MANUFACTURING SECTOR
Submitted to:
Prof. Guha Bijoy
Submitted by:
DIVISION: F1M
According to a study recently conducted by global management consulting firm McKinsey and
Company, the Indian manufacturing industry is expected to touch US$ 1 trillion by 2025.
Industry experts accredit the increasing demand of manufacturing units and the penchant for
setting up low-cost plants in India by multinational firms for this possible development.
Around 90 million domestic jobs are waiting to be created by that timeframe with the
manufacturing segment contributing about 25-30% of India’s gross domestic product. India’s
rapidly expanding economy is giving both international entrepreneurs and home players an
array of opportunities to venture out and grow.
The Gross Value Added (GVA) at basic constant (2011-12) prices from the manufacturing
sector in India grew 7.9 per cent year-on-year in 2016-17, as per the 2nd provisional estimate
of annual national income published by the Government of India. Under the Make in India
initiative, the Government of India aims to increase the share of the manufacturing sector to
the gross domestic product (GDP) to 25 per cent by 2022, from 16 per cent.
Government of India has envisaged adding 100 million jobs in manufacturing by 2022. This
column finds that the structure of the country’s manufacturing sector is misaligned with the
objective of job creation. Subsectors that have low potential to generate jobs dominate the
manufacturing profile. To generate jobs, more employment-intensive subsectors should be
promoted.
Creating employment in the manufacturing sector is a key strategy for economic development
in India. A number of initiatives have been taken over the years with the intent of generating
the required jobs. Under the Make in India1 programme, the government has envisaged
adding 100 million new jobs in the manufacturing sector by 2022.
In this column, I show that the linkage between the potential of a manufacturing subsector
to create jobs and its size in the overall manufacturing index is relatively weak, inhibiting the
capacity of manufacturing to meet the target. I compare the importance of manufacturing
subsectors in the overall manufacturing sector index (as measured by their percentage
contribution2) with their employment elasticity as worked out by Misra and Suresh (2014) in
a Reserve Bank of India (RBI) paper.
This five-year stretch of sub-3% growth rate in the manufacturing index is probably the
longest post-independence, indicating deep distress afflicting the sector. It is a result of
continued problems in global economic conditions as well as moderate domestic demand due
to poor monsoons, high inflation, declining investments, and other factors.
Data on employment in the sector from the National Sample Survey (NSS) is available only up
to 2011-12. Share of manufacturing employment in the total employment in the economy
increased from 11.9% in 1999-2000 to 13.6% in 2011-12. In absolute terms, this is an increase
of about 17 million jobs in the sector over this period, outpacing the overall growth rate of
employment (Misra and Suresh 2014).
Comparing the average elasticities of the subsectors with the weights of these subsectors in
the manufacturing index, it is found that there is weak linkage between the two. This implies
that the manufacturing subsectors with high presence in India’s overall industrial landscape
have low employment-creation capacity. The top 12 sectors for employment elasticity have a
combined weight of just 36.5% of the manufacturing index (with manufacturing index at
755.27 of the IIP for NIC (National Industrial Classification, 2004).
By contrast, the top 10 sectors by weight in the manufacturing index make up 79% of the total
manufacturing sector (Table 3 below). But the average employment elasticity of these sectors
is 0.43, barely higher than the overall manufacturing employment elasticity of 0.41.
The top five sectors by weight in the manufacturing index have employment elasticities that
are far below the average for manufacturing as a whole. In fact, the chemicals sector shows
fewer jobs with increase in value addition.
Table 3. Top 10 manufacturing subsectors by weight in IIP, and their employment elasticities
and growth rates
Food processing and textiles are generally believed to be high employment generators, but
the jobs created by them per unit of growth appear to be less than those in more
employment-elastic subsectors. These sectors account for 9.6% and 8.2% of total
manufacturing sector by weight, respectively. However, their share in unorganised
employment is the highest (Goldar and Sadhukhan 2015). The growth of these subsectors has
been uneven, but both expanded at an average pace that was much faster than the overall
manufacturing index.
The subsector with highest employment elasticity in the RBI list is furniture manufacturing.
The weight of this subsector is less than 4% and its growth has been varied, declining
substantially in three of five years from 2011-12 to 2015-16, but expanding by a huge 44% in
the last financial year.
The second highest employment elasticity is found in wearing apparel, which has 11 th highest
ranking by weight. It may also be counted among the subsectors to be especially promoted,
and its growth potential is evident from the fact that in two of the last five years, it expanded
by an average of 15%.
The subsectors ‘other non-metallic mineral products’, ‘fabricated metal products’ and ‘motor
vehicles’ are promising as both their contribution to the manufacturing index and rank in
employment elasticity is high. While the first has generally grown faster than manufacturing
as a whole, the vehicles segment suffered during the low-growth years, and picked up only
over 2015-16. Fabricated metals too have not performed well with negative growth rates in
three of last five years. Given their above-average employment elasticity, these three
subsectors could be targeted in terms of policies to boost and stabilise their growth.
In terms of growth rates, it is heartening to note that the 10 subsectors with highest five-year
average growth rates, led by wearing apparel and furniture, have an employment elasticity
that is higher than average (Table 4). This may indicate that the shift to more job-creating
subsectors is underway, despite relatively lower weights.
