The economic policy discourse in India, which is on the cusp of getting a new government, is considerably devoted to stimulating large-scale manufacturing.
Historically, this has been the route to absorb a vast pool of surplus labour, otherwise engaged in low-productivity agriculture. However, for various reasons, India has leapfrogged the development trajectory—from agriculture to manufacturing and then, services. As such, unlike in the past when agriculture provided bulk of the gross domestic product (GDP), now it is the services sector, which has far lower employment capacity. As manufacturing is capable of generating more jobs per unit of output, hence the focus.
However, going by past trends, this may not be so easy. Consider the five years to 2007-08, a period of India’s strongest ever growth, 8.9% each year. Manufacturing grew at an annual average rate of 10% in real terms. It also contributed to more than half the increase in private investment, which grew by an annual average of 17%, adjusted for inflation; and spending on machinery and equipment, which directly reflects manufacturing demand, grew at a much faster pace, 31%. Despite this spectacular performance, how much did its share of the GDP pie increase? Just one percentage point!
Global demand is critical in uplifting Indian manufacturing to another level altogether. In the aforesaid period, world output growth was unprecedented, an average 5% annually, outstripping the previous record average of 4% over 1984-89. This fuelled robust growth of Indian exports, which grew 22% each year. Even though direct exports account for just 15% of manufacturing output, manufacturing growth correlates very strongly with lagged export growth (over 2000-10 period), reflecting globalization effects.
But the external environment is far less compelling now; the International Monetary Fund forecasts a much slower pace of world output—3.6% in 2014 (from 3% last year) and then inching up to 3.9% in 2015. Foreign demand structures are changing too. Advanced countries are growing more on the strength of their exports to the developing world, whose exports are projected to grow at a relatively slower pace. That’s one reason for concern in the medium-term.
It is hard to reorient manufacturing towards the domestic market in a short while especially at a time when large-scale foreign direct investment into export-oriented industries has completely bypassed India. Moreover, structural and institutional changes, like better infrastructures, labour market flexibility and so on, requires attracting foreign capital, which again takes time.
In the near term therefore, the best strategy is to expand export shares in other directions—from the established markets in the developed countries to emerging economies and other developing countries. Macroeconomic policies must be suitable too; in a world where almost all currencies have weakened equally, the challenge is to preserve competitiveness.
Indian manufacturing has steadily lost competitiveness since the start of the millennium. Losses are comparatively much higher in some areas, e.g., textiles, which exports two-fifths of its output, adds 14% to industrial production and employs nearly 8% of labour force. Such trends must have a bearing upon policy settings to revive manufacturing.
Source:- livemint.com
No comments:
Post a Comment