correlation between Production Linked Incentive (PLI) scheme incentives and sectoral performance that have been pivotal in revitalizing the manufacturing sector, positioning India as a potential global manufacturing hub.

Current Status of India’s Manufacturing Sector

• The manufacturing sector is emerging as an integral pillar in the country’s economic growth with 17% of the nation’s GDP and over 27.3 million workers.
• Growth and Performance: According to the Annual Survey of Industries (ASI) for 2022-23, the manufacturing sector registered a robust growth rate of 21.5% in output, with a Gross Value Added (GVA) growth of 7.3%.
• Key sectors such as basic metal manufacturing, coke and refined petroleum products, food products, chemicals, and motor vehicles collectively contributed 58% to the total manufacturing output.
• Employment Generation: The manufacturing sector has also been a significant source of employment, adding approximately 22 lakh jobs in 2022-23.
• It has surpassed pre-pandemic levels, indicating a steady recovery and expansion.
• Major states like Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Uttar Pradesh have been leading contributors to the sector’s GVA and employment.
• Foreign Direct Investment (FDI): FDI in India’s manufacturing sector has reached US$ 165.1 billion, a 69% increase over the past decade, driven by production-linked incentive (PLI) schemes.
• In the last five years, total FDI inflows amounted to US$ 383.5 billion.

Future Prospects

• According to the National Manufacturing Policy (NMP), India aims to have 25% of the economy’s output come from manufacturing by 2025.
• India has the capacity to export goods worth US$ 1 trillion by 2030 and is on the road to becoming a major global manufacturing hub.
• As in the Confederation of Indian Industry (CII)’s estimations, manufacturing sectors share in the GVA has a potential to rise from the current 17% to over 25% by 2030-31, and to 27% by 2047-48 if sustained efforts to boost domestic manufacturing capabilities and domestic value addition continue.
• It helps to transform the Indian economy into a developed economy by 2047.

Challenges and Concerns Related to India’s Manufacturing Sector

• Infrastructure Deficiencies: It includes not only physical infrastructure like roads, ports, and power supply but also digital infrastructure.
• Poor connectivity and unreliable power supply increase operational costs and reduce efficiency.
• Skilled Labor Shortage: While India has a large workforce, there is a significant gap in the skills required for modern manufacturing processes.
  • It is partly due to inadequate vocational training and education systems.
• Regulatory Hurdles: Land acquisition laws, labor laws, and environmental regulations can be cumbersome and time-consuming, deterring investment and slowing down project implementation.
• Access to Finance: Small and medium-sized enterprises (SMEs), which form the backbone of the manufacturing sector, often face difficulties in accessing finance.
  • High-interest rates, stringent collateral requirements, and lengthy approval processes make it challenging for these businesses to secure the necessary funds for expansion and modernization.
• Global Competition: India’s manufacturing sector faces stiff competition from countries like China, which have more developed manufacturing ecosystems.
  • Lower production costs and better infrastructure in these countries make it difficult for Indian manufacturers to compete on a global scale.
• Policy Implementation: While the government has introduced several initiatives like ‘Make in India’ and the Production-Linked Incentive (PLI) scheme, the implementation of these policies has been inconsistent.
  • Bureaucratic delays and lack of coordination between various government departments often result in suboptimal outcomes.
• Technological Adoption: The adoption of advanced manufacturing technologies such as automation, artificial intelligence, and the Internet of Things (IoT) is still in its nascent stages in India.
  • Limited investment in research and development (R&D) and a lack of awareness about the benefits of these technologies hinder their widespread adoption.
• Environmental Concerns: Issues such as pollution, waste management, and sustainable resource use are critical concerns that need to be addressed to ensure the sector’s long-term viability.

Key Recommendations for Sustained Growth in India’s Manufacturing Sector

• Expanding the Scope of PLI: The PLI Scheme has been instrumental in boosting manufacturing in sectors like electronics, pharmaceuticals, and automobiles.
  • Extending PLI incentives to labor-intensive sectors such as apparel, leather, footwear, and furniture, as well as sunrise industries like aerospace, space technology, and maintenance, repair, and overhaul (MRO), could unlock new growth frontiers.
  • Additionally, sectors with high import dependency but untapped domestic capabilities, such as capital goods, should also be considered for PLI incentives.
• Female Workforce Participation: Enhancing female workforce participation is an untapped opportunity for boosting manufacturing growth.
  • The World Bank’s latest South Asia Development Update estimates that India’s manufacturing output could rise by 9% if more women join the workforce.
• Focusing on MSMEs: MSMEs contribute around 45% of India’s manufacturing GDP and employ about 60 million people.
  • Tailoring PLI incentives to accommodate MSMEs, by lowering capital investment thresholds and reducing production targets, would empower these enterprises to scale up, innovate and integrate more effectively into value chains.
• Addressing Structural Challenges: These include improving infrastructure, enhancing skill development, and ensuring ease of doing business.
  • Strong reforms are essential to create a conducive environment for manufacturing to flourish.
  • Investments in transportation networks, warehousing, and port facilities can enhance efficiency and reduce the time and cost of moving goods.
• Skill Development and Labor Reforms: Initiatives like the Skill India Mission aim to equip the workforce with the necessary skills to meet the demands of modern manufacturing.
• Promoting Sustainable Practices: Ensuring environmental sustainability through green manufacturing practices is vital.
  • Policies that promote energy efficiency, waste reduction, and the use of renewable energy sources can help achieve long-term sustainability goals.
• Encouraging Foreign Direct Investment (FDI): Attracting FDI through favorable policies and a stable business environment can bring in capital, technology, and expertise.
  • It can enhance the competitiveness of India’s manufacturing sector on a global scale.
• Leveraging Digital Technologies: Adopting digital technologies can improve efficiency and productivity.
  • The Digital India initiative aims to integrate these technologies into the manufacturing process.

Way Forward

• The revival of the manufacturing sector is a testament to the effectiveness of strategic policy initiatives like the PLI scheme.
• The need for strong reforms to fully capitalize on its potential is evident. Extending PLI incentives to labor-intensive sectors as well as sunrise industries like aerospace and space technology, could unlock new growth frontiers.
• Additionally, addressing high import dependency in sectors with untapped domestic capabilities, such as capital goods, is crucial.