Manufacturing : From Laggard to Leader

Context:  With India now entering into the recovery phase, there is a need to look beyond recovery to rejuvenation, rebuild the confidence and dynamism of corporate India and small enterprises.

Business cycles in India’s post-liberalization era.

• Post-crisis recovery period: 1993-94 to 1996-97
• Slowdown period: 1997-98 to 2003-04
• Major boom period: 2004-05 to 2010-11
• Slowdown period: 2011-12 to 2017-18

Manufacturing growth during these periods: Largely laggard

• Export growth:
  • Relatively high rates of growth during post-crisis recovery and the boom period.
  • Slower export in slowdown period due to slowdown in world trade in manufactures.
• Employment growth:  Growth in manufacturing employment in the post-liberalisation era has been below the pre-liberalisation decade.
• Factor productivity growth:  Improved since the boom period and continued during the subsequent slowdown.
• Sharp drops in the current slowdown period: Sharp drop in the investment ratio, export growth and employment growth.
• Overall growth performance: Out of the 25 post-liberalisation years, 12 had a net value-added growth rate above the pre-liberalisation average. 

Ways to transform from laggard to leader in manufacturing

• Follow an aggressive exchange rate strategy: To boost exports and growth.
  • But this method to boost exports cannot be done frequently and have other management challenges.
• Achieve technological dynamism: To keep up with the standards set by competitors in terms of price and product specification.
• Promote Export-led backward integration: A strategy followed by high growth East Asian countries.
  • Move rapidly from growing product exports to backward integration into growth in the production of manufactured inputs for these export products.
• Indian industries should go for more innovations: By investing more in corporate research centres driven by market demands.
• Give incentives to all:
  • Avoid political discretion and give incentives for exports and export-linked backward integration to all rather than just a chosen few. (As practised in Japan, China and Korea)

Conclusion:  To promote high growth, we need policies to promote export-oriented backward integration and linked development of technological capacity in our manufacturing sector at all levels from large to small and from established companies to start-ups.