Topic: Why manufacturing sector is not able to generate jobs
Topic in Syllabus: GS Paper 3: Indian Economy
In coming years, India is expected to witness significant demographic growth and a disproportionate expansion in the working age population. To absorb much of this labour force, the manufacturing sector would need to play an important role. Currently, the sector accounts for 12 per cent of the total employment in the country, well below its true potential.
India’s manufacturing sector has the potential to touch US$ 1 trillion by 2025. There is potential for the sector to account for 25-30 per cent of the country’s GDP and create up to 90 million domestic jobs by 2025. Business conditions in the Indian manufacturing sector continue to remain positive.
Contribution of manufacturing sector to Employment Generation in India:
- Manufacturing sector holds a key position in the Indian economy, accounting for nearly 16 per cent of the real GDP in FY12 and employing about 12 per cent of the country’s labour force. Growth in the sector has been strong, outpacing overall GDP growth since the past few years.
- The manufacturing sector is critical for the economy’s growth as it employs 12.0 per cent of the country’s labour force as well as provides a transitional opportunity to the labour force in agriculture. In addition, the sector has a multiplier effect for job creation in the services sector. Every job created in the manufacturing sector creates two-three additional jobs in related activities.
- Textiles and garments, leather and leather products, and food processing are among the major employers in the manufacturing sector. As depicted in the exhibit 5, there is a significant variation in terms of volume and requisite skill sets across various industries in the manufacturing sector.
- According to a CII-BCG report on manufacturing3, the average capital efficiency (revenues/invested capital) in the manufacturing sector is nearly 2.4 (based on an analysis of registered sector data); however, across sub-sectors, it varies from 1.4 for non-metallic products to 3.5 for food products. The average labour efficiency (revenues in INR10 million/ 1,000 workers as reported by the Annual Survey of Industries) is nearly INR480 million/1,000 workers.
- The Micro, Small and Medium Enterprises (MSMEs) have witnessed the highest growth rate in manufacturing sector employment in recent years. The sector is estimated to employ about 73 million workers in over 31 million units throughout the country7.
- MSMEs have consistently registered a higher growth rate vis-à-vis the industrial sector. There are over 6,000 products ranging from traditional to high-tech items, which are being manufactured by the MSME’s in India. The sector also offers maximum opportunities for both self-employment and jobs in India, after the agriculture sector.
- The manufacturing sector is widely regarded as the transformational sector, for agricultural labourers moving from low skilled to more value added jobs. This is because, historically, economic development has followed a pattern of pulling people out of agriculture, moving them into non-farm activities such as manufacturing and services. The importance of the role of manufacturing (industrial sector) in absorbing surplus labour from agriculture sector has also been proved by the development experience of many developed countries and lately in various South East Asian countries.
- For India—where provision of gainful high-quality employment has been a key element of goals under successive Five-Year Plans—including the 12th Five Year Plan (2012–17), robust growth in the manufacturing sector can be a potential panacea for providing employment to a vast majority of the population.
Why manufacturing sector is not able to generate jobs?
It can be explained by differentiating between sectoral employment elasticity and aggregate employment elasticity of the economy.
- The estimated number of entrants into the workforce in the period 2005-10 was an average of 12 million per annum (But some experts believe that only about 7 million have been added to the labour force annually since 2005. This is due to a declining population growth rate and rising educational levels). This was a period when the economy grew at an average 8.7% and at above 9% in three of the five years. But despite this growth, the economy managed to create just 5.5 million jobs annually in the industry and services sectors in the same period.
- According to latest salary index, manufacturing is the lowest paid sector with Rs. 211.7 median hourly gross salary in 2016. This comes as a jolt at a point where there have been concerted efforts otherwise to make India a manufacturing hub. Despite economic growth, the median hourly salary dropped 16% for the manufacturing sector. This daunting phenomenon can pose as a major challenge in attracting talent to the sector.
