The trajectory of industrial growth in the post-reform period has presented a conspicuous divergence from the overall Gross Domestic Product (GDP) growth, as the industrial sector has struggled to keep pace with the broader economic expansion. Several factors contribute to this lag, impeding the industrial growth rate and posing challenges to achieving harmonized development. One significant factor is the inadequate infrastructure, which hampers the efficiency of industrial operations. Insufficient investment in transportation, energy, and communication infrastructure constrains the sector’s ability to scale up production and meet market demands promptly. Additionally, the regulatory environment and bureaucratic hurdles have acted as impediments to industrial growth, discouraging investment and hindering the ease of doing business.
Tag: Effects of liberalization of economy, changes in industrial policy and their effects of industrial growth.
Decoding the Question:
- In the Intro, try to write about Industrial growth in Industrial Policy of 1991 era.
- In Body,
- Discuss the constraints in Industrial growth
- Discuss new industrial policy related initiatives.
- Try to conclude the answer by writing about Make in India targets and $5 trillion economy target.
Answer:
Industrial policy 1991 set out directions for industrialisation in an economy that began its journey in liberalization. It dealt with liberalizing licensing and measures to encourage foreign investments. However, Industrial growth rate could not match the pace with the overall growth of GDP. In the post-reform period India’s GDP growth rate was on average above 6% but industrial growth rate was just around 3-4%.
Constraints for Industrial Growth: Constraints for industrial growth in India can be attributed to various factors. Here are some key constraints:
- Infrastructure Deficit: India faces challenges in inadequate infrastructure, including power supply, transportation, and logistics, which hinder industrial growth.
Example: According to the World Bank’s Logistics Performance Index (LPI) in 2018, India ranked 44th out of 160 countries, indicating areas for improvement in infrastructure and logistics.
- Complex Regulatory Environment: Cumbersome regulations, bureaucracy, and delays in obtaining approvals hinder ease of doing business in India.
Example: India’s ranking in the World Bank’s Ease of Doing Business Index improved from 142nd in 2014 to 63rd in 2019, but challenges persist in certain sectors.
- Access to Finance: Limited access to affordable credit and capital for industries, especially small and medium-sized enterprises (SMEs), hampers their expansion and growth.
Example: The credit growth to the industrial sector remained relatively subdued during the economic slowdown of 2019-2020, affecting investment and expansion plans.
- Skilled Labor Shortage: The lack of adequately skilled labor, especially in the manufacturing sector, affects industrial productivity and efficiency.
Example: According to a report by the National Sample Survey Office (NSSO), around 6% of India’s workforce was formally skilled in 2017-2018, indicating a need for skill development initiatives.
- Rigid Labor Laws: Labor laws in India are often considered rigid, discouraging industries from hiring more workers and creating employment opportunities.
Example: The inflexible labor laws have led some industries to prefer automation over hiring labor, which could potentially impede job creation.
- Inadequate Research and Development (R&D) Investment: Low investment in R&D hampers innovation and technological advancements, limiting the competitiveness of industries.
Example: India’s expenditure on R&D as a percentage of GDP was around 0.7% in 2019, which is lower than other developing countries like China and South Korea.
- Land Acquisition Challenges: Land acquisition for industrial projects can be a time-consuming process, leading to delays and increased project costs.
Example: The development of some large industrial projects has faced protests and resistance from local communities, leading to land acquisition challenges.
- Taxation and Tariff Issues: High tax rates and complex tariff structures can increase the cost of doing business and reduce competitiveness.
Example: The Goods and Services Tax (GST) introduced in 2017 aimed to simplify taxation, but certain sectors continue to face challenges related to tax compliance and rates.
Initiatives: To cope with these challenges and make Indian industries more competitive, recently Department of Industrial Policy and Promotion (DIPP) has recently introduced some changes in industrial policies, that will focus on increasing industrial growth rate in the following manner:
- Production Linked Incentive (PLI) Scheme: The PLI scheme was launched by the Government of India in April 2020. The government has allocated over INR 2.4 lakh crore (approximately $32 billion) to various sectors. The PLI scheme for the electronics sector has an allocated budget of INR 40,951 crore (approximately $5.5 billion) over five years.The PLI scheme for the pharmaceutical sector has a budget of INR 15,000 crore (approximately $2 billion) over a period of eight years.The PLI scheme for the medical devices sector has a budget of INR 3,420 crore (approximately $460 million) over a period of five years.
- National Single Window System: The National Single Window System launched in September 2021 aims to streamline the process of obtaining various clearances and approvals required to start and operate businesses in India. As per the World Bank’s Ease of Doing Business Index for 2020, India’s rank improved from 142nd in 2014 to 63rd in 2020. The implementation of the National Single Window System is expected to significantly reduce the time and effort required for obtaining approvals and licenses, improving the ease of doing business.
- Industrial Parks and Economic Zones: The government has been setting up new industrial parks and special economic zones (SEZs) to promote industrial growth and attract investments. As of 2020, India had over 240 operational SEZs, employing more than 2 million people and contributing significantly to the country’s exports. the Ministry of Commerce and Industry, the total export turnover from SEZs stood at approximately USD 80 billion in the financial year 2019-2020.
- Atmanirbhar Bharat Abhiyan (Self-Reliant India Initiative): Launched in 2020, the Indian government announced an economic package worth INR 20 lakh crore (approximately $266 billion) to support various sectors and revive the economy during the COVID-19 pandemic and including electronics, pharmaceuticals, and medical devices, with an allocation of INR 1.97 lakh crore (approximately $26 billion).
- New Labor Codes: The new labor codes, including the Industrial Relations Code, the Occupational Safety, Health and Working Conditions Code, and the Social Security Code, aim to provide a more conducive environment for industrial growth and investment.India’s ranking in the World Bank’s Ease of Doing Business Index improved from 142nd in 2014 to 63rd in 2020. According to the Economic Survey 2019-2020, India’s labor force participation rate declined from 55.9% in 2017-18 to 49.8% in 2019-20. According to a survey by the International Labour Organization (ILO), India had over 10,000 strikes and lockouts in 2019
- Make in India: The Make in India campaign aims to promote manufacturing in India and position the country as a global manufacturing hub. The initiative has led to increased foreign direct investment (FDI) inflows into the manufacturing sector. In 2020, India received over $74 billion in FDI, a significant portion of which went into manufacturing projects.
- National Infrastructure Pipeline (NIP): The NIP is a strategic initiative aimed at boosting infrastructure development, including industrial infrastructure, to support economic growth and industrial expansion. The NIP involves investments of over INR 100 lakh crore (approximately $1.3 trillion) across various sectors during the period 2020-2025. During the fiscal years 2020 to 2025, sectors such as Energy (24%), Roads (19%), Urban (16%), and Railways (13%) amount to around 70% of the projected capital expenditure on infrastructure in India.
Conclusion:
- Therefore, to make India a global manufacturing hub and increase exports oriented manufacturing the need is to focus on constant evolutions of policies which create the most favorable business environment to attract and make Indian manufacturing most competitive in the world. To achieve $ 5 trillion economy and increase manufacturing contribution in GDP to 25% then it is imperative to continuously remove the challenges in the way of achieving these targets.
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