As the Indian economy is recovering from the pandemic-induced disruption, one of the biggest challenges for policymakers is to enable it to attain higher sustainable growth in the medium term. The task has become more challenging because of global headwinds. Besides, India’s own weaknesses could affect potential growth. Higher public debt, for instance, will be a drag. On the positive side, India’s corporate and bank balance sheets have improved and can support growth. It also has large foreign exchange reserves, which is helping in dealing with external pressure. While reviving growth in the medium term would be a challenge, India also needs to contend with the formidable issues of uneven distribution of growth and sustained regional imbalances. The recently released Annual Survey of Industries, which captures data for the organised manufacturing sector, once again highlighted the regional imbalance in the distribution of industries.
Uneven distribution of industry and industrial investment has implications for job creation and quality of life in general. The latest survey, which was done in 2019-20 and covered all factories using power and employing 10 or more workers as well as those not using power and employing 20 or more people, showed that Gujarat had over 20 per cent share in fixed capital. This has increased from about 15 per cent in 2012-13. The state had 28,479 factories during the period under review. Meanwhile, Tamil Nadu had the highest number of factories and employed the most number of people compared to any other state. While about 16 per cent of all factories considered in the survey were in Tamil Nadu, states such as Madhya Pradesh, Jharkhand, and Bihar had under 2 per cent share. Predictably, the number of people employed in such units is also low in these states.
To be sure, there are reasons why some states have done well in hosting manufacturing facilities compared to others. This could range from simply having a locational advantage to better administration. For instance, it is easier for factories in coastal states to import raw materials and export the final product. Although output in India is dominated by services, it’s only the manufacturing sector that can provide large-scale employment and pull people out of the agriculture sector. Although successive finance commissions have tried to reduce the regional imbalance, in general, more will need to be done. In the absence of corrective action, the gap is likely to grow over time with the concentration of productive assets, which could lead to increased social tensions. In this context, it is important to ensure free movement of labour in the country. This will allow large states to export surplus labour to states which have more factories and offer employment opportunities. It would also make those factories more competitive. Several states, however, have tried to enforce reservation for local labour, which must be avoided.
At the macro level, one of the engines for attaining higher sustainable growth could be exports. India has lagged in taking advantage of its surplus labour to become a manufacturing hub. One of the reasons for this is that India’s factories are too small to benefit from scale. As the survey also showed, among the factories considered, about 50 per cent were either classified as individual proprietorships or partnerships and engaged less than 30 people on average. It’s hard for such small firms to compete in international markets.
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