First things first. Manufacturing as a share of GVA or GDP is a ratio. A ratio can stay the same, or even decline, even if the numerator keeps growing steadily if the denominator grows at the same rate or faster. It does not mean that the numerator is stagnant.
Second, humans are not wired to do the counterfactual well. In other words, we don’t think about how well or badly the manufacturing sector would have done but for the government’s ‘Make in India’ related initiatives.
But this question has to be asked because the last 10 years were not normal. At least two major shocks buffeted the Indian economy and its manufacturing sector.
The first shock was a credit bust. Excess debt taken during the boom years had to be paid back as optimistic assumptions behind such borrowing and investment did not materialize in the post-2008 crisis world, as global growth disappointed.
Indian exports could not grow at the same rate as they did before 2008, as global trade growth in the following decade trailed the levels seen in the earlier period.
A reversal of fortunes in India’s manufacturing sector can be seen in capital formation growth rates in this sector, specifically among private corporate manufacturers with their relatively weak investments in machinery and equipment.
The compounded annual growth rate (CAGR) of gross fixed capital formation (GFCF) in the sector over the seven years till 31 March 2021 was 4.9% and 3.0%, respectively, at current and constant prices. Specifically, for private corporations, the growth rates were 4.5% and 2.5%, respectively.
The data for these calculations comes from the National Income Accounts of the Union ministry of statistics and programme implementation (MoSPI).
Data for investment in the manufacturing sector, specifically machinery and equipment, is available only at current prices. The seven-year CAGR for investment in machinery and equipment is 3.5%, and this rate drops to 1.8% for private corporations.
We have used this seven-year period because it covers two shocks: the credit bust and the covid pandemic. In addition, this period witnessed structural reforms such as the introduction of the goods and services tax (GST) and the Insolvency and Bankruptcy Code.
Post-covid, the picture brightens considerably. The CAGR of GFCF over the two years till 31 March 2023 in the manufacturing sector was 26% and 13%, respectively, at current and constant prices.
Private corporations drove this GFCF recovery in the manufacturing sector. Their CAGR during the same period was 23.5% and 10.6%, respectively, at current and constant prices.
With respect to GFCF in machinery and equipment, the two-year CAGR in the sector as a whole was 28.5% and 29.4% for private corporations. MoSPI will release granular data for 2023-24 in January 2025.
A similar picture emerges when we examine data from the Annual Survey of Industries. A slowdown in GFCF shows up in the growth of the number of factories set up during the seven years till 31 March 2021, whether small (less than 100 employed), medium (more than 100 employed) or big (more than 5,000 employed).
Again, as in the case of GFCF, the most recent two years for which data is available (2021-22 and 2022-23) show much greater promise. Not only has the number of medium and large factories grown faster, but the growth in the number of workers and employees in such factories has picked up pace too.
I have cited these figures not to feel smug or pat the government on its back, but to provide context to discussions on the health of the manufacturing sector in the country. Admittedly, much remains to be done.
A recent paper by Arvind Subramanian et al cited multiple units of relatively small sizes in each location as one of the features of Indian manufacturing that sets it apart from other developing economies. This diagnosis is correct.
If one divides the total number of persons employed in factories classified as having 5,000 or more employed by the total number of such factories, the number should be at least 5,000. It is not.
It is far lower. So, the average true plant size is lower than what one observes at first glance. That said, as the paper too notes, recent developments are encouraging.
In the years 2021-22 and 2022-23, the average number of ‘workers’ in factories with more than 100 employees has increased from 249 to 262. Similarly, the average number of ‘employees’ in factories with more than 100 employees has gone up from 313 to 327. However, this pace of recovery has to be much faster for us to realize our development goals.
We also studied the data on the number of companies, both public and private, incorporated in different industries. Between 2016-17 and 2023-24, the total number of companies in the country went up from 981,491 to 1,629,560. The CAGR is 7.5%.
In manufacturing, the growth rate was 6.3% as the number of companies rose from 215,594 to 330,369 in the same period. The total paid-up capital rose from ₹21.9 trillion to nearly ₹37 trillion over the same period, at a CAGR of 7.8%.
In manufacturing, the corresponding figures are a little over ₹6 trillion and nearly ₹10.6 trillion at a CAGR of 8.2%. That said, the road ahead is long. The total number of companies in India, at around 16 million, is low even compared to smaller countries.
As the Economic Survey of 2023-24 noted, we need a tripartite conversation between the Union and state governments and the private sector on deregulation and the deployment of technology in the context of labour versus capital, and particularly on labour’s share of income.
On deregulation, much has been done, but much remains to be done too, particularly in states and by local governments. Policy stability and continuity are desirable goals to pursue at all levels of government. This should include a discussion on the trade-off between boosting employment and the costs entailed by mandated employee benefits.
Apart from these, entrepreneurs and industrialists must reflect on whether they have a passion for growth. Do they prefer to be big fish in small ponds or small fish in an ocean? Among other things, their choices too will determine how soon and how easily the pond becomes an ocean.
These are the author’s personal views.
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