Column: Fixing manufacturing

Feb 04 2014, 03:35 IST
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SummaryThe year 2013 was another dismal year for Indian manufacturing. Manufacturing output fell by 0.6% between April-November 2013

The year 2013 was another dismal year for Indian manufacturing. Manufacturing output fell by 0.6% between April-November 2013 compared to a year earlier and its share in GDP has now fallen for the third consecutive year to below 15%.

In fact, since 1980, the manufacturing to GDP ratio has been stuck in a narrow 14-16.5% band. That manufacturing never took off in a big way in India is well-known. Less analysed, however, are the regional dynamics that will be needed to achieve the key objective envisaged under the National Manufacturing Policy—raising manufacturing’s share in GDP to 25% by 2022.

At the sub-national level, what then are the likely trends in manufacturing activity in the coming years? And what do they imply for the ambitious targets under the policy?

There are three major states where the manufacturing-to-GDP ratio is higher than the all-India average—Maharashtra, Tamil Nadu and Gujarat. In Maharashtra and Tamil Nadu, the share of manufacturing in the economy peaked in the mid-1990s. In Gujarat, the share of manufacturing in its GDP was around the national average of 15% in 1980, but nearly doubled to 29% by 2006-07.

In fact, were it not for the rapid rise of manufacturing activity in Gujarat, the share of manufacturing in India’s GDP would have fallen much lower by now.

Gujarat’s share in India’s manufacturing GDP, which was around 7.7% at the end of 1980s, rose to nearly 14% in 2011-12.

But now, the share of manufacturing in GDP has stopped growing in both Gujarat and Maharashtra. Manufacturing has also expanded slower than the rest of the economy in Tamil Nadu since the mid-1990s, except in a very recent period.

It is not surprising that services activity in these states is now expanding at a faster pace than manufacturing. As the economy develops and incomes rise, the demand for services—transport and communication, hotels and restaurants, education and health—begins to rise rapidly. Also, as education and skills develop, skill-based services such as IT/ITeS and financial services begin to grow.

At the same time, manufacturing in both Maharashtra and Gujarat will get a boost from major industrial zones planned over the coming years—the Delhi-Mumbai industrial corridor and the Mumbai-Bangalore industrial corridor.

However, what is critical to raise the share of manufacturing in GDP significantly is a jump in manufacturing activity in states of Bihar, Uttar Pradesh (UP) and West Bengal. In 1980, just like in Gujarat, the manufacturing to GDP ratio in West Bengal

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