Manufacturing Industry and its Impact on Indian Economy
India has been in a race for the past two and a half centuries but unfortunately it has been a race to the bottom. What is more unfortunate is that India is winning this race. To put things in perspective, we need to go back to the 1760s when the Mughal empire was at its zenith. Amongst the seven major economies of the world that could be considered a peer group, there were only two countries, Britain and France,that were ahead of India. (See chart 1)
The first Industrial Revolution started around the same time with the invention of the steam engine. The first industries to use the steam engine were the power looms and weaving industry and subsequently it was used for transportation. This was the period when India slipped to fourth position.
After a century came the second industrial revolution around 1870s with the onset of electricity and mass production. During the second industrial revolution, India’s ranking dropped further from fourth to sixth position. Fast-forward another century to the 1970s, we saw the dawn of the digital age and India hit the bottom of the ranking. Almost half a century later we are standing at the threshold of yet another Industrial Revolution; the fourth industrial revolution, which is going to be driven by Artificial Intelligence, the Internet of Things, Cloud Computing, 3d Printing and other technologies of that nature. This is the first industrial revolution that has been anticipated and the first one for which mankind has been able to plan.
With a unique database of 175 years spanning all the industries and all the economies around the world, Dun & Bradstreet is uniquely placed to study all the sectors in the global economy, specifically the manufacturing sector. There are three very interesting outcomes that emerge from our study of the sector:
Firstly, most people think that the manufacturing industry is similar to the services or the agri industry; each industry having its own relative advantages and features. What is not clear to most is that the manufacturing-led economies are unique in being more egalitarian in their distribution of wealth. Secondly, manufacturing led economies are also much more resilient than economies that are led by other industries. Finally, and more importantly relevant for India, the manufacturing industry in India creates more employment opportunities with its growth than any other sector.
Going into detail,
If we group the countries in our Dun & Bradstreet database across a Gini index into two clusters, egalitarian and non-egalitarian we find that the manufacturing-led industries to tend to fall on the egalitarian side whereas agri based industries fall on the non-egalitarian side. (See chart 2)
The services industries fall in the middle of the two. Hence, we see that manufacturing led industries are much more equal societies. Not surprisingly, a lot of the northern European economies are egalitarian and manufacturing led.
The second insight our research shows us is that manufacturing led economies are much more resilient and robust. If we look at the number of years of continuous growth, we find that the minimum is that for agri led economies while the manufacturing-led economies are almost two times the index of the agri led economies. Services industries again, fall somewhere in the middle. (See chart 3)
Thirdly, moving specifically to India, our insight covered the last four decades starting from 1978. Now we take a look at the jobs created for every percentage point of GDP added by each of the three groups of industries. In technical terms, this is referred to as Gross Value Added. We observe that for every percentage of gross value added, the agri industry has not created any jobs. In the case of the services industry, for every percentage of gross value added, 0.4 percent of jobs have been created. For the manufacturing industry, however, the corresponding number is 0.7 percent. (See chart 4)
If we now look at the next twelve years, there are going to be a total of 175 million additions to the labor force in the country. During this time if we assume that the Indian Economy will grow at the rate of 6 percent, all the industries grow at the same rate, we will be able to absorb only 125 million incremental labor. Approximately 50 million of these people will remain unemployed. In order to ensure that the entire 175 million are gainfully employed, the manufacturing industry will have to outstrip the growth of the services and the agri industry. It will have to grow at about 10 percent within the overall 6 percent that the economy will grow. This is what is required to ensure that the Indian industries absorb the incremental labor force.(See chart 5)
INDIA’S READINESS FOR INDUSTRY 4.0
(See Chart 6) Cross-country comparisons indicate that India has a long way to go to take on Industry 4.0 or the fourth industrial revolution that we began by discussing. At this point, which economic growth path we choose will shape our future development. In this context, the key deficiencies affecting India’s readiness for meeting the current scenario include:• Institution • Infrastructure • Human capital • Technology & innovation
Addressing these systemic deficiencies will provide the Indian economy with multiple rewards. It is up to us today to create an advantage by ‘making in India’ or to create a challenge by leaving millions unemployed. Keeping in mind the volumes expected to enter the workforce in coming years, boosting the manufacturing sector may be a viable solution.