Building on the revival of the manufacturing sector

‘Extending PLI incentives to labour-intensive sectors could unlock new growth frontiers’
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India’s journey to becoming a global manufacturing hub has gained momentum with the government’s strategic policy initiatives, particularly the Production Linked Incentive (PLI) scheme. This scheme has been instrumental in transforming the manufacturing landscape in sectors such as mobile manufacturing, electronics, pharmaceuticals, automobile, and textiles, among others, through enhanced production, exports and job creation.

The scheme’s impressive performance has been mirrored by the results of the Annual Survey of Industries (ASI) for 2022-23, released recently, which reveals a positive correlation between PLI scheme incentives and sectoral performance. In the ASI data, manufacturing output registered a robust growth rate of 21.5%, while gross value added (GVA) grew by 7.3%. This expansion comes on the back of the PLI scheme’s success, showcasing that many sectors benefiting from the scheme have performed particularly well. Basic metal manufacturing, coke and refined petroleum products, food products, chemicals and chemical products, and motor vehicles — many of which are covered under the PLI scheme — collectively contributed 58% to the total manufacturing output and registered an output growth of 24.5% in 2022-23.

Recovery of the manufacturing sector

ASI surveys are a vital source of data on the registered, organised manufacturing sector in the economy. They include factories with 10 or more workers using power, and those with 20 or more workers, without power. The results of the ASI 2022-23 show a healthy double-digit expansion in the growth rate of manufacturing sector output — at 21.5% — despite a high base of 2021-22 which saw a sharp rebound as the economy emerged from the COVID-19 pandemic-induced slump. The impressive growth in output and value added in 2022-23, as compared to the pre-pandemic period, indicates that the manufacturing sector is slowly but steadily turning the corner after the disruptions in recent years.

The performance of the manufacturing sector shows that the stage is set for India to become a global manufacturing powerhouse. However, strong reforms are needed to fully capitalise on the manufacturing potential.

The success of the PLI scheme underscores the need to expand its scope beyond the traditional industries where manufacturing activity is concentrated. Extending PLI incentives to labour-intensive sectors such as apparel, leather, footwear and furniture, as well as sunrise industries such as aerospace, space technology and MRO could unlock new growth frontiers. There are also sectors with high import dependency but untapped domestic capabilities such as capital goods. This can help in reducing vulnerability to global demand fluctuations and supply chain disruptions. Promoting green manufacturing and incentivising research and development in advanced manufacturing technologies can further enhance India’s manufacturing competitiveness.

The striking gap between manufacturing output growth (21.5%) and GVA growth (7.3%) — as the ASI data show — is largely driven by soaring input prices, which surged by 24.4% in 2022-23. This divergence suggests that while production volumes are rising, industries are grappling with elevated input prices, which have eroded their value addition. With bulk of the inputs being imported, it is pivotal to bring down their landing costs in the country. To bring this to fruition, a more streamlined import regime that simplifies tariffs into a three-tier system, with 0 – 2.5% for raw materials, 2.5% – 5% for intermediates, and 5% – 7.5% for finished goods, could help mitigate these input costs, enhance competitiveness, and improve India’s integration into global value chains.

A concentration of industrial activity

The regional imbalance in manufacturing activity, with Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Uttar Pradesh, collectively accounting for over 54% of total manufacturing GVA and 55% of employment, highlights the concentration of industrial activity in a few States. This regional imbalance not only hinders equitable development across the country but also limits the sector’s overall growth potential. For India to fully capitalise on its manufacturing capacity, it is essential for States to be an active participant in India’s growth story by implementing the fundamental factor (market reforms) in areas such as land, labour and power in addition to developing infrastructure, and promoting investments.

Focus must move to MSMEs and women

For manufacturing to serve as a true catalyst for inclusive growth, special attention must be given to micro, small and medium enterprises (MSME) and increasing women’s participation in the workforce. MSMEs contribute around 45% of India’s manufacturing GDP and employ about 60 million people. Tailoring PLI incentives to accommodate MSMEs, by lowering capital investment thresholds and reducing production targets, would empower these enterprises to scale up, innovate and integrate more effectively into value chains.

Enhancing female workforce participation is an untapped opportunity for boosting manufacturing growth. The World Bank’s latest South Asia Development Update estimates that India’s manufacturing output could rise by 9% if more women join the workforce. Developing supportive infrastructure such as hostels, dormitories, and childcare facilities near factories could significantly boost women’s participation in manufacturing, driving output and inclusive development.

To transform the Indian economy into a developed economy by 2047, the manufacturing sector ought to play a critical role. As in the CII’s own estimations, its share in the GVA has a potential to rise from the current 17% to over 25% by 2030-31, and to 27% by 2047-48 if sustained efforts to boost domestic manufacturing capabilities and domestic value addition continue. Apart from boosting its competitiveness by improving ease of doing business and bringing down cost of doing business, seizing the current moment by leveraging on the slew of policy measures will be imperative for the manufacturing sector.

Chandrajit Banerjee is Director General, The Confederation of Indian Industry