GST has begun the process of unifying indirect taxes. Small saving rates have been reduced. For MSMEs, there is MUDRA and the Stand up India window. Labour laws are being unified under four codes... Many instances of inverted duty structure have been addressed.
In 2016-17, IIP (index of industrial production) only grew by 5%. Is this all “Make in India” could achieve? Of course, IIP also includes mining and electricity, though manufacturing has a weight of almost 78%. That manufacturing component of IIP grew by 4.9%, a little lower than the aggregate. In 2001, there was the Report of National Statistical Commission. Before reacting to IIP, one should read what this Report had to say on deficiencies of IIP. Yes, the new series, with a 2011-12 base, is better, but there is still a problem with the unorganised sector, flagged in 2001. How about the manufacturing performance in national accounts, now GVA (gross value added)? In real terms, there has been growth of 10.8% in FY16 and 7.9% in FY17, though it was 5.5% in FY15. Perhaps we want manufacturing to grow at 10%-plus for several years, perhaps we want it to grow at rates higher than GDP/GVA growth, perhaps we want manufacturing’s share in GDP/GVA to increase over time. These are parallel and complementary objectives and we have had this basket of wants since Industrial Policy Resolution of 1948.
Since public memory is short, most people have forgotten National Manufacturing Policy (NMP), announced in 2011. “The DIPP’s vision to increase the share of manufacturing in GDP from 16% to 25% was endorsed in the conference of State Industry Ministers on 17 November 2009.” Over the “medium term”, rate of growth in manufacturing was supposed to increase to 12-14% per annum. Share of manufacturing in GDP was to become 25% by 2022—100 million additional jobs were supposed to be created by 2022. The press release that accompanied NMP stated, “The share of manufacturing in India’s GDP has stagnated at 15-16 percent since 1980 while the share in comparable economies in Asia is much higher at 25-34 percent.”
Whether a sectoral share in GDP should be an objective is a moot point. After all, such a relative share is a function of how other sectors perform. For instance, non-manufacturing industry will have a shore of 10%, services will presumably have a share of 60%. That leaves 5% for agriculture by 2022. (In FY15, in constant prices, agriculture and allied activities had a 16.3% share in GVA, manufacturing of 17.3% and services of 63.6%.) Three years after NMP’s announcement in 2011, say in 2014, there wasn’t a general questioning of what had happened. Perhaps people were waiting for the medium term from 2011, say eleven years down the line, in 2022. The “Make in India” initiative was announced on August 15, 2014. Three years down the line, one should indeed ask what has happened.
What are constraints to increasing manufacturing’s share to around 20% of GDP? The constraints themselves suggest solutions. Some constraints are generic, they cut across all manufacturing sectors. Others are more specific and pertain to specific sectors. I will focus on the generic and therefore also ignore several sector-specific initiatives under Make in India. A National Manufacturing Competitiveness Council (NMCC) was set up in 2005. In 2006, this produced a National Strategy for Manufacturing and this listed the following generic issues: taxation, both direct and indirect; labour laws; entry and exit problems; administrative laws and complicated procedures; credit problems, both cost and availability; lack of skills; deterrents against urbanisation and formalisation; and infrastructure constraints.
This National Strategy apart, several studies exist on what determines, or constraints, investments in States and these too, endorse this list, with law and order thrown in. On infrastructure, the strategy document stated, “Power supply remains the main physical infrastructure bottleneck to industrial growth on account of chronic shortages, high cost and unreliability. The average manufacturer in India loses 8.4 per cent a year in sales on account of power outages as opposed to less than 2 per cent in China and Brazil. The adverse impact on similar units in the unorganized sector could be higher. It is estimated that power shortage alone contributed to a production loss of at least one per cent of GDP.”
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With this lens, consider what’s happened since 2014. There have been public investments in highways, railways, inland water transport, port and airports. There have been power sector (including renewable) reforms and discoms are in better shape. Bad infrastructure increases logistics costs. World Bank has a Logistics Performance Index, also disaggregated into international shipments, timelines, customs, logistics competence, infrastructure and tracking and tracing. In the 2016 report, across segments, and in the aggregate, scores have improved since 2014 and therefore, so has India’s cross-country rank. GST has begun the process of unifying indirect taxes.
Incidentally, this makes CVD (countervailing duty) determination easier and probably levels the playing field for domestic manufacturers. Small saving rates have been reduced, facilitating lower deposit and lending rates. For MSMEs, there is MUDRA and the Stand up India window. Labour laws are being unified under four codes (wages, safety, social security, industrial relations). There is a Skill India programme. Many instances of inverted duty structure have been addressed. In addition to World Bank’s “Doing Business” indicators, DIPP has triggered improvements in ease of doing business in States. Both entry (such as FDI) and exit (such as Insolvency and Bankruptcy Code) have been simplified. A public procurement policy has been announced. The 2014 Make in India has every ingredient of work in progress, unlike the 2011 NMP, which was work in promise.
Author is Member, NITI Aayog. Views are personal.