Boosting India's manufacturing growth

The manufacturing sector’s health is critical to India's journey towards development as it creates wealth and brings prosperity. It is, therefore, essential for the Government to create more jobs and facilitate ease of doing business, write Ravindra Ojha and Prem Vrat

The growth of the manufacturing sector is critical for India’s journey towards development as it creates wealth and brings prosperity. Research findings revealed that there are eight significant drivers to the growth of the manufacturing sector represented in the acronym ‘Triger’ — Technological interventions; reforms in labour laws and skill levels; infrastructural growth and investments; good governance; education quality; and resource management.

An understanding of the ingredients of good governance has seen a rise since the 1990s so much so that today, it has become a major player in analyses of what’s missing in the countries’ struggle for development in various areas like political, economic, social and technological growth. Manufacturing growth has in fact been warranting improvement in various ingredients of good governance: Government effectiveness, ease of doing business, manufacturing attractiveness, better labour and asset productivity, technology-driven investments, macro-economic indicators and political stability.

The six most cited governance indicators — voice and accountability, political stability, Government effectiveness, regulatory quality, rule of law and control of corruption — continue to garner focus. Per capita income and quality of governance are strongly and positively correlated. Good governance is, however, negatively correlated to the crime rates across countries.

Ease of doing business gained significant importance in accelerating manufacturing growth through foreign direct investment (FDI) in India. Ten areas defined by a World Bank Annual Report 2016 on ease of doing business needing focus are: Starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

Based on system dynamics simulations, to get some useful insights of the impact of good governance on manufacturing, the NorthCap University made four recommendations:

• Government effectiveness is primarily driven by three factors: Political stability, capacity of the Government to implement reform-related decisions and macro-economic health of the nation. A combined effect of these three factors has a significant effect on the behaviour of Government effectiveness. This should be on the radar of our policy-makers and business planners. The ‘transforming India’ drive of the Government, coupled with Sabka saath sabka vikas approach is expected to provide the desired traction.
• Growth in manufacturing output will facilitate healthy rate of job-creation. This must, however, be aligned to the employment of skilled workers produced annually from educational institutions. Job-creation rate has a high impact on political stability which in turn impacts the manufacturing growth rate significantly. Skill India initiative must be effectively aligned for ensuring creation of quality jobs.
• A consistently average annual manufacturing output growth rate of seven per cent over a period of 15 years is realistic for India and should be the target of our policy-makers, planners and manufacturing leaders. The Make in India drive can facilitate this goal.
• Productivity, FDI and private investment impact manufacturing growth rate. Improvement to these depends on Government effectiveness, rank in ease of doing business and corruption index. The Government ought to focus on these factors to give a push to manufacturing growth. These recommendations reinforce intuitive perceptions as well.

In summary, the two take aways for our policy-makers are: First, there is a need to leverage growth in manufacturing output to improve trends in job creation. Attempts must be made to absorb skilled workers. Otherwise an increasing trend of unemployed workers in a diversely populated country like India can lead to political instability. Second, there is a need to enhance Government effectiveness in reform-related decision-making process and ensuring a good macro-economic health. Focus ought to be on improving the rank in ease of doing business and in providing a corruption-free business environment.

(Ravindra Ojha is director, School of Engineering and Technology and Prem Vrat is pro-chancellor, the NorthCap University)