What is the news?

• According to a recent study Productivity growth in Indian manufacturing has been slowing since the 1990s, with a more pronounced decline in the years leading up to the Covid-19 pandemic. Exploring the causes behind this decline is crucial to develop effective strategies for revitalizing the sector.

Central idea

• India’s manufacturing sector has long been a matter of concern for policymakers and the subject of extensive academic research. The government has consistently aimed to increase the share of manufacturing in the country’s GDP. However, despite efforts to promote manufacturing, the sector’s contribution and overall employment has remained stagnant.

Key Facts about Manufacturing Productivity in India

• Slowing Growth: Productivity growth in India’s manufacturing sector has been declining since the 1990s, with a significant acceleration in the mid-2010s and leading up to the Covid-19 pandemic.
• Gap with the United States: India’s manufacturing productivity per worker is considerably lower compared to the United States. In 2020, it was only around a fifth of the productivity level in the US.
• Regional Disparities: There are wide variations in manufacturing productivity across Indian states. Western and Central Indian states tend to have higher average productivity, while Southern and Eastern states have lower productivity levels. This contrasts with the GDP per capita rankings, where Southern states generally have higher incomes than their Western and Central counterparts.

Potential reasons behind the decline in manufacturing productivity

• Slow Manufacturing Sector Growth: The overall growth rate of India’s manufacturing sector has been decreasing, particularly since around 2015. This sluggish growth can limit the opportunities for productivity improvement and hinder overall sector performance.
• Insufficient Investments: Inadequate investments in technology, infrastructure, and research and development (R&D) can hamper productivity growth. Limited capital expenditure by firms may result in outdated machinery, inefficient processes, and lower productivity levels.
• Skill Mismatch: The manufacturing sector requires a specific skill set, and a mismatch between the skills possessed by the labor force and the skills demanded by the industry can impede productivity. The lack of trained and skilled workers in areas such as advanced manufacturing techniques, automation, and specialized operations may contribute to lower productivity levels.
• Informality and Informal Labor Market: The prevalence of informal employment in the manufacturing sector can hinder productivity growth. Informal workers often lack access to training, social security benefits, and stable employment conditions, which can lead to lower productivity levels compared to formal employment arrangements.
• Regulatory Challenges: Cumbersome regulatory processes, including complex labor laws, bureaucratic red tape, and regulatory compliance burdens, can hamper productivity growth. These challenges may discourage investment and hinder the adoption of efficient production practices.
• Infrastructure Deficiencies: Inadequate infrastructure, such as poor transportation networks, unreliable power supply, and limited access to technology and connectivity, can negatively impact manufacturing productivity. Insufficient infrastructure can increase costs, disrupt supply chains, and hinder efficiency in production processes.
• Inefficient Supply Chains: Weak linkages and coordination within supply chains can contribute to lower productivity in manufacturing. Challenges such as fragmented value chains, inefficient logistics, and inadequate coordination between suppliers, manufacturers, and distributors can result in delays, increased costs, and reduced overall productivity.
• Lack of Innovation and Technology Adoption: Limited emphasis on innovation, research, and development, as well as a slower adoption of advanced technologies, can constrain productivity growth in the manufacturing sector. Insufficient investment in technological upgrades and a reluctance to adopt new manufacturing techniques can lead to lower productivity compared to global standards.

Implications of Declining manufacturing productivity 

• Economic Growth: Declining manufacturing productivity can hinder overall economic growth.
• Reduced Competitiveness: Declining productivity in manufacturing can erode a country’s competitiveness in the global market. This can lead to a decline in exports and an increase in imports, negatively impacting the trade balance and potentially affecting the overall economic stability of a nation.
• Employment and Labor Market Challenges: Lower productivity can result in reduced job creation within the manufacturing sector, leading to unemployment or underemployment.
• Technological Progression: When productivity declines, the incentives for firms to invest in research and development or adopt new technologies may diminish, leading to a slower pace of technological advancement within the manufacturing sector.
• Industrial Development and Diversification: A decline in productivity can hinder the growth and diversification of the manufacturing sector, limiting its ability to contribute to overall industrial development.
• Investment and Innovation: Declining productivity in manufacturing can discourage investment and innovation within the sector.
• Sectoral Shifts: Declining manufacturing productivity may result in a shift towards other sectors of the economy. If manufacturing becomes less competitive and less productive, resources and investments may be redirected to other sectors such as services.

What can be done? 

• Boost Investments: Encouraging both domestic and foreign investments in the manufacturing sector can help upgrade infrastructure, improve technology adoption, and enhance productivity. This can be achieved through attractive investment policies, tax incentives, and easing of regulatory procedures.
• Skill Development and Training: Focusing on skill development programs tailored to the manufacturing sector can address the skill mismatch and enhance the capabilities of the workforce. Collaborating with educational institutions and industry associations to design training programs and apprenticeships can ensure a skilled labor force.
• Infrastructure Development: Prioritizing infrastructure development, including transportation networks, power supply, logistics, and digital connectivity, is essential for improving productivity. Investment in infrastructure projects can create an enabling environment for manufacturing activities and reduce operational inefficiencies.
• Regulatory Reforms: Streamlining regulatory processes, reducing bureaucratic complexities, and simplifying labor laws can create a business-friendly environment. Establishing a favorable regulatory framework can attract investments, foster innovation, and enhance productivity in the manufacturing sector.
• Research and Development (R&D): Encouraging R&D activities and innovation in the manufacturing sector can lead to technological advancements and productivity gains. Collaborations between industry, research institutions, and academia can facilitate knowledge transfer and promote innovation-driven manufacturing.
• Entrepreneurship and Start-up Ecosystem: Supporting entrepreneurship and nurturing a vibrant start-up ecosystem in manufacturing can bring fresh ideas, innovation, and competitiveness. Providing access to finance, mentorship programs, and incubation support can encourage entrepreneurial growth and drive productivity.
• International Collaborations: Strengthening international collaborations and partnerships can facilitate knowledge exchange, technology transfer, and best practice sharing. Engaging with global manufacturing networks can help Indian manufacturers learn from successful models and adapt to global standards.

Conclusion

• The findings of this study underscore the urgent need for policy interventions to address the challenges faced by India’s manufacturing sector. Encouraging investments in workers, improving labor market conditions, and promoting a conducive business environment are crucial steps that can help revitalize India’s manufacturing sector, enhance productivity, and lift millions out of poverty.

Also read:

Revisiting India’s Manufacturing Dilemma: A Call for Comprehensive Ecosystem Development

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