Magnets for manufacturing

ECONOMY / GOVERNANCE

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment 

Magnets for manufacturing

Context: In the aftermath of the pandemic, several manufacturing companies operating from China are predicted to relocate their businesses to other destinations

Many American, Japanese, and South Korean companies based in China have initiated discussions with the Indian government to relocate their plants to India.

Why are companies expected to exit China?

• The first is the realisation that relying heavily on China for building capacities and sourcing manufacturing goods is not an ideal business strategy due to supply chain disruptions in the country caused by COVID-19. 
• The second is the fear of Chinese dominance over the supply of essential industrial goods. 
• The third is the growing risk and uncertainty involved in operating from or dealing with China in the light of geopolitical and trade conflicts between China & USA

India’s Position in Manufacturing Sector

India lags far behind China in manufacturing prowess. 

• Ranking: China ranks first in contribution to world manufacturing output, while India ranks sixth. 
• Possibility of missing Target: Against India’s target of pulling up the share of manufacturing in GDP to 25% by 2022, its share stood at 15% in 2018, only half of China’s figure.
• Slow Growth Rate: Industry value added grew at an average annual rate of 10.68% since China opened up its economy in 1978. In contrast, against the target of 12%, the manufacturing sector has grown at 7% after India opened up its economy. 
• Share in World market: Next to the European Union, China was the largest exporter of manufactured goods in 2018, with an 18% world share. India is not part of the top 10 exporters who accounted for 83% of world manufacturing exports in 2018.

What are the constraints that India faces while promoting manufacturing sector?

• Infrastructure constraints leading to high logistical costs
• A disadvantageous tax policy environment 
• A non-conducive regulatory environment
• High cost of industrial credit
• Poor quality of the workforce
• Rigid labour laws
• Restrictive trade policies
• Low R&D expenditure 
• Delays and constraints in land acquisition
• Inability to attract large-scale foreign direct investment into the manufacturing sector. 

Way Ahead

• A lasting solution to these constraints cannot be possible without the active participation of State governments and effective policy coordination between the Centre and the States.
• State-specific industrialisation strategies need to be devised and implemented in a mission mode with active hand-holding by the Central government
• To promote electronic manufacturing, Minister of Electronics & IT suggested forming a Strategy Group consisting of representatives from the Central and State governments along with top industry executives. 
• The purpose of this strategy group is to instil teamwork and leverage ideas through sharing the best practices of the Centre and States.
•  A similar approach is needed for developing the whole manufacturing sector.

Connecting the dots:

• Make in India Scheme
• FDI rules for neighbourhood (targeted at China) in the wake of Pandemic