Model Answer
0 min readIntroduction
Since the initiation of economic reforms in 1991, India has witnessed significant growth in its Gross Domestic Product (GDP). However, the industrial sector’s contribution to this growth has been comparatively subdued. While services have emerged as the dominant driver of economic expansion, and agriculture remains substantial, industrial growth has often lagged behind, exhibiting volatility and failing to consistently contribute a larger share to the GDP. This disparity raises concerns about the sustainability and inclusivity of India’s growth trajectory, necessitating a critical examination of the underlying reasons and the efficacy of recent policy interventions.
Reasons for Lagging Industrial Growth
Several factors contribute to the slower pace of industrial growth in the post-reform period:
Supply-Side Constraints
- Infrastructure Deficiencies: Inadequate power supply, transportation bottlenecks (roads, ports, railways), and logistical inefficiencies significantly raise the cost of production and hinder competitiveness.
- Land Acquisition Issues: Complex and time-consuming land acquisition processes, coupled with rehabilitation and resettlement challenges, delay project implementation. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, while aiming to protect land owners, has often been cited as contributing to these delays.
- Labour Laws: Rigid labour laws, particularly those related to hiring and firing, create disincentives for large-scale employment and investment in labour-intensive industries.
- Access to Finance: Small and Medium Enterprises (SMEs), which constitute a significant portion of the industrial sector, often face difficulties in accessing affordable credit.
Demand-Side Constraints
- Weak Global Demand: Fluctuations in global economic conditions and protectionist tendencies in developed countries impact India’s export performance, affecting industrial output.
- Limited Domestic Demand: While domestic demand has grown, it hasn’t been sufficient to fully absorb the increased industrial capacity, particularly in certain sectors.
- Low Investment in R&D: Insufficient investment in research and development (R&D) limits innovation and the development of high-value-added products.
Structural Issues
- Sectoral Imbalance: The focus on services has led to a relative neglect of manufacturing, resulting in a skewed economic structure.
- Informal Sector Dominance: A large proportion of the industrial sector remains informal, lacking access to formal credit, technology, and market linkages.
- Technological Obsolescence: Many Indian industries operate with outdated technology, hindering productivity and competitiveness.
Evaluation of Recent Changes in Industrial Policy
The government has implemented several policy changes aimed at boosting industrial growth:
Production Linked Incentive (PLI) Scheme (2020 onwards)
The PLI scheme provides financial incentives to companies based on incremental sales of domestically manufactured goods. It covers sectors like automobiles, electronics, pharmaceuticals, and textiles. Impact: The scheme has shown initial success in attracting investment and boosting production in select sectors, particularly electronics and pharmaceuticals. However, its effectiveness across all sectors remains to be seen.
‘Make in India’ Initiative (2014)
This initiative aims to transform India into a global manufacturing hub. Impact: While it has raised awareness and attracted some investment, it hasn’t yet resulted in a substantial and sustained increase in the manufacturing sector’s share of GDP.
National Industrial Corridor Programme
This programme focuses on developing industrial corridors with integrated infrastructure. Impact: These corridors have the potential to improve connectivity and reduce logistical costs, but their implementation has been slow.
Changes in Labour Laws (2020 onwards)
The government has introduced a set of labour codes aimed at simplifying and rationalizing labour regulations. Impact: These codes are intended to improve ease of doing business and encourage investment, but their impact on employment generation remains uncertain.
Focus on Infrastructure Development
Increased investment in infrastructure projects, including roads, railways, and ports, is expected to address supply-side constraints. Impact: While progress has been made, significant infrastructure gaps still remain.
However, the effectiveness of these policies is contingent upon efficient implementation, addressing bureaucratic hurdles, and ensuring a conducive business environment. Furthermore, a holistic approach that integrates industrial policy with other economic policies, such as trade, investment, and skill development, is crucial.
Conclusion
The lagging industrial growth rate in the post-reform period is a complex issue stemming from a combination of supply-side bottlenecks, demand constraints, and structural imbalances. Recent industrial policy changes, particularly the PLI scheme and infrastructure development initiatives, offer potential solutions. However, their success hinges on effective implementation, sustained investment, and a broader focus on improving the overall business environment. A renewed emphasis on skill development, technological innovation, and fostering a competitive manufacturing ecosystem is essential for India to realize its industrial potential and achieve inclusive and sustainable economic growth.
Answer Length
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