Indicus Analytics: Growing pains

With stark regional imbalances, the manufacturing policy?s target to increase the sector?s share in the economy may turn out to be a paper dream

Historically, the development trajectory has shown the predominance of agriculture, manufacturing and services in that order in the economy. However, this is not true in the case of India, where the service sector has been the engine of growth and where the contribution of manufacturing has remained fairly stagnant.

Looking at decadal growth, the manufacturing sector has registered higher growth across the years, touching almost nine per cent in the last decade. But it has never been the major driver of economic growth as the service sector has always risen faster. This has led to the manufacturing sector’s share staying at around 15 per cent of the national income since the eighties.

The national manufacturing policy announced last October aims to increase the share of manufacturing to 25 per cent by 2022. This target can only be achieved by a consistent rise in growth of manufacturing GDP every year for the next decade, a tall order given the constraints under which the sector is working. (Click here for chart)

With sharp regional diversity, the growth of the manufacturing sector has varied widely across states. Looking at the period for which estimates are available for all states – 2004-05 to 2009-10 – Uttarakhand tops the list with 30 per cent annual growth, a result of the state’s tax policy. Next is Meghalaya, registering annual growth of 24.2 per cent. There are 10 more states with more than 10 per cent annual growth rate in manufacturing — Orissa, Punjab, Bihar, Chhattisgarh, Kerala, Arunachal Pradesh, Maharashtra, Madhya Pradesh, Karnataka and Rajasthan.

At the other end of the table, negative growth has been registered in Jharkhand and Assam, a worrying state of affairs. Besides, in Tripura, Delhi, Goa, West Bengal, Uttar Pradesh, Himachal Pradesh, Tamil Nadu and Haryana growth of manufacturing GDP registered in the period is lower than that of the all-India average.

Though raising manufacturing activity at the national level is important, there is also the issue of balanced regional growth and the structure of state economies. States where more than 20 per cent of the gross state domestic product comes from manufacturing are Puducherry, Gujarat, Goa, Chhattisgarh, Uttarakhand, Maharashtra and Jharkhand. While some states with high growth have low shares of manufacturing, like Meghalaya and Bihar, the contribution of manufacturing to the state income was low at around six per cent in 2009-10. There is Goa with a high share of manufacturing but significantly lower growth.

If we focus on India’s industrialised states – Maharashtra, Gujarat and Tamil Nadu – these are contributing around 44 per cent to India’s manufacturing sector. Of these, Maharashtra and Gujarat had respectable double-digit growth, while Tamil Nadu had an annual average of just seven per cent over the period. These states will pull the national manufacturing sector up, but clearly the policy for balanced regional growth has failed to show results so far.

ON A SLOW TRACK Manufacturing GDP in India (%)
	1951-52 to 1960-61	1961-62 to 1970-71	1971-72 to 1980-81	1981-82 to 1990-91	1991-92 to 2000-01	2001-02 to 2010-11
Average share in GDP	10	12.6	13.7	14.7	15.3	15.6
Average annual growth	6.4	4.3	4.7	6.0	7.3	8.9

The new policy for raising manufacturing growth looks at setting up clusters and liberalising the environment for industry within these clusters. This does not augur well for balanced regional growth either. Moreover, unless the national fiscal, monetary, trade and labour policies are in sync with a pro-manufacturing stance, the latest manufacturing policy’s target will remain a dream on paper.

Indian States Development Scorecard, a weekly feature by Indicus Analytics, focuses on the progress in India and across the states across various socio-economic parameters.
sumita@indicus.net