- Ironically, the frenzy ‘Make in India’ movement sent the nation into for the new-found admiration for ‘manufacturing sector’, the sector per se accounts for only around 15% of the total national employment, leading us to what we can term as ‘jobless growth’. And whatever jobs are out there in the sector, are woefully low paying in comparison with other sectors, with a visible gender gap
- Even though manufacturing has the highest employment elasticity, its overall impact has been muted because of slow increase in employment share and low relative growth (ratio between growth of manufacturing and overall economy). By the same logic, agriculture is having a large negative impact on employment generation.
- Expectations from India’s manufacturing sector are as high hopes, especially in terms of worthwhile job creation at that. While the sector holds good prospects for jobs with promising remuneration, what makes it an unsatisfactory scenario is that 65% of India’s population is below the age of 35 – giving us the edge of demographic dividend. Manufacturing sector could have played a huge role in bridging this divide as there is a considerable gap between India’s manufacturing potential and its realization.
- In the recent past, the manufacturing sector has also suffered because of poor tax structure and inadequate infrastructure. However, government’s policy reforms like implementing GST and improving public spending through infrastructure projects are again favorable moves for the sector. Many manufacturing industry players have shown confidence in their companies achieving increased growth on the back of introduction of GST and an incessant push to infrastructure such as highways, etc.
- Unlike the service sector that requires specific education and skill set, which a large chunk of India’s population cannot afford and meet, the labour-intensive manufacturing sector is the only ray of hope for India to absorb its burgeoning labour force.
- India’s skill ecosystem needs an overhaul. According to a FICCI report, India has 5.5 million people enrolled in vocational courses, while China has 90 million of them! The monumental difference clearly signifies a need to have a curriculum that focuses on soft-skills and value-based training that meets the demands of the industry. If we can’t create an education system that fosters employability, it is only unfair to expect a sector to handle employability by itself.
- Employment and unemployment surveys conducted by the National Sample Survey Organisation (NSSO) shows that the total manufacturing employment in the country declined absolutely, by three million, between 2004-05 and 2009-10. It is to be noted that this decline in overall manufacturing employment occurred despite a revival in employment in the organized sector. Clearly, it points to a sharp absolute fall in unorganized manufacturing employment in the country by the late 2000s.
- Quick fixes rarely work in policy making, and the so-perceived magic FDI bullet has clearly failed to revive the manufacturing sector and generate jobs.
Government Initiatives for strengthen Manufacturing sector:
In a bid to push the ‘Make in India’ initiative to the global level Prime Minister of India, pitched India as a manufacturing destination at the World International Fair in Germany’s Hannover in 2015. Mr Modi showcased India as a business friendly destination to attract foreign businesses to invest and manufacture in the country.
The Government of India has taken several initiatives to promote a healthy environment for the growth of manufacturing sector in the country. Some of the notable initiatives and developments are:
- The National Institution for Transforming India (NITI Aayog), after its recent push for Rs 6,000 crore (US$ 889 million) textile sector package, aims to persuade the Government for similar support in the manufacturing sectors with large-scale employment generation opportunities, such as electrical and electronics engineering, footwear and light manufacturing segments, which also have export potential.
- The Ministry of Labour and Employment plans to relax compliance measures for MSMEs by exempting them from inspections related to key labour laws in order to encourage entrepreneurs to help promote manufacturing in India.
- The Government of India plans to give a big boost to local manufacturing by introducing the new ‘Make in India green channel’, which will reduce the time taken for cargo clearance at ports from about a week to a few hours without any upfront payment of duties.
- Gujarat government is planning to set up an electronics products manufacturing hub in the state, through its newly announced Electronics Policy 2016, which will generate about 500,000 jobs in the electronics sector in the next five years.
- The Ministry of Heavy industries and Public Enterprises, in partnership with industry associations, has announced creation of a start-up centre and a technology fund for the capital goods sector to provide technical, business and financial resources and services to start-ups in the field of manufacturing and services.
