The newly formed coalition government in India must redouble its efforts on economic reforms, particularly related to manufacturing. 

About Manufacturing Sector in India

• Refers: The manufacturing sector consists of establishments that are involved in the mechanical, physical or chemical transformations of materials, substances or components to make them into new and finished products.
• Historical Background: Before British colonization, India had a thriving and self-sufficient industrial sector, with industries such as textiles, cotton, silk, and handicrafts.
  • India was famous worldwide to produce muslin, a very fine variety of cotton cloth.
• The Statistics: As per World Bank data, manufacturing is in relative decline, making up only 13% of the GDP in 2022. 
  • This compares unfavorably to markets such as Vietnam (25%), Bangladesh (22%), Malaysia (23%), Indonesia (18%), Mexico (21%), and China (28%).
  • Target: In 2014, the government committed to increase manufacturing as a percent of gross domestic product (GDP) from 15% up to 25% by 2025. 
  • Action Taken: Some significant economic reforms that should have helped to attain the target, most notably the approval of the Goods and Services Tax (GST) in 2017, which largely unified India’s State-level tax codes.
    • By GST, logistic costs are reduced by 10-12%.
    • Unification of Labour Laws
    • Make in India 2.0
    • PLI schemes
    • Liberalised Foreign Direct Investment (FDI)
    • Start-up India
    • Atmanirbhar Bharat Campaign
    • Special Economic Zones
    • MSME Innovative Scheme
    • Ease of Doing Business
• Decline in the Sector: India’s continued urbanization resulted in hundreds of millions of agriculture workers relocating to cities to find formal employment in the coming decades. 
  • A failure to generate low-skilled employment could push staggering stress on India’s governance structures. 

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Reasons to Improve Manufacturing Base in India

• Powerful Domestic Compulsions: India has a massive employment-creation requirement. About half of Indian labor remains mired in low-productivity agriculture. 
  • If India’s attempts to enact major farming reforms are successful, there could be a fast, massive transition of employment out of agriculture. 
• Maintenance of Goods Trade Deficit: Despite a perception that India is “anti-trade”, India had a little over $1 trillion in goods trade in the last 12 months and a $250 billion deficit during that period. 
  • Imported Items: Hydrocarbons account for over one-quarter of India’s imports and manufactured goods such as electronics are a substantial component. 
  • Less Employers: Even though the services sector creates substantial economic output, it employs relatively few workers.
    • When India enjoys a large surplus in services trade about $160 billion surplus in the last 12 months on $518 billion in total services trade. 
  • Others: To boost economic growth, to excel in the defense sector self-reliance, etc.

Role and Stake of United States in India’s Manufacturing Sector

• Improvement in Attractiveness: The U.S. can play a modest but meaningful role in improving the business attractiveness of Indian States. 
• This may include:
• • expanding engagement with Indian States to provide direct guidance on effective economic governance.
  • to improve pathways for potential investors to engage with State governments. 
• Emerging Role in Regional Security: Improvements to the industrial base will have direct and indirect effects on the ability to underwrite its emerging role in regional security which is increasingly important given China’s rising aggression. 
• A Manufacturing Base: Having this manufacturing base in friendly countries improves the viability of U.S. supply chains. 

Challenges faced by India

• States and Their Business Environments: The rankings of States’ business environments called the “Business Reforms Action Plan (BRAP)”, has not been updated since the COVID-19 pandemic.
  • It is also considered weak as it focused on States’ self-reporting on their local business practices which was often at odds with actual investor experiences. 
• States Consent: The central government’s plan to help craft model industry laws for States to consider has been underwhelming.
  • Getting all States to focus on thoughtful, transparent industrial policies is a difficult task. 

Measures Need to be Taken by India

• Policy Attention: Most factors of production such as electric power, water, sanitation, labor regulations, land acquisition rules, and environment regulations are primarily controlled by India’s State governments. 
  • Hence, the Indian government needs to provide a much higher degree of policy attention.
• Emphasis on Job-Creation: The government should also consider putting stronger emphasis on job-creating manufacturing sectors such as textiles, paper mills, and furniture, instead of pushing almost exclusively for investments in capital-intensive sectors such as semiconductors and robotics.
• Go beyond Delhi-Mumbai-Bengaluru Circuit: Senior U.S. officials visiting India must commit to engaging a wider set of large States on the importance and opportunity from the current evolution of global supply chains.
• Need for more Investment and Research and Development: It is the need of the hour to tackle issues associated with the manufacturing sector in India and achieve the desired results.

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Conclusion

India’s national election provided an opportunity to assess and redirect policy. But India’s core needs behind the current manufacturing push — jobs, trade, and security — will not change. More work needs to be done to attain desired results, especially at the State level in India, for “Make in India” to further accelerate.