To become the factory of the world, India must first fix its manufacturing sector.

Economists have offered various explanations for the slowdown in growth. Chief among these is that the 1.1% contraction in the manufacturing sector during the quarter has been a drag. High inflation has made inputs costlier, reducing the profitability of manufacturing firms. This has also reduced the spending power of the consumers.

The estimates released showed that private consumption growth slowed to 2.1% during the quarter. Therefore, there are also concerns about whether the demand supporting consumption will remain in place after the post-pandemic shutdown.

Chief Economic Advisor V Ananth Nageswaran has rejected all these things. According to him, the growth in the third quarter appeared “gloomy” as it was calculated on a higher base. But official estimates for the previous quarter show that the manufacturing sector contracted for the second quarter in a row after contracting by 3.6% in the previous quarter. ,

Quarterly estimates are generally not given much weight in serious analyzes of the economy because they are calculated using primary data sources, but more reliable data comes with a delay. Nevertheless, concerns about the health of the manufacturing sector should not be taken lightly, as national income accounts estimates have consistently shown that manufacturing is a part of the economy that is struggling.

It is a legacy issue. As a percentage of GDP, manufacturing output has remained stable at 14-17% of GDP over the years. The efforts of the UPA government were not successful in increasing it. The Modi government has also not been successful so far.

The export basket has also shifted away from labour-intensive products. Between 2000 and 2015, the share of capital-intensive products in merchandise exports increased from 32% to 53%, while the share of unskilled labor-intensive products declined from 30% to 17%. While Bangladesh and Vietnam have seen sharp increases in their share of global apparel exports from 2.6% in 2000 to 6.4% in 2018 and 0.9% in 2000 to 6.2% in 2018 respectively, India’s share has increased marginally – from 3 3.5%.

The target of raising the share of manufacturing to 25% of GDP, which was first set during Prime Minister Manmohan Singh’s tenure and re-emphasized by the Modi-led government, remains elusive. Even before the pandemic, India’s manufacturing sector was not performing very well.

Initiatives ranging from a new manufacturing policy to ‘Make in India’ and production linked incentives (PLIs) have so far failed to produce robust manufacturing growth.

This is because India’s industrial policy has consistently been biased towards capital-intensive industries, a feature it acquired soon after independence. India needs an industrial policy that encourages labour-intensive manufacturing.

When more and more Indians get jobs, there will be a growing consumer class with spending power, removing a significant constraint on aggregate demand and creating a growing market for manufactured goods. This becomes even more important when the government’s ability to spend to spur demand is limited, given that the tax-to-GDP ratio has been stuck at around 11.14% for years, and a systemically coordinated monetary Global demand is slowing in response to the tightening. important central bank.

The productivity of labor in agriculture, trade and tourism, and construction is lower than the economy-wide average. It is more in manufacturing. The sector can easily absorb low-skill, low-education labor. Therefore, a major push for labour-intensive industrialization is essential for sustainable GDP growth. But the government is going the opposite way – giving policy support to capital-intensive industries.

Economist Radhika Kapoor has strongly argued that blaming the lack of progress on labor reforms is lazy analysis and fails to explain India’s unemployment and underemployment problem. Firms circumvented the rules by hiring workers on short contracts indirectly through middlemen and paying them half of the stipulated wages. This is the reason why even in states like Rajasthan where governments have amended labor laws, there has been no significant impact on employment at the plant level.

Kapoor’s analysis reveals what is really holding back the manufacturing sector from growing and creating more jobs – market size, capital formation, credit availability, infrastructure and government policies.

Policymakers have also made the mistake of assuming that India’s large number of small firms and startups will take care of the job shortfall. If the manufacturing sector is to grow rapidly and smartly, large firms in labor intensive industries should be encouraged as they will bring technology, capital, best management practices and economies of scale to the sector.

At the same time, the competitiveness and productivity of small enterprises in labor-intensive industries should be improved. Protection through high and rising import duties is no way out. Instead, barriers such as infrastructure availability, regulatory hurdles and complex tariff structure that hinder manufacturing firms by limiting their access to affordable inputs and reducing their production costs will have to be addressed.

Fixing India’s manufacturing sector is the surest way to create more jobs and ensure a strong and sustainable economic recovery.