- The Government plans to organise a ‘Make in India week’ in Mumbai between February 13-18, 2016 to boost the ‘Make in India’ initiative and expects 1,000 companies from 10 key sectors to participate in the exhibition of innovative products and processes, a hackathon and sessions on urban planning, among other events.
- NITI Aayog plans to release a blueprint for various technological interventions which need to be incorporated by the Indian manufacturing economy, with a view to have a sustainable edge over competing neighbours like Bangladesh and Vietnam over the long term.
- Minister of State for Commerce and Industry has launched the Technology Acquisition and Development Fund (TADF) under the National Manufacturing Policy (NMP) to facilitate acquisition of Clean, Green and Energy Efficient Technologies, by Micro, Small & Medium Enterprises (MSMEs).
- The Government of India has asked New Delhi’s envoys in over 160 countries to focus on economic diplomacy to help government attract investment and transform the ‘Make in India’ campaign a success to boost growth during the annual heads of mission’s conference. Prime Minister, Mr Modi has also utilized the opportunity to brief New Delhi’s envoys about the Government’s Foreign Policy priority and immediate focus on restoring confidence of foreign investors and augmenting foreign capital inflow to increase growth in manufacturing sector.
- The Government of Uttar Pradesh has secured investment deals valued at Rs 5,000 crore (US$ 741.2 million) for setting up mobile manufacturing units in the state.
- Government of India has planned to invest US$ 10 billion in two semiconductor plants in order to facilitate electronics manufacturing in the country.
- Entrepreneurs of small-scale businesses in India will soon be able to avail loans under Pradhan Mantri MUDRA Yojana (PMMY). The three products available under the PMMY include: Shishu – covering loans up to Rs 50,000 (US$ 735), Kishor – covering loans between Rs 50,000 (US$ 735) to Rs 0.5 million (US$ 7,340), and Tarun – covering loans between Rs 0.5 million (US$ 7,340) and Rs 1 million (US$ 14,700).
- In Union Budget 2018-19, the Government of India reduced the income tax rate to 25 per cent for all companies having a turnover of up to Rs 250 crore (US$ 38.75 million).
- Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Government of India increased export incentives available to labour intensive MSME sectors by 2 per cent.
- The Ministry of Electronics and Information Technology is in the process of formulation of a new electronics manufacturing policy. The aim of the new policy will be to create an ecosystem of manufacturing in the country, enable India to become a significant global player in some of these categories.
- Ministry of Home Affairs liberalised Arms Rules to boost ‘Make in India’ manufacturing policy of the government. The liberalisation of the policy is expected to encourage investment in the manufacturing of arms and ammunition and weapon systems and promote employment generation.
- The Government of India has launched a phased manufacturing programme (PMP) aimed at adding more smartphone components under the Make in India initiative thereby giving a push to the domestic manufacturing of mobile handsets.
- The Government of India is in talks with stakeholders to further ease foreign direct investment (FDI) in defence under the automatic route to 51 per cent from the current 49 per cent, in order to give a boost to the Make in India initiative and to generate employment.
- The Ministry of Defence, Government of India, approved the “Strategic Partnership” model which will enable private companies to tie up with foreign players for manufacturing submarines, fighter jets, helicopters and armoured vehicles.
- The Union Cabinet has approved the Modified Special Incentive Package Scheme (M-SIPS) in which, proposals will be accepted till December 2018 or up to an incentive commitment limit of Rs 10,000 crore (US$ 1.5 billion).
