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November 23rd, 2017

Focus should be on value addition while restructuring manufacturing in India              

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Estimated reading time: 5 minutes

Editor

November 23rd, 2017

Focus should be on value addition while restructuring manufacturing in India              

0 comments | 1 shares

Estimated reading time: 5 minutes

Indigenous value addition across industries in India is generally less than 10 percent.  For India to become a manufacturing hub, we must reorient our domestic production and exports towards higher value creation writes Aniruddha Ghosh.

The NDA government plans to add an ambitious 100 million manufacturing jobs by 2022. For that to happen, studies suggest an increase in the share of manufacturing as a percentage of GDP from the current 17 percent to a modest 25 percent by 2022, which still will be lower than China’s current share of 32 percent.  Recently, in the ‘Ease of Doing Business’ Rankings, calculated by the World Bank, India made a significant jump of 30 spots to reach the 100th place. The Government of India (GoI) needs to be credited for strong improvements in the components of credit access, contract enforcements and insolvency resolutions, all essentials for a robust manufacturing sector.

Figure 1:  Growth Rate of Gross Value Addition for the Indian Economy from 2011-12 to 2016-17 (Provisional Estimates)  Source: Office of the Economic Adviser

 

Prime Minister Narendra Modi’s mission for a prosperous and innovative ‘New India’ by 2022 rests crucially on the performance of the manufacturing sector. Importantly, estimates from various studies suggest that every unit of job created in the manufacturing sector has a multiplier effect of around three jobs created in the services sector. For economy to grow at a double-digit rate commensurate with job opportunities, it is imperative to look at the way manufacturing is structured in India.

An important measure to gauge the performance of the economy (sectoral or macro-level) along with the GDP metric is to look at the Gross Value Addition (GVA). The GVA is a measure of total output and income in the economy; the aggregate value addition in the economy. It provides the nominal value for the amount of goods and services produced in an economy (GDP) after deducting the input costs that have gone into the production of those goods and services. It is instructive to look at the trends in the GVA measure for our manufacturing sector.

Figure 2: Share of manufacturing in Gross Value Addition from 2012-13 to 2016-17. Source: Office of the Economic Adviser 

 

Figure3: Growth rate of Gross Value Addition (manufacturing growth) from 2015-16 Q1 to 2017-18 Q1. Source: Office of the Economic Adviser 

 

While the growth rate of GVA has been above the pre-2014 levels (Figure 1), the share of manufacturing sector in GVA has nearly been constant, if not slightly lower (Figure2). What stands out is the dip in the growth of manufacturing GVA in the first quarter of 2017-18 (Figure3). Over the past quarters, the growth of manufacturing GVA has seen double digit numbers but the slowdown over the last two quarters has been a bit worrying. While commentators have ascribed this fall to the demonetisation drive and GST implementation, there are larger issues that plague poor GVA in Indian manufacturing. The mobile ‘manufacturing’ industry in India is a good example to reflect upon some of these.

By 2020, it is estimated that nearly 96 percent of the mobile phones sold in India will be locally ‘manufactured’. Despite mammoth ‘manufacturing’ highs in the mobile industry, our localisation rate (LR), defined as indigenously sourced components for domestic manufacturing, in this industry has been a meagre 6 percent, compared to near 50-70 percent LR in China and Vietnam. Such a low LR reflects only the poor value creation that is generated in these ‘manufacturing’ units because of their incessant focus on just ‘assembling’ in India .

It is disheartening to note that mostly, indigenous value addition across industries has generally been less than 10 percent. While the government bodies may claim the boom in mobile manufacturing as a success of ‘Make in India’, certainly we aren’t adding much to what we are selling. The low indigenisation has been the hallmark of India’s manufacturing and continues to plague the sector even now.

Another example from India’s external sector is exports. Exports contributed nearly one-fourth to India’s GDP in 2016-17. The Trade in Value Added (TiVA) database computed by the OECD-WTO offers some dense and interesting insights in the structure of our manufacturing exports. While the GDP numbers reflect ‘what we sell’ and that has an importance of its own, what matters for growth and employment more is ‘what we do’ or the value added. The downside of the TiVA database is that currently it reports value added content in exports with a lag of six years owing to its dense computation. But it is instructive to see what it has to say on India’s outside manufacturing orientation from 1995 to 2011.

The foreign content of India’s exports (value of imported intermediate goods and services that are embodied in India’s exports) has increased significantly and across all industries in the last two decades, more than doubling from under 10 percent in 1995 to 24.0 percent in 2011.

The share of foreign value addition in the exports of the manufacturing sector is the highest and clocks nearly 50 percent.  Further, the poor value addition is also reflected in the massive share of intermediate goods as a proportion of India’s manufacturing exports.

In comparison, the Chinese economy has undertaken significant structural makeover of their exports over the last two decades. The country has moved from being predominantly an exporter of textiles to an exporter of high-tech products. But across most of the sectors, including manufacturing this shift has been accompanied by a significant increase in the domestic value-added content.  The main reason for this lies in China’s increasing ability to upgrade within the production value-chain either through a) increased specialisation in higher value-added activities or b) increased participation (spill-overs) in domestic value-chains by upstream intermediate suppliers or c) both. In 1995, for example around 75 percent of the total value of Information and Communication Technology (ICT) exports reflected foreign content but by 2011 this has fallen to just over 50 percent, with similar large declines seen in other hi-tech sectors, such as Electrical Machinery and Transport Equipment.

Therefore, we must recognise that much of what we are doing is adding very less to what we are selling. For the advancement of manufacturing in New India by 2022 to be successful, it is essential that we look at gross value-addition in our manufacturing sector more closely.

Cover image credit: ILO in Asia and Pacific/CC BY-ND 2.0

This article gives the views of the author, and not the position of the South Asia @ LSE blog, nor of the London School of Economics. Please read our comments policy before posting.

About The Author

Aniruddha Ghosh is a graduate student who has recently completed his MSc. Econometrics and Mathematical Economics from London School of Economics and Political Science aan INLAKS scholar.

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