Table 4. Top 10 fastest-growing subsectors, and their employment elasticity and weight in IIP
Rank in Ind. Sector % Employment Average annual
growth code weight in elasticity growth rate
rate manufacturing 2011-12 to 2015-
IIP 16, %
1 18 Wearing apparel 3.68 0.79 6.6
2 36 Furniture 3.97 0.89 6.2
3 35 Other transport 2.41 0.47 5.1
equipment
4 19 Leather products 0.77 0.64 5
5 27 Basic metals 15.01 0.43 4.9
6 23 Coke, refined 8.89 0.36 4.8
petroleum
products, and
nuclear fuel
7 15 Food products 9.63 0.31 3.2
and beverages
8 24 Chemicals and 13.32 -0.04 3.2
chemical products
9 17 Textiles 8.16 0.35 2.9
10 26 Other non- 5.71 0.59 2.4
metallic mineral
products
11 22 Printing and 1.43 0.56 2.3
publishing
Total 72.98 Average 4.2
0.49
All 100 0.41 1.56
manufacturing
Conclusion
It may be noted that the weightage accorded to the subsectors comprising the IIP is
undergoing revision and the new index with base year of 2011-12 is expected to be introduced
by end of 2016. Possibly, this may reveal new insights into the structure of India’s
manufacturing sector.
In this column, I find that the structure of the manufacturing sector is misaligned with the
objective of job creation. The subsectors with the highest presence, or weights, in IIP have
low employment elasticities, while the subsectors with high employment elasticities do not
figure significantly in terms of weight.
It is necessary to introduce sectoral industrial policies that synergise with India’s asset of a
large working class, and choose the right subsectors that will drive employment growth.
Global situation
Cement
With an average growth of 5% over the last year, the cement industry witnessed a significant
level of consolidation activity. All cement players remain optimistic about the Indian economy,
expecting it to grow by 7–8% over the next 12 months. While demonetisation caused a
temporary and short-term market slowdown, cement companies have bounced back and are
trying to become more agile and responsive. Only a third of the respondents spoke of increasing
their manufacturing capacity, with about two-thirds of them not planning to add employees
during the next 12 months. With the GST Bill near finalisation and adoption, the launch of
housing and infrastructure initiatives by the government and core economic growth, all players
in the cement industry expect an increase in both capacity utilisation and margins. Notable
amongst them are the significant infrastructure spend planned by the government with
initiatives like Pradhan Mantri Awas Yojana, which will continue to offer growth opportunities
to the cement industry.
Chemicals
Globally, the chemical industry grew only by 2.1% in 2016 due to low demand. The Indian
industry has fared better and company growth rates have been in higher single digits as
relatively stronger domestic consumption has ensured that Indian chemical companies enjoyed
better growth compared to their global peers. When catering to exports, companies benefit only
if China is not dominating this sub-segment and labour and technology are transferred to India.
Overall, respondents have indicated that their own growth estimates have been revised
downwards. The scope for Indian companies to refuel growth through acquisitions is limited due
to a lack of potential targets. Due to this, they are looking to find growth avenues outside their
core business through new product introductions or expansions into new geographies. Specialty
chemicals company respondents have indicated that their margin has stayed the
same/increased in the last 6–12 months, and they are confident of successful margin
management measures to at least maintain margins in the next 6–12 months. This is in contrast
to a 1–2% drop in earnings before interest, tax, depreciation and amortisation (EBITDA) margins
forecasted for 2017 in our global publication. Keeping capacity utilisation high remains a focus
rather than a strong trend towards increasing the existing capacity.
Downstream metals
The downstream metals industry is largely dominated by the steel industry. In recent years, the
steel industry has been impacted by competition from cheaper imports. Demand growth in this
sector is driven by infrastructure development and growth in the automotive, power and
cement industries. The first quarter of the year (FY17) was slow due to a weak monsoon and
rural demand. However, in the subsequent quarter, demand picked up, and with trade
restrictions on cheap imports and better cost control, leading steel players witnessed improved
and profitable performance. Margins increased for a majority of the companies—70% of the
respondents reported that their gross margins had improved in the last 6–12 months. There
continues to be a strong focus on controlling costs, especially wages and raw material costs. In
addition, while domestic prices may remain stable, exports will be dictated by oversupply and
hence lower realisations. Companies, however, have a better outlook for the future, with the
expectation that overall margins will continue to increase. Expectations on margins are largely
linked to expectations on price (including price support). Capacity additions undertaken over
the previous years are yet to be fully utilised. Therefore, market players will be very selective
while undertaking any new additions.
Packaging
The packaging industry has exhibited muted growth over the last year, with a slowdown in
industrial growth and drop in consumer demand. However, respondents are positive about
growth in the next 12 months. They consider India’s low per capita packaging consumption vis-
à-vis that of developed economies, increasing disposable incomes, growth in end-use
industries—especially packaged food—and a shift towards organised markets as the key growth
factors. The outlook for new capital investment is also positive as most companies plan to invest
in new manufacturing facilities to cater to increased demand. Going forward, packaging
companies plan to focus on driving revenue and profitability through an emphasis on exports,
improved customer service and increased production efficiencies. Further, with the
implementation of GST from 1 July 2017, the packaging industry will witness higher growth, as
demand across key end user industries is likely to increase.
Future growth
The manufacturing industry will look to focus on new products/services, R&D, IT and expanding
its facilities. This year, 52% of the respondents have stated that they will be increasing their
investment in IT compared to just 21% last year. Also, compared to 51% last year, 66% of the
respondents say they will be focusing on introducing new products/ services in the coming year.
This indicates that manufacturing companies in India are now spearheading growth through
innovation and emerging new technologies.
Conclusion
There is greater optimism about the state of the global and Indian economy compared to last
year. With its strong performance, the Indian economy has been able to instil confidence in a
larger section of business. As the industry prepares for immediate changes like the
implementation of GST and long-term improvements through Industry 4.0, the key expectation
from the government is the creation of a clear and stable policy environment that can facilitate
long-term business and investment planning