Boosting Employment in Manufacturing Sector: Agenda for action:
Manufacturing sector is critical for the growth of the economy. This is because the sector tends to have a multiplier effect on other sectors in the economy. The manufacturing sector avails raw materials and services from other sectors in the economy and in turn supplies them with finished products. Hence stimulating demand for everything from raw materials to intermediate goods. Its area of influence includes sectors like software, health, and transportation. As envisaged in NMP, the manufacturing sector has the potential to provide employment to 100 million people by 2022. However, before this happens, it is important to bring about certain reforms in India’s manufacturing and labour sector. Some of the suggestions through which employment can be boosted in the manufacturing sector are touched upon below –
Encourage growth in labor-intensive industries:
- Wood, paper products and textile industries tend to be more labor-intensive and require a large workforce, mostly unskilled with no special qualifications. By focusing on growth in these industries, it is possible to absorb the rising surplus of unskilled workers, particularly in less developed states (such as Uttar Pradesh and Bihar), where population is projected to grow 8–11 per cent by 2015.
Focus on MSMEs:
- MSMEs are critical for the country’s economic and social development. They significantly contribute to the GDP, manufacturing output, exports and employment. In India, MSMEs account for eight per cent of GDP, 45 per cent of manufacturing output and 40 per cent of exports. Also, the labour-capital ratio is much higher in MSMEs than larger industries. Furthermore, they are considered budding grounds for entrepreneurs, thus encouraging innovation in the country. Hence, it is imperative to focus on growth in MSMEs that, in turn, would provide a fillip to the manufacturing sector as well as raise the level of employment.
- Globalization has resulted in several opportunities, such as access to supply chains worldwide, for SMEs and MSMEs. However, for the sector to reap benefits from the fruits of globalization, it is important to enhance the sector’s competitiveness. One of the options for SMEs to improve competitiveness is to adopt the cluster approach, which addresses the general problems of taxation, interest rate or FDI policies as well as harmonizes and simplifies procedures including those related to labour laws.
- It is also important to increase the availability of bank credit for the SMEMSME sector. Even though the sector falls in the category of priority sector lending, only 8 per cent of the total bank credit finds its way in to the sector. This is miniscule given the fact that almost 95 per cent of the total industrial sector is in the SME – MSME sector.
- A multitude of labour laws exist in India. There are 45 Central Acts and 16 associated rules that directly deal with labour. In addition, other acts indirectly deal with labour issues. A number of these acts prohibit companies, with more than 100 employees, from making positions redundant and firing people for any cause other than criminal misconduct.
- An additional 45 national laws, intersecting or derived from the Industrial Disputes Act of 1948, and about 200 state laws control the relationship between employees and employers. Rigid labour laws are potentially restricting the country’s industrial growth and impacting the very workers they are meant to protect, by preventing large scale flexible employment. Consequently, companies are increasingly resorting to outsourcing and contracting of labour. Hence, it is important to harmonize rules across all of these acts to ensure labour laws are more flexible.
Improve the quality of training imparted in schools and colleges:
Apart from labour reforms, the government is aware of the human capital challenge and has taken major initiatives such as setting up the NSDC to encourage private participation/management of ITIs. However, there is scope for further initiatives such as:
- to improve the quality of teaching in schools and colleges;
- to increase provisions for vocational training as well as its attractiveness; and
- to expand the availability and feasibility of vocational education for school dropouts.
Enhance labour productivity:
- Indian companies have made major strides in improving labour productivity in recent years. Over the last decade, the country’s labour productivity has increased significantly, but has been lower compared to China. Although India has lower wage rates than China, productivity-adjusted wage rates are equal in the two countries. India needs to make substantial efforts to close this productivity gap and remain competitive on a global level by focusing on lean manufacturing techniques and R&D.
The manufacturing sector would need to play a crucial role for India to achieve its goal of employment generation. There is a need for strong commitment from the government as well as the industry for the sector to enter the next orbit of high growth and employment generation. Also, there is a need for a robust labour policy, which strikes the right balance between workers’ rights and competitive needs of the manufacturing sector. Furthermore, it is important to enhance the productivity of the labour force by enhancing the quality of training.
Why India’s manufacturing sector is unable to generate expected employment? Discuss the reasons and enumerate the government initiatives to address the issue.