The Demographic Imperative Of ‘Make in India’

India is sitting on a demographic time bomb. More than 12.5 crore people are expected to enter the workforce in the next 10 years. This means on an average, 1.25 crores new jobs need to be created every year to absorb these people into the workforce.  The new jobs that are being created in the country are low-productivity jobs in the unorganized sector, offering low incomes, little protection or benefits. Services jobs are relatively high productivity, but services alone can’t provide jobs to such a large number of people. India’s challenge is to create the conditions for faster growth of productive jobs outside of agriculture, especially in organized manufacturing. India’s share of manufacturing as a percentage of GDP is extremely low and there is significant scope to improve this further.  It is impossible to provide so many new jobs without increasing the share of manufacturing in the overall GDP.

Post 2008-09, the industrial sector, consisting of manufacturing, mining, electricity, and construction, showed steady growth for three years but lost momentum. Industry grew by just 1.0 per cent in 2012-13 and slowed further in 2013-14, posting a modest increase of 0.4 per cent. Indian manufacturing, in particular, was hit hard by the recent slowdown. Manufacturing sector continued to show negligible to negative growth in the FY13 & FY14.

Source: CSO

The recently released CSO’s GDP data shows manufacturing growth at 7.1% during FY15 even as IIP data pegs factory output growth at a measly 2.3%. We await the detailed break-up of these numbers of understand the extent of manufacturing revival.

India fares poorly in comparison to global peers

India’s share of manufacturing as a percentage of overall GDP remains low at 14.9%. Countries like China, South Korea, Japan & Thailand have all become export powerhouses on the back of very competitive exports. For example, India exports less apparel than much smaller Bangladesh and less than one-tenth of that by China.

   Source: UNIDO & World Bank

India’s comparison with global peers in manufacturing sector

In the last 20 years, China has raced ahead to become the world’s largest manufacturer with overall global export share of around 15%. It has successfully harnessed cheap labour and efficient SEZ policy to create a sustainable competitive advantage. East Asian Tiger Countries like South Korea and Taiwan have also become export hubs for electronic items.

In the Independence day address to the nation, PM Narendra Modi talked about making India a manufacturing hub. He invited manufacturers to ‘Come’ and ‘make in India’. India can become a big export hub by manufacturing auto components, agricultural products, leather products, textiles, gems & jewellery and machinery products.PM also wanted to ‘ channelize the strength of the youth through manufacturing’, considering a large number of youth can be employed in these proposed manufacturing hubs. He stressed about manufactured goods having zero defect and zero effect on environment.

It is a very ambitious vision. Previous governments have had ambitious targets of increasing the share of manufacturing in India GDP to 25% from the current 15% level. However, due to lack of execution, this vision has remained a pipe dream.  This can change with a focused policy approach and determined execution. Focus on manufacturing sector would help in creating employment besides helping curb the current account deficit.

With clever resource allocation, India can become a global manufacturing hub in sectors like Automobiles & auto components, pharmaceutical, textiles, gems & jewellery, leather goods, IT hardware and solar power. The SEZ policy was launched with this very intention. However, policy muddles and land acquisition issues brought this to a complete halt. SEZ policy will need to be revived and several incentives will need to be given to the industry to expand in these sectors.

Labour laws also need a complete overhaul so that producers are encouraged to hire more employees. Once labour and land issues (land acquisition policy needs to be revamped but more on that in my next article) are streamlined and cheap finance is available to industry, Indian manufacturing will blossom and will lay the foundation of a virtuous cycle of more jobs productivity gains, high salaries and high growth.