Wishlist for Budget 2025: Urgency to uplift India's manufacturing

The Make in India initiative was launched a decade ago to raise the manufacturing sector’s share in Gross Domestic Product (GDP) to 25 per cent and create 100 million additional industrial jobs (from about 60 million) by 2025. A similar target was also part of the National Manufacturing Policy (NMP), launched in 2011 by the then government of India. While the target for the manufacturing sector’s contribution to the GDP has remained the same, the actual performance has worsened over the years (the percentage share fell to 13 per cent in 2023, from 17 per cent in 2010). The government of India has also launched several sector-specific production-linked incentive schemes since 2020. However, despite these efforts, the manufacturing sector's contribution is far from the targeted levels.

 

A thriving manufacturing sector is also the solution to the country's job challenge. According to the Economic Survey 2023-24, India needs to create nearly 7.85 million jobs annually in the non-farm sector to accommodate the growing workforce. While the services sector can absorb highly skilled professionals like engineers, business analysts, and so on, a well-functioning manufacturing sector is required for the absorption of unskilled and semi-skilled labour that moves away from agriculture.

 

To expand from 13 per cent of GDP to 25 per cent over a ten-year period when GDP is growing at 6.5 per cent, the manufacturing sector will have to grow at around 13.6 per cent per year. This cannot be based on domestic demand and will have to involve a much stronger export performance. Asian economies like South Korea, Japan, China, and Vietnam, which have developed on the back of a strong manufacturing sector, have witnessed a high contribution of manufacturing to global exports. India, on the other hand, has a very low share in global manufacturing exports (1.8 per cent in 2022), even lower than a smaller country like Vietnam (2 per cent in 2022).

 

As the budget for FY25-26 is about to be announced, we have listed below the four priority areas for Indian manufacturing that need attention in this budget.

 

Reduction in import tariffs

 

High tariffs are a major obstacle to integration in global value chains, and India has one of the highest levels of tariffs in the world. According to World Trade Organization statistics, India’s average Most Favoured Nation (MFN) tariff stood at 17 per cent in 2023, as compared to 5.6 per cent for Malaysia, 9.4 per cent for Vietnam, 9.8 per cent for Thailand, and 7.5 per cent for China. Moreover, Vietnam, through its trade agreements with key economies like the US and EU, has much lower preferential tariffs for imports. Specifically, a lower tariff on intermediate goods is key to strengthening global value chain integration as it has a cascading effect on the entire supply chain. For instance, man-made fabric (MMF)-based apparel exporters in India rely on imports of key MMF inputs like man-made fibres, yarn, and fabric, but high tariffs on these inputs make it harder for Indian exporters to compete with global players like Bangladesh and Vietnam. This year’s budget should focus on liberalising imports of key inputs for the manufacturing sector, and this is particularly important for emerging sectors like green energy where India has an opportunity to become the global leader.

 

Enhancing the ecosystem for quality control

 

There has been a rampant increase in quality control regulations across global economies for both domestic producers and importers. These regulations have various objectives, like sustainability, health protection, and labour safety. While these can be noble initiatives, there can be implications for a country’s competitiveness. For instance, some of the proposed sustainability-driven regulations of the EU pose a huge risk for India’s exports, potentially putting $37 billion worth of Indian exports at risk. Indian exports would have to incur extra costs to comply with these regulations, making them uncompetitive. The risk to competitiveness also exists when such measures are implemented by the Indian government and disrupt the supply chain by obstructing imports from cheaper foreign sources. For instance, India’s recent quality control order on viscose staple fibres, an important input for apparel production, has led to complex and time-consuming conformity assessment requirements, excluding key importers like Indonesia that supply at lower prices and higher scale. This is likely to have adverse implications for the final cost of man-made apparel in India. In the wake of the widespread adoption of these measures, the Indian government needs to subsidise capital investments in technology for testing and certification and facilitate more capacity building in this space.

 

Balancing access to land and labour

 

While land is the fundamental requirement for setting up a manufacturing unit, its availability is a challenge due to its non-scalable nature. For developing a holistic manufacturing ecosystem, land needs to be accompanied by adequate transport connectivity and labour availability. Labour housing can provide a solution to this problem, as it might result in lower attrition rates, higher productivity, and workforce stability. One of the challenges in this arrangement is the cost of such housing projects. Last year’s budget announced measures to address the need for workers' accommodation. According to the finance minister, “Rental housing with dormitory-type accommodation for industrial workers will be facilitated in public-private partnership (PPP) mode with viability gap funding (VGF) support and commitment from anchor industries." In this regard, the recent report by NITI Aayog on site-adjacent factory employee (SAFE) accommodation suggested the adoption of viability gap funding wherein the government can contribute up to 30 per cent of the total project cost (excluding land). Under this scheme, industrial workers could rent a room for as low as Rs 3,000. To continue the momentum on this issue, this year’s budget should allocate funds to develop this necessary manufacturing ecosystem.

 

Promoting research and development

 

Currently, India invests only 0.6 per cent of its GDP in research and development (R&D), which is inadequate compared to competitors like Malaysia (0.9 per cent), Thailand (1.2 per cent), and China (2.4 per cent). While the government of India offers a 100 per cent tax deduction for in-house R&D activities recognised by the Department of Scientific and Industrial Research (DSIR), this incentive has not significantly driven change. Budget 2024 also announced several measures to financially support innovation activities in India. Anusandhan National Research Foundation (ANRF) was set up to receive Rs 50,000 crore worth of funds to foster R&D in government institutions, with more than half of the funds sourced from public sector enterprises, the private sector, and philanthropic organisations. The design of ANRF is less likely to incentivise private sector R&D. The government also announced a Rs 1 trillion pool to support R&D initiatives that bridge the gap between industry and research, as well as a venture capital fund of Rs 1,000 crore to support startups and projects in the space sector. While government support might provide a short-term push, the onus eventually lies on the private sector to invest in R&D. Domestic and foreign competition will drive firms to invest in R&D and innovation. The budget should hence focus on fostering more foreign technology flows to facilitate diffusion and innovation in the country. At the domestic level, the government should consider introducing performance-linked incentives to encourage more R&D by the private sector.

 

Jobs are one of the country's fundamental problems, and manufacturing is the easy answer to this problem. However, developing the desired manufacturing base is not easy and requires dedicated efforts by the government and private sector, which should be the focus of the budget for 2025. In these times of an uncertain global order, India has the golden opportunity to use its demographic dividend to emerge as one of the leading manufacturing players in the world. 

 

The author is Associate Fellow, CSEP

 

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper