India's manufacturing sector has seen stagnant growth for decades, a puzzling trend given the 1991 economic reforms aimed at industrial deregulation. Rakesh Mohan, a Part-Time Member of the Economic Advisory Council to the Prime Minister (EAC-PM) and former Deputy Governor of the Reserve Bank of India, argues that fundamental changes, particularly in labour regulations, are essential to unlock the sector's true potential for higher productivity and global competitiveness.
Understanding India's Manufacturing Stagnation
Mohan points out that the share of manufacturing in India's GDP has remained broadly constant at 6-6.5% for the past 35 years, mirroring the average GDP growth rate. Despite the significant industrial deregulation post-1991, which dismantled the 'licence-control raj' and opened up the economy, the expected surge in labour-intensive industries did not materialise.
Several factors contributed to this stagnation:
- Historical Reservations: Until FY11, many labour-intensive sectors like leather, textiles, footwear, and furniture were reserved for small-scale enterprises. This policy prevented the emergence of large-scale units capable of competing globally, unlike countries such as China, Vietnam, and Bangladesh.
- High Tariffs: India continues to maintain some of the highest average tariff rates globally, hindering its integration into international supply chains.
- Overvalued Exchange Rate: An overvalued currency makes exports more expensive and imports cheaper, disadvantaging domestic manufacturers.
Pathways to Higher Productivity and Global Competitiveness
To reverse this trend, Mohan advocates for a multi-pronged strategy focused on export orientation, quality improvement, and scaling up production. Crucially, he stresses the need for greater private sector investment in Research and Development (R&D) to drive technological advancement and productivity gains.
Reforming Labour Regulations
A central pillar of Mohan's argument is the necessity of better labour regulations. He highlights that the widespread use of contract labour in Indian factories disincentivizes employers from investing in worker training or adopting new technologies. This lack of investment directly impacts productivity and creates a significant wage disparity compared to manufacturing powerhouses like China and Vietnam.
Beyond labour laws, there's a pressing need to:
- Enhance Skill Development: Both the private sector and government must significantly increase efforts in vocational training.
- Improve Land Accessibility: Policies should facilitate easier and cheaper access to land for industry, especially in the top 100 cities, to improve labour mobility and job creation.
India's Potential as a Regional Manufacturing Hub
Despite the challenges, Mohan believes India can still become a significant regional and global manufacturing hub. He urges the government to pursue more meaningful Free Trade Agreements (FTAs) beyond those with the UK and EU, specifically targeting Asian economies like China, Japan, and South Korea. Joining regional blocs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) is vital for integrating into regional supply chains and accessing vast markets.
Challenges for Hi-Tech Manufacturing
While India excels in niche public sector areas like space and atomic energy, becoming a hi-tech manufacturing hub remains a distant goal. Mohan points to the extremely low R&D investment, currently at just 0.7% of GDP, as a major impediment. Achieving this ambition requires substantial investment in high-quality universities, robust R&D facilities, and a consistent supply of highly skilled technology graduates.