Balanced approach

Manufacturing needs growth and diversification

The Ministry of Statistics and Programme Implementation recently released the results of the Annual Survey of Industries (ASI) for 2020-21 and 2021-22. Notably, in both these years, the Indian economy was facing disruption related to the Covid-19 pandemic. However, the results exhibit the resilience of India’s manufacturing sector in terms of input use, output, and profits. The ASI extends to the entire country and remains the principal source of industrial statistics. It considers units employing 10 or more workers using power and the ones employing 20 or more workers without using power. The manufacturing sector contributes around 17 per cent to India’s gross domestic product (GDP). While India’s industrial sector did well during the period under review, its relatively small scale and concentration remain matters of concern.

The growth rates in the manufacturing sector’s gross value added (GVA) in FY21 and FY22 were 8.8 per cent and 26.6 per cent, respectively, at current prices. Despite the contraction in output, GVA in 2020-21 registered positive growth on account of a sharp fall in input prices. It’s worth noting that output contracted not just in FY21, but also in the preceding year, which was only marginally affected by the pandemic, before bouncing back in FY22. In terms of employment, predictably, the sector experienced a marginal fall in FY21. But this was more than compensated for in the subsequent year, with total employment registering a growth rate of 7 per cent year-on-year. Average compensation per employee in the sector also increased in the two years covered in the survey. Besides, the pandemic did not lead to a decline in capital employed. Both fixed and invested capital registered positive growth during the reference periods.

However, the manufacturing activity remains concentrated geographically and across a few product categories. ASI results showed that only five states — Gujarat, Maharashtra, Tamil Nadu, Karnataka, and Uttar Pradesh — contributed more than 50 per cent to total manufacturing GVA in both FY21 and FY22. Also, basic metal, coke and refined petroleum, pharmaceutical product, motor vehicle, food, and chemical product industries, taken together, contributed about 56 per cent to the total GVA in the sector. In terms of employment, despite the recovery, only a little over 17 million people were employed in the manufacturing sector in FY22.

This is one of the biggest weaknesses of the Indian economy. India has not been able to create enough jobs in the manufacturing sector to pull people from agriculture, where productivity is low. The government on its part has intervened to attract investment with measures like lower corporation tax, single-window clearances, and production-linked incentive schemes in various sectors. It is also being hoped that diversification away from China by global corporations would result in higher investment in India. Thus far, however, there has been limited success on this account. India will need to constantly work on improving conditions for attracting investments. The policy challenge for the government is not only to encourage and attract higher investment in order to push output and employment, but also to ensure that investment is not concentrated in a handful of states. Skewed growth in terms of industrial output and employment can increase tensions in a federal system, which have, in fact, started to surface in different forms.