78 Years of Freedom
The Narendra Modi authorities’s quest to bolster the home manufacturing sector just isn’t the primary time a authorities has tried this. In reality, the manufacturing sector has been the main target of presidency coverage — in come what may — ever since 1956, to comparatively modest success.
At the time of Independence or thereabouts, the Indian economic system regarded very completely different from its present state each in phrases of dimension in addition to composition. At the time, agriculture was the overwhelmingly dominant driver of the economic system, contributing about half of the nation’s Gross Domestic Product (GDP), as per information with the Reserve Bank of India.
The nascent manufacturing sector, alternatively, made up about 11% of the GDP. Now, the providers sector has taken over the dominant position vacated by agriculture, whereas manufacturing has remained largely the place it was.
The first Five Year Plan (1951-56) centered on the concept of accelerating home financial savings, because it was presumed that larger financial savings would immediately translate into larger investments. This coverage, nonetheless, ran right into a basic downside: investments couldn’t materially enhance because the nation didn’t have a home capital items producing sector.
The second Five Year Plan (1956-61), primarily based on the concepts of PC Mahalanobis, and successive Plans sought to deal with this by growing investments in the capital items producing sectors themselves. The thought was to enhance authorities funding in capital items manufacturing, whereas the micro, small, and medium enterprises (MSMEs) would cater to the patron items market.
As the economist and professor Aditya Bhattacharjea famous in a paper revealed in Springer Nature: “With long-run growth being seen as the means for reducing widespread poverty, the model provided an intellectual justification for increasing investments in the capital goods sector of a labour-abundant country.”
So, what adopted was that progress charges of each funding in and output of the equipment, metals, and chemical compounds industries outpaced these of shopper items industries.
The Mahalanobis mannequin didn’t incorporate particular industry-wise insurance policies, nevertheless it had a number of broad themes that got here to characterise India’s industrial coverage over the nation’s first three many years since Independence.
The first and most blatant theme was the large position of the general public sector. The feeling on the time was — not not like what the Modi authorities felt in the wake of the COVID-19 pandemic — that personal sector funding wouldn’t be choosing up the load for a while, and so the general public sector would have to do the heavy lifting.
The 1948 Industrial Policy Resolution (IPR) reserved the manufacturing of arms and ammunition for the Union authorities, and new investments in sectors as various as iron and metal, plane, ships, phone, telegraph and wi-fi gear have been stored because the unique area of central public sector enterprises.
The 1956 IPR, which got here after the historic Avadi session of the Indian National Congress in 1955, expanded the reserved record to 14 sectors. The driving ideology was that the federal government and the general public sector would assume the “commanding heights” of the economic system.
The second and equally important theme of this thought course of was using licensing as a method to make sure that scarce sources have been allotted to precedence sectors.
Third, the idea was that the home {industry} would wish to be protected against worldwide competitors, and this safety took the type of excessive tariffs — one thing U.S. President Donald Trump appears to have an issue with even at this time — and import licensing.
By 1980, the share of manufacturing in India’s GDP had grown to about 16-17%. According to some economists like Pulapre Balakrishnan, the actual progress in the manufacturing sector took off from right here, and never from the 1991 liberalisation, as is usually assumed.
This, they stated, was due to a number of coverage adjustments enacted by the federal government of the time: permitting up to 25% automated growth of licensed capacities, permitting manufacturing licences to be used to produce different objects throughout the similar broad industrial class, and important rest of value controls on cement and metal.
The 1991 reforms and the resultant finish of the ‘licence raj’, the opening up of the economic system to the non-public sector and worldwide competitors additional helped issues, with the manufacturing sector rising strongly and contributing a gradual 15-18% of a rapidly-growing GDP until about 2015.
Steep fall
That 12 months noticed a marked change, nonetheless, with the share of manufacturing in GDP constantly falling for the following decade. A serious cause for this alteration was the non-performing property (NPA) disaster in the banking sector. Profligate lending by banks in the 2009-14 interval led to a build-up of unhealthy loans, which got here to mild in 2015-18 following an Asset Quality Review of the banking sector. Such was the disaster and its fallout that financial institution lending to giant {industry} just about dried up.
This, coupled with the loan-fuelled over-capacity that had been created in the course of the 2009-14 interval meant that corporations didn’t want to make investments in further capability to meet demand, and couldn’t discover ample credit score even when they wished to make investments.
Underpinning all of this was the elevated reliance on imports from China, which just about transformed giant components of Indian manufacturing into meeting and repackaging items. Of course, the COVID-19 pandemic additionally severely hampered each demand and investments in India.
The Modi authorities’s Make in India efforts, thus, couldn’t stop the share of manufacturing in GDP falling from 15.6% in 2015-16 to 12.6% in 2024-25 — the bottom share in 71 years.
Another downside confronted by the Modi authorities, one thing all earlier governments additionally confronted, was that plenty of the reforms to drive manufacturing have been wanted on the State degree. So, whereas the Union authorities has put in place the framework for land and labour reforms that might probably enhance the size of Indian manufacturing, they’re held up as most State governments will not be cooperating.
The providers sector, alternatively, has gone from power to power on the again of the IT growth. So, the place providers made up 37% of the GDP in 1950, this grew to 42% by 1996-97. Thereafter, the acceleration was fast, with the sector now making up practically 58% of the GDP.
So, 78 years after Independence, the manufacturing sector stays an also-ran in India’s progress story, regardless of fervent makes an attempt by authorities after authorities. The providers sector, alternatively, has blossomed exterior the federal government’s focus.
