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Paying a heavy price for ignoring the manufacturing sector

— FILE PHOTO

AWAITS BIG PUSH:The Indian manufacturing sector is not able to add as much value to the intermediate inputs as is done by other countries. It needs restructuring in order to be globally competitive. Picture shows an assembly line of a light commercial vehicle unit in Chakan.

India's growth is slowing down while inflation is going up. All blamed it on higher prices of commodities and a generalised inflation where demand outstrips supply. The Reserve Bank of India (RBI) is likely to control the demand side pressures by tightening liquidity in the system. However, the present economic situation is an end-result of a wrong fiscal policy adopted over the years.

RBI Deputy Governor K. C. Chakrabarty reportedly said after the recent rate hike by the central bank that “Instead of saying that RBI should bring down inflation, we must increase productivity and bring down the cost of services and that will only bring down inflation. Otherwise, it will not come down”. He said this because in the present scenario, for the RBI, the capacity for conventional policy responses appears limited. This also points to ineffectiveness or failure of fiscal measures in containing inflation. Planning Commission Deputy Chairman Montek Singh Ahluwalia had stated: “Manufacturing growth in India is much below than what it should be. If we can't achieve 12 per cent growth, then we would not be able to create large employment”. The share of manufacturing sector in real gross domestic product (GDP) has risen over the years. However, this increase has not matched the expectations for two main reasons.

Study

First, the expectations from the manufacturing sector were high due to the emphasis on heavy industries-led development in the planning process in India; and, second, the countries with similar levels of development on the eve of planning in India, especially the East Asian economies including China, have been able to make their presence felt in the global market for manufacturing products to a far greater extent than India, said a research study by the RBI's Development Research Group on productivity, efficiency and competitiveness of the Indian manufacturing sector which was published recently. The share of manufacturing sector in China's GDP was 34 per cent in 2007, compared with 16.1 per cent for India in 2009-10.

The average share of manufacturing sector in real GDP increased from about 13 per cent during 1970-75 to about 15.1 per cent during 2002-07, that is, by just about 2 percentage points over a period of more than three decades. During 1970-75, India's real GDP of manufacturing sector was more or less equally distributed between its registered and unregistered segments.

Over the years, the growth of real income in the registered manufacturing sector has been higher than that of unregistered manufacturing sector, resulting in the average contribution of the unregistered sector shrinking to almost half of that of the registered sector during 2002-07. The situation has remained more or less unchanged even during the post-2007 period.

China was a significant positive outlier (that is, China's manufacturing sector contributed more to its national income compared with the historical evidence on countries of similar levels of development) in 1981. To put it differently, India had approximately the normal share of output and employment in manufacturing in 1981, if compared with countries at a similar level of development and size. Over the next two decades, (when reforms were implemented, so as to remove the constraints on manufacturing sector), it failed to keep pace with the growth of the manufacturing sector in other countries with similar levels of development.

Unorganised sector

The unorganised sector accounts for about 80 per cent of the employment generated in the manufacturing sector. However, its contribution to income generation or real GDP of manufacturing is much less in proportion to its employment generation.

Furthermore, the relative income contribution of the unregistered sector vis-à-vis registered sector in manufacturing has been consistently declining over the years. In the first half of the Eighties, this share was about 45 per cent and it has fallen to about 32 per cent during 2002-07.

Even in 2008-09, the share of unorganised sector in real GDP of manufacturing sector was about 33.2 per cent. In brief, income originating in the unregistered segment of manufacturing sector is much lower than the proportion of workforce it supports. This has implications for the differences in labour productivity in registered and unregistered segments of India's manufacturing sector.

Though the composition of GDP in India has undergone substantial changes over the years, the dependence of workforce on manufacturing sector had hardly increased. Historically, during the transition process, manufacturing sector has been the main absorber of mass unskilled labour that gets released from the agricultural sector. Unlike the East Asian economies, India failed to draw employment from agriculture into manufacturing in any significant magnitude.

The employment and output generation in organised and unorganised manufacturing sectors exhibit a major imbalance. The unorganised sector accounts for almost 80 per cent employment and generates only about 33 per cent of output of the manufacturing sector. This causes sharp inequality between the per capita output (and also wages) between the organised and unorganised segments of the manufacturing sector.

One of the areas of concern regarding the reform process in the Indian manufacturing sector has been the deceleration in the rate of growth of real emoluments. Growth of real emoluments has been shrinking over the years and it was in fact negative during the latter half of the Nineties. The worrisome feature of Indian manufacturing sector is stagnancy of per capita real wages. Further, the growth rate of compensation to supporting staff (especially managerial) has increased since the late Nineties in relation to the workers directly engaged in the production process. This can have an adverse effect on the motivation for the shop-floor workers.

It also explains as to why most engineering graduates do not prefer to pursue their engineering skills on the shop-floor and instead prefer to take up managerial positions. It is necessary for the manufacturing sector to retain technologists who are engaged in production process and for this the real per capita incomes to technologists have to move in tandem with those for the other managerial staff. Productivity increases depend both on technology and managerial improvements and India can ill-afford to neglect either of these.

Another concern pertaining to India's manufacturing sector has environmental point of view, that is, the growth of manufacturing sector has been material resource intensive. Total value added constitutes barely 20 per cent of the value of output in India's organised manufacturing sector. The ratio of material inputs to total value of output has ranged between 58 per cent and 65 per cent and the respective range for the fuel inputs is between 6 per cent and 7 per cent.

If compared with the resource intensity in the U.S., the proportion of value added in gross output is about half as compared to about one-fifth in India. Material inputs account for about two-thirds of value of output in India in comparison to just about one-third in the U.S. Fuel inputs account for about 5-7 per cent of value of output in India as compared to merely 2 per cent in the U.S. For Germany, the average ratio of value added to gross output was about one-third during 1998-2007, that is, for the last ten years for which the data are available. It is true that the composition of the manufacturing sector of the U.S. or Germany and that of India are quite different.

However, if the Indian manufacturing sector is not able to add as much value to the intermediate inputs, as is done by other countries, it needs restructuring in order to be globally competitive. In other words, there is scope for improving efficiency and productivity in Indian manufacturing sector, only if India benchmarks itself with the globally competitive advanced nations. Even in China, the average ratio of value added to gross output of the industrial sector during 1998-2007 was about 29 per cent (China Statistical Yearbook, 2009), Benchmarking against the most competitive economies is mandated, if India needs to compete with the manufacturing giants in this era of globalisation.

Once the country ignored agriculture and gave importance to industry especially heavy industries. Later, again in recent years, the country ignored both agriculture and manufacturing but gave thrust to services and other IT-related sectors. Now India pays a heavy price for that.

OOMMEN A. NINAN

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