Enabling growth: Why structural reforms are needed in manufacturing

The deeper challenge lies in the sector's role in the economy. Despite years of policy attention, manufacturing contributes just 17% of gross domestic product and only about 12 per cent of jobs

The Annual Survey of Industries (ASI) 2023-24 data, released on Wednesday, indicates that India’s manufacturing sector is growing, but structural concerns persist. Gross value added (GVA) rose 11.9 per cent at current prices in FY24, but overall output grew about 5.8 per cent, which is a sharp slowdown from FY23, when output had expanded by 21 per cent on the back of the post-pandemic rebound. Employment, too, grew 5.9 per cent, but output per persons engaged declined. For a labour-abundant country such as India, where manufacturing must support incomes, these are not an encouraging set of numbers.

 

The deeper challenge lies in the sector’s role in the economy. Despite years of policy attention, manufacturing contributes just 17 per cent of gross domestic product and only about 12 per cent of jobs. This is far short of what India needs. Millions of semi-skilled and low-skilled workers continue to enter the labour force every year. Without more factory jobs, people may have no choice but to take up low-paying informal work. The spread of industrial activity is also concentrated. The top five states alone account for nearly 54 per cent of manufacturing GVA and 55 per cent of employment in the sector. Further, output remains dominated by just five industries — basic metals, motor vehicles, chemicals, food products, and pharmaceuticals. Such concentration restricts inclusivity and undermines the potential of manufacturing to serve as a broadbased engine of growth.

 

From a policy perspective, Indian manufacturing is highly fragmented, dominated by small firms with limited access to technology and finance. This keeps productivity low and costs high. It is well accepted that institutional rigidities tend to affect investment. India’s labour laws, for example, offer little incentive for entrepreneurs to scale up their operations. Fear of compliance burdens and disputes discourage enterprises from hiring at scale, especially in labour-intensive industries such as textile, footwear, and food processing, where India should hold a comparative edge.

 

It is thus important that policy must go beyond tax breaks and production-linked incentive schemes to push up the scale in labour-intensive industries. Expanding the pool of skilled labour in line with evolving technologies and incentivising geographic dispersal is also important. A balanced strategy that aligns investment with jobs and wage growth is crucial for manufacturing-led development. Thus, India must encourage scale in labour-intensive sectors. This means easing rigidities that discourage hiring and creating industrial clusters, which can deliver cost competitiveness. New labour codes, for example, have been passed but are awaiting implementation. Further, skills must be aligned with the new realities of technology, where digital tools, automation, and green manufacturing are reshaping workplaces. Finally, investment support should be linked with employment. To be fair, trade tensions with the United States have increased uncertainties for the manufacturing sector, and output may suffer in the near term, particularly in labour-intensive sectors. However, the policy must focus on medium- to long-run prospects. India needs wide-ranging reforms in land, labour, and capital to boost manufacturing output and create conditions to generate employment for its growing workforce. A delay in implementing reforms at this stage can affect growth disproportionately in the coming years.