Economic Survey asks private sector to buck up as manufacturing slumps

The comparison with China is omnipresent as India continues to look for reasons to explain its insignificant presence in the world export basket amid a slowdown in domestic manufacturing, year after year.

In the Economic Survey 2024-25, which was tabled in Parliament on Friday (January 31), Chief Economic Advisor V Anantha Nageswaran has acknowledged that even in the current fiscal, the growth in domestic manufacturing has slowed down.

And, while he has exhorted stakeholders – the government, industry, academia and research organisations – to come together to make India a manufacturing powerhouse, there is precious little in concrete terms that the Survey has suggested for making India’s manufacturing more attractive globally.

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'Make in India' left behind

Interestingly, unlike past Survey reports, there is no longer a discussion about the ‘China Plus 1’ strategy of rich nations, which are looking to contain the dominance of China in world trade by exploring manufacturing sites in other countries. The CEA has merely referred to the IMF’s observation that global manufacturing is shifting to emerging market economies, including China and India.

The erstwhile war cry of the Narendra Modi government, the ‘Make-in-India’ programme, has also not been highlighted for any past achievements in accelerating India’s moribund manufacturing sector.

MVA Index of UNIDO

The Survey cites the World Manufacturing Value Added (MVA) Index of the UN Industrial Development Organisation (UNIDO), which measures the relative contribution of a country’s manufacturing sector to the global manufacturing output. India is at sub-0.2 while China is close to 1.

Also, as a percentage of GDP, the industry value added (or contribution of industrial production to GDP) in India is not just lower than in China, but also lowest among other low income, middle income and high income economies.

With such a low share of industrial production, how do we aspire to be global suppliers of any consequence?

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Growth decline

In the July-September quarter of 2024-25, India’s industrial growth declined to 3.6 per cent as manufacturing exports suffered a sharp slowdown and untimely rains slowed down activities like construction and mining.

Take the example of some of the core input industries which comprise India’s manufacturing sector. While a third of the manufacturing capacity of cement lay unused last fiscal and government capex slowed down, India became a net importer of steel between April and November this fiscal due to the widening gap between international and domestic prices.

India is the second biggest producer after China, but nearly a third of the installed capacity for cement production remained idle in FY24. In the April-October period of the current fiscal, about 40 per cent of the installed capacity had been utilised.

As for India’s reliance on imports for steel this fiscal, the Survey said: “The decline in India's export of finished steel during FY25 was mainly driven by gaps between international and domestic prices. The low price in the international market during this period resulted in a low margin on exports and cheaper imports.”

Textile woes

On capital goods, too, the Survey has pointed out the growing reliance on imports despite an increase in domestic production. We are increasingly importing capital goods due to “technology gaps” and how will these gaps be bridged unless India begins to invest substantially more in research and development (R&D)?

The textile industry, which accounts for 8 per cent of India’s total merchandise exports, has also seen a drastic decline in export value last fiscal. The Survey has highlighted several problems plaguing this sector – such as small enterprises populating textile manufacturing, thus making the sector fragmented and raising logistics costs.

The textile sector has attracted limited foreign investment and continues to face significant skill gaps. Much of the diagnosis of the ills of the textile sector is a repetition with little having been done by the government in the past years to elevate production and export competitiveness here.

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Positive developments

Of course, the Survey emphasised the positive developments in several sectors due to the government’s production linked incentive (PLI) schemes – in electronics, automobiles and auto components, white goods – where incentives are being made available to encourage domestic production and reduced import reliance.

The Survey has highlighted the case of smartphones, a category where 99 per cent of the goods are now being manufactured locally.

Funding for R&D

On R&D spends, the Survey commended the “government’s policies and interventions” while asking the private sector to step up. “The funding for R&D in India is primarily sourced from government entities,” it said.

This, despite India’s R&D spend as a percentage of GDP being only above Indonesia and South Africa among a list of 22 countries complied by the World Bank in 2020. China, Brazil and Thailand are some of the emerging economies which were spending far more than India on R&D as a percentage of GDP.

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But the Survey has pinpointed the share of private sector investments in R&D in developed and emerging economies, giving the example of China, Japan, South Korea and the US. It has underlined the investment in R&D by American companies including Google and Amazon, to say that the private sector accounts for 70 per cent of the spend on R&D in the US.

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