Reviving India's Manufacturing Sector: Government Incentives as a Game-Changer - Raghav Modani

 

Reviving India's Manufacturing Sector: Government Incentives as a Game-Changer

India has experienced the fastest growth rate among emerging economies, driven by its service sector and increasing consumer demand. However, the manufacturing sector, considered a crucial driver of long-term growth, remains largely underdeveloped. Currently, Indian manufacturing employs only 11% of the workforce and its contribution to the country’s GDP has remained stagnant. This contrasts sharply with other growing economies like Vietnam and China, where manufacturing significantly contributes to economic growth. 

To give a scale of comparison, China, recognized as the "factory of the world," contributes 28.7% to global manufacturing output, supported by a well-established ecosystem with advanced infrastructure, extensive supply chains, and economies of scale. Manufacturing accounts for 27% of China's GDP, driven by strong government policies, investment in industrial parks, and a focus on exports. In contrast, India contributes 3.1% to global manufacturing output, with manufacturing forming 14-17% of its GDP. Despite initiatives like Make in India and efforts to raise this share to 25% by 2025, India lags behind due to challenges such as low labor productivity, skill gaps, and regulatory hurdles. While China excels with a skilled workforce, automation, and efficient logistics (logistics costs at 8-10% of GDP), India is improving its infrastructure through projects like the Dedicated Freight Corridors but still faces higher logistics costs (14% of GDP). These disparities highlight the significant gap India must bridge to rival China's dominance. 

The sector faces many systemic issues such as inefficient labour laws, restrictive trade policies, and a shortage of skilled workers, which have hindered its ability to scale up and become globally competitive. Outdated legal frameworks have curtailed the sector’s growth potential. For instance, according to ‘The Factories Act,’ companies with over 100 employees must seek permission before firing workers. This has led many businesses to limit their workforce size to avoid these restrictions, preventing them from expanding. In Karnataka, overtime wages are double the usual rate, whereas, in Vietnam, they are limited to just 1.5 times the usual rate. 

The sector has also suffered from trade restrictions. The US has revoked India’s duty-free trade status, and the European Union has imposed tariffs of 10-12% on textiles exported from India. This has made it more difficult for Indian businesses to compete globally and has squeezed exporters’ profit margins. Additionally, labour shortages have exacerbated the sector’s troubles. Millions of Indians work in the low-productivity agriculture sector and are reluctant to leave their rural homes for manufacturing jobs. This reluctance is due to factory wages not being significantly higher than agricultural income, and seasonal rural welfare programs keeping them content during off-farming periods. 

To revitalize the sector, the government has launched several schemes, the most recent being the Employment-Linked Incentive Schemes, announced by the Finance Minister in the Union Budget 2024-25. These three schemes focus on formalizing employment by providing direct support to both employers and workers. 

While the government’s recent initiatives are a step in the right direction, more comprehensive reforms are needed to unlock the potential of India’s manufacturing sector. Easing restrictive labour laws, negotiating better trade deals, and developing strategies to attract and retain a skilled workforce is essential if India is to compete with global manufacturing powerhouses. Moreover, India needs to address its productivity gap. Indian workers are estimated to be 20-30% less productive than their counterparts in countries like Bangladesh. To close this gap, the government and private sector must invest in workforce training and technological advancements to improve efficiency and output. 

Despite these challenges, India has the potential to become a global manufacturing hub. With a large, young workforce and a growing middle class, the country has a unique opportunity to build a competitive manufacturing sector to drive sustainable economic growth. The government’s employment-linked incentives are a positive step toward realizing this vision, but much more needs to be done to ensure that India’s manufacturing sector can reach its full potential. 

The time is ripe for a manufacturing renaissance in India. With the right mix of policies, incentives, and reforms, the country can move beyond its current limitations and position itself as a leader in the global manufacturing landscape. The next decade will be critical in determining whether India can seize this opportunity or lag behind its competitors.