Economics and finance, Trade and industry | South Asia

20 January 2022

India’s national government is moving the right direction on manufacturing, but more reform is needed to skills, innovation, infrastructure, and gender policies to take full advantage of the sector’s potential, Rahul Singh Bais and Cornelius Kalenzi write.

India is a predominantly services economy, with a manufacturing industry that contributes approximately 17 per cent of its gross domestic product (GDP). Yet despite manufacturing being a relatively small part of the country’s overall economy, India ranked as the world’s second most competitive and preferred manufacturing country in a recent Global Manufacturing Risk Index for 2021, signalling there is huge room to grow in the sector.

India is the fifth largest manufacturer in the world and accounts for roughly three per cent of global manufacturing output.

The country has the potential to take that next step to being a true global manufacturing hub, but it needs to upscale the sector to keep up with its regional manufacturing competitors, like Malaysia, which has a manufacturing industry contribution to GDP of approximately 23 per cent.

Recently, the government set a target of increasing the contribution of the manufacturing sector to GDP to 25 per cent by 2022. But without strong policy action, India is highly unlikely to achieve this goal.

So, what steps can policymakers take to usher the Indian manufacturing industry to a position of leadership in the global manufacturing market?

The first area India needs to improve is in utilising its human capital. Excellent human capital is a prerequisite for a vibrant and dynamic manufacturing sector, and India’s manufacturing sector still lacks skilled labour to make the most of its potential.

The current workforce needs both reskilling and upskilling, and to solve this problem, India should consider a ‘twin model’ to invest in its manufacturing workforce. The two pillars of the ‘twin model’ are training and retraining.

New students could be trained in the early years of their higher education and even in high schools in a manner similar to the German vocational training system, preparing them for manufacturing jobs. On top of this, providing public and private reskilling and upskilling facilities to the existing workforce will maximise productivity and allow older workers to contribute too.

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The second step India can take is to further invest in innovation, a key factor for economic growth.

Despite registering high growth in the number of new patents, India’s present manufacturing model is based mostly on imported knowledge and innovation. This is despite the fact that India possesses top-notch institutions which, if invested in, can innovate further improvements in manufacturing themselves. This would convert India’s manufacturing industry from a fast follower to a first mover.

To do this, governments, corporations, and academia need to come together and invest in innovation. Future technologies in space, artificial intelligence, machine learning, cloud computing, defence technologies, and the ‘Internet of Things’ need substantial research and development, but if produced in India could be massive assets to India’s manufacturing sector.

India also needs to establish better manufacturing infrastructure.

Infrastructure is the backbone of the manufacturing process, and India’s needs upgrading. Crucially, the country is ranked lower in infrastructure development than its nearest competitors, including China, Thailand, and Malaysia.

This is one of the reasons that the sector’s potential is not being achieved. The Singapore Infrastructure Model is worth considering for policymakers in India. Singapore, in recent decades, has built itself into a global city by investing in infrastructure like transportation systems, energy and communication networks, and water systems – if India did the same, its fortunes in manufacturing would surely turn the corner.

Social infrastructure should also part of any broader infrastructure paradigm. Taxation, legal stability, political stability, and social cohesion also amount to infrastructure building, and India can improve in these areas too. Both social infrastructure and physical infrastructure need to be ramped up to make India more competitive in the international manufacturing sector.

More on this: Can India build a military-industrial complex?

Finally, if it hopes to be competitive, India needs a more inclusive manufacturing workforce.

Low participation of women in the manufacturing sector is a global concern, but it is a more prominent issue in developing economies than in developed economies.

Recently, research found that women’s participation in manufacturing was only 12 per cent in 2021. One silver lining in this research was that the participation of women increased from nine per cent in 2019 to 12 per cent in 2021, but women’s participation remains at an abysmally low rate.

This is a systemic issue. Manufacturing sector workplaces are not gender inclusive and the wider gender gap in society reflects itself in every domain, including the manufacturing sector.

Policymakers, civil society, and manufacturing sector leadership must tackle this critical issue and formulate policies that increase gender inclusivity in the manufacturing sector.

Some steps to take may include gender workshops to eliminate stereotypes and create safe workplace facilities. Similarly, the pay gap is a huge issue, and must be reduced – and eventually eradicated. If manufacturing jobs are safer and more lucrative for women, India would be able to make use of their skills to remain competitive in global manufacturing.

Of course, the government of India has taken some steps in the right direction recently, with schemes and initiatives like encouraging foreign manufacturing companies to relocate to India, workforce skills programs, credit schemes for micro and small enterprises, infrastructure projects, and production-linked investment schemes.

Ultimately though, more must be done. If India hopes to become the global manufacturing hub that it has the potential to be, it must make the most of its human capital, accelerate innovation, invest in infrastructure, and commit to more inclusive – and productive – workplaces.

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