Budget 2021 Expectations: Will Modi govt bring new dawn for manufacturing firms in upcoming Budget?

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Updated: Jan 06, 2021 4:49 PM

Union Budget 2021 Expectations for Manufacturing: Manufacturing generated 17.4% of India’s GDP in the last financial year 2020 -- a little more than the 15.3% it had contributed in 2000.

manufacturing Budget 2021 Expectations, Budget 2021 Expectations for manufacturingNotwithstanding Modi government’s initiatives to boost manufacturing, the sectoral growth fell to 7.4% per year over the last six years, compared to 9.5% per year growth during FY2006 and FY2012 (Bloomberg image)

Union Budget 2021-22 Expectations for Manufacturing: Prime Minister Narendra Modi has kept the manufacturing sector at the forefront of the flagship Atmanirbhar Bharat initiative and the Make in India campaign. However, manufacturing in India has many roadblocks. While the government has taken measures to fight the challenges, it needs to provide greater incentives to the industry in the upcoming Union Budget 2021 and draw from international examples too.

Even as India climbs up on the Ease of Doing Business rankings, the rise in manufacturing activities has not matched the pace. Manufacturing generated 17.4 percent of India’s GDP in the last financial year 2020 — a little more than the 15.3 percent it had contributed in 2000, according to a report by McKinsey. By comparison, Vietnam’s manufacturing sector more than doubled its share of GDP during the same interval.

Manufacturing lags, despite Modi’s campaigns

Notwithstanding Prime Minister Narendra Modi government’s initiatives to boost manufacturing in India, the sectoral growth fell to 7.4 per cent per year over the last six years, compared to 9.5 per cent per year growth during FY2006 and FY2012, the McKinsey report added. Also, India’s manufacturing sector share of employment increased by just one percentage point, compared with a five-point increase for the services sector, in the past 13 years.

In fact, in the one year period between Q1 FY19 and Q1 FY20, the share of workers in the manufacturing sector fell from 33.7 per cent to 32.5 per cent, according to the latest Periodic Labour Force Survey released by the Ministry of Statistics and Programme Implementation (MOSPI).

Also Read | Budget 2021 Expectations: Should common taxpayer expect major rationalization in income tax slabs and rates?

Action taken, but more needed

The Modi government had set a target to grow manufacturing to 25 per cent of the GDP, but to no avail. “Unfortunately the second term of the government is fraught with many challenges such as the COVID pandemic and global economic slowdown. But they have been proactive to take countermeasures with several new policies such as the PLI schemes,” Alok Kirloskar, Director, Kirloskar Brothers Ltd, told Financial Express Online.

To continue on the path of Atmanirbhar Bharat, the government should also consider schemes like the patent box program promoted by the British government, so that in the future, industries will be incentivized to register IP in India, Alok Kirloskar added.

Key challenges

According to an analysis, nearly 700 of the top 1,000 manufacturers produced returns that were less than their cost of capital in 2018, thereby destroying value. There are many reasons why Indian manufacturers tend to create limited value. The costs of infrastructure and key inputs; poor logistics causing delays and raising inventory costs; high prices for power and credit inflate operating expenses are some of the main reasons.

“Increased cost of raw material, rise in import freight, open-cell shortage, no barriers to entry, no value add in terms of component manufacturing in India are some of the major roadblocks for the manufacturing firms,” Arjun Bajaaj, Director, Videotex, told Financial Express Online. Brands entering India are looking for local partners for manufacturing, which is a great opportunity for Indian manufacturers. However, at the same time, foreign companies are also setting up assembly plants in India, which is leading to an increase in competition, Arjun Bajaaj added.

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