The missing middle and breaking bottom of India’s manufacturing sector

Irene Yuan Sun, a well known Chinese-American author, has written the acclaimed book "The Next Factory of the World" about the role of Chinese investment in industrialisation of Africa. In her latest article published by Bloomberg, she has commented as to why factories leaving China (relocation of Chinese factories accelerated by rising costs and US-China trade war) aren't coming to India, but rather going to Vietnam and Africa.

She wrote that the relocating Chinese companies present an enormous opportunity for other countries as these companies can spark much-needed economic transformation in their new homes. There may not be another such chance for this generation.

The only proven pathway to long-lasting, broad-based prosperity has been to build a manufacturing sector linked to global value chains which raises productivity levels and creates knock-on jobs across the whole economy. This was how most rich nations, not to mention China itself, lifted themselves out of poverty.

She advised that India must abandon its overconfidence that investors would come simply for its large population. She further counselled that countries need to analyse which manufacturing sub-sectors they were best positioned for, meet the requirements those manufacturers have in order to set up shop, and target the regions of China (and elsewhere in the world) where those types of manufacturers are to be found.

In simple terms, India should focus on those manufacturing sub-sectors where it has an inherent advantage and attract global manufacturers in such sub-sectors with sector-specific incentive packages.

She also made some more pertinent comments about India. "The fantasy, most common in India, that a country might somehow 'leapfrog' from a rural, agriculture-heavy economy straight to a services-based economy is just that: a fantasy."

The ‘Make in India’ initiative launched by NDA government, with the twin objectives of increasing the share of manufacturing sector in GDP to 25 per cent and to create 100 million new jobs by 2022, could not succeed in attracting global manufacturing to India.

In more than five years since its launch, the share of manufacturing in GDP has remained virtually stagnant at 16 per cent. If the nitty-gritties of implementation are lacking, even a laudable mission can fail.

During the last seven decades, India has created a diverse manufacturing base, but its contribution as a per cent to GDP has stagnated in the mid-teens. To boost the share of manufacturing in GDP, there is no single formula. Sub-sector wise specific constraints need to be attended to.

For some of manufacturing sub-sectors, bottlenecks or high costs of land acquisition may be the burning issue. For capital-intensive manufacturing sub-sectors, high cost of debt may be the issue.

For such capital-intensive manufacturing sectors, to make available low-cost and easy flow of debt, government needs to reverse the diminishing role of development finance institutions (who are providers of long-term capital), the risk-averse credit behaviour of banks and create a vibrant corporate debt market, along with the usual repo rate cuts.

For the problems of labour-intensive manufacturing sectors, the answer may lie in judicious labour reforms.

India’s manufacturing sector is characterised by a concentration of small and micro firms at one end of the spectrum, and very large firms at the other end. Middle-sized firms are conspicuous by their absence.

Take the steel sector for example. You have very large integrated steel manufacturers like Tata Steel, JSW Steel and SAIL at one end and small rolling mills at the other. There are hardly any mid-sized integrated steel companies.

Along with ‘Make in India’ initiative, India also needs a 'Grow in India’ initiative to nurture the small and micro firms to grow into mid or large-sized firms. To the contrary, small and micro firms have suffered the twin blows of Demonetisation and bumpy implementation of the Goods and Services Tax (GST) regime.

Coupled with the economic slowdown, the bottom of the manufacturing sector is coming off. Whether it is the auto-ancillary manufacturing cluster in Chakan (Pune) or power-loom cluster in Bhiwandi or bicycle manufacturing cluster in Ludhiana or knitwear manufacturing cluster in Tirupur, a quarter to a half of the units have either closed down or drastically reduced the operations.

India has about 5,000 industrial clusters spread across the country where most of semi-skilled and unskilled segment manufacturing employment opportunities are created. To create jobs for the 5 to 10 million people joining the labour force each year, India needs to nurture such SME industrial clusters. Large industry is getting highly automated and hardly any visible new employment is being created by them even when they grow.

An integrated cluster development programme needs to be ushered in, instead of them being administered by several ministries (Textiles, Leather, Food, MSME, Heavy Industry) under different terms and conditions.

Such an integrated cluster development programme should essentially focus on technology upgrade, skill development, marketing facilitation, design improvement and digital infrastructure. Such initiative should also be replicated at the state level. Sufficient funds need to be ear-marked for purposeful cluster development programmes by both the Centre and the states.