Model Answer
0 min readIntroduction
The manufacturing sector is widely recognized as a crucial engine for economic growth, employment generation, and technological advancement. In India, despite its potential, the sector’s contribution to the Gross Domestic Product (GDP) has remained relatively stagnant over the past four decades, exhibiting a fluctuating trend. As of 2022-23, the manufacturing sector contributed around 17.1% to India’s GDP. This is significantly lower than many other developing economies. Understanding the historical trajectory, evaluating the reasons behind this performance, and outlining the government’s strategies to revitalize the sector are essential for formulating effective economic policies.
Historical Trend of Manufacturing’s Share in GDP (1980s – 2020s)
The manufacturing sector’s share in India’s GDP has followed a complex pattern over the last four decades. It can be broadly divided into the following phases:
- 1980s – Early 1990s: Stagnation (around 17-18%) – This period was characterized by a ‘License Raj’ which stifled private sector investment and innovation. Import substitution policies limited competition and efficiency.
- Mid-1990s – Early 2000s: Moderate Growth (15-17%) – Economic liberalization initiated in 1991 led to some improvement, with gradual deregulation and increased foreign investment. However, infrastructure bottlenecks and rigid labor laws hindered substantial growth.
- 2000s – 2010s: Fluctuations (15-16%) – The period witnessed a brief surge in manufacturing growth driven by global demand, particularly in sectors like automobiles and pharmaceuticals. However, the 2008 global financial crisis and subsequent slowdown impacted the sector.
- 2014 – Present: Gradual Recovery (17-18%) – The ‘Make in India’ initiative launched in 2014 aimed to boost domestic manufacturing and attract foreign investment. The introduction of the Goods and Services Tax (GST) in 2017 aimed to streamline the tax system and improve ease of doing business. More recently, the Production Linked Incentive (PLI) scheme has been introduced to incentivize domestic production in key sectors.
Evaluation of Manufacturing Sector Performance
The performance of the Indian manufacturing sector has been underwhelming compared to other Asian economies like China, South Korea, and Vietnam. Several factors contribute to this:
- Infrastructure Deficiencies: Inadequate power supply, poor transportation networks, and insufficient logistics infrastructure increase production costs and hinder competitiveness.
- Labor Laws: Rigid labor laws make it difficult for firms to adjust to changing market conditions and hinder job creation.
- Land Acquisition: Complex and time-consuming land acquisition processes create delays and increase project costs.
- Access to Finance: Small and Medium Enterprises (SMEs), which constitute a significant portion of the manufacturing sector, often face difficulties in accessing affordable finance.
- Technological Gap: Limited investment in research and development (R&D) and slow adoption of advanced technologies hamper innovation and productivity growth.
- Scale of Production: Many Indian manufacturing firms are small-scale, lacking the economies of scale necessary to compete globally.
However, the sector also possesses strengths:
- Skilled Workforce: India has a large pool of skilled and relatively low-cost labor.
- Domestic Demand: A large and growing domestic market provides a significant demand base for manufactured goods.
- Engineering Capabilities: India has a strong engineering base and a growing number of innovative startups.
Government Actions and Contemplated Measures
The government has implemented several initiatives to address the challenges facing the manufacturing sector:
- ‘Make in India’ (2014): A flagship initiative aimed at promoting domestic manufacturing, attracting foreign investment, and improving the ease of doing business.
- Production Linked Incentive (PLI) Scheme: Launched in 2020, this scheme provides financial incentives to companies for increasing domestic production in key sectors like electronics, pharmaceuticals, automobiles, and textiles.
- National Manufacturing Policy (2011): Focused on creating a conducive environment for manufacturing growth through infrastructure development, skill development, and technology upgradation.
- Goods and Services Tax (GST) (2017): Streamlined the indirect tax system, reducing cascading effects and improving efficiency.
- Infrastructure Development: Investments in roads, railways, ports, and airports to improve connectivity and reduce logistics costs. The PM Gati Shakti National Master Plan aims to integrate different modes of transport.
- Ease of Doing Business Reforms: Simplification of regulations, online clearances, and reduction in compliance burden.
Further, the government is contemplating measures such as:
- Further reforms in labor laws to provide greater flexibility to firms.
- Streamlining land acquisition processes to reduce delays and costs.
- Promoting R&D and innovation through increased funding and collaboration between industry and academia.
- Developing industrial corridors and clusters to promote specialization and economies of scale.
Conclusion
The Indian manufacturing sector has experienced a subdued performance over the last four decades, hampered by structural issues and policy constraints. While recent initiatives like ‘Make in India’ and the PLI scheme have shown promise, sustained and comprehensive reforms are needed to unlock the sector’s full potential. Addressing infrastructure gaps, improving labor market flexibility, streamlining regulations, and fostering innovation are crucial for achieving a significant and sustained increase in manufacturing’s share in GDP and creating a robust and competitive manufacturing base. A focus on value addition and integration into global value chains will be key to future success.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.