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Analysis of Trends in the Manufacturing Growth in Last Five years

(2006-07 to 2011-12)

Jitender Singh Assistant Director

Research Studies Office of the Economic Adviser

Department of Industrial Policy and Promotion Ministry of Commerce & Industry

Udyog Bhawan, New Delhi India

March, 2013

Views expressed in this paper are those of the author(s) and may not be attributed to the Government of India.

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Acknowledgement

This study w ou ld not h ave been pos s ib le w ithou t Dr. Man ju la Kris hn an Principle Adviser, w ho w ith her k ind coopera tion , active s uperv is ion and s tead fas t s upport h as made this research work reality.

I am extrem ely gra tefu l to Mrs . Ad iti S . Ray , S en ior Ad v is er, S hri. S rik ara Naik , Econom ic Ad vis er, Dr. Moh an Chu tan i, Econom ic Ad vis er, an d S hri S .S . Das Ad d l. Econom ic Ad vis er w hos e k een con tinuous encouragem en t and s ugges tions he lped to com ple te th is w ork .

Place:

Date: Jitender Singh

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CONTENTS

SN

Subject Pg. No.

I. INTRODUCTION 4 -6

Current Economic Situation a Macro Scenario 4

International scenario 5

Structural Transition of economic activities 6

II THE EVOLUTION OF INDUSTRIAL STRUCTURE IN INDIA THROUGH THE PRISM OF PLANNING

7 -17

Overview of the Industrial Policy 7

Overview of the Planning

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Strategy and Key recommendations included 16

III TRENDS IN MANUFACTURING SINCE INDEPENDENCE 18-20

Phases of growth in manufacturing in India since independence 18

Post 1991- Paradigm Shift in Industrial Policy and Manufacturing 19

Structural changes in manufacturing 19

IV MANUFACTURING TRENDS IN THE LAST FIVE YEARS - 2007-08 to 2011-12 21-25

Index of Industrial Production (IIP) 21

Trends in Growth of Eight Core Industries 23

Trends in Employment in Manufacturing 24

V FACTORS AFFECTING MANUFACTURING GROWTH 26-38

Investment 26

Investment Intentions 27

Foreign investment 28

Inflation in Manufacturing Sector 28

Monetary Policy 29

Trends in Deployment of Gross Bank Credit (GBC) 29

Fiscal policy & Industrial Growth 32

Quality Standards & Manufacturing Growth 33

Trade Policy and Industrial Growth 34

Labour preferences and Manufacturing 37

Conducive Business environment 38

VI INITIATIVES TO BOOST MANUFACTURING IN THE LAST FIVE YEARS 39-44

National Manufacturing Policy 39

Delhi Mumbai industrial corridor (DMIC) 40

Promotion of Business environment 42

Other Ministries engaged in manufacturing 44

VII

ROAD MAP TO BOOST MANUFACTURING 45-49

Skill Building and human resource development 45

Shifting employment from informal sector to manufacturing 45

Enabling jobs/ employment 46

Supporting Unorganized Sector 46

Technology upgradation, systems for transfer of technology, incentivizing and green production and R&D 46

Credit Access 47

Exploring new areas of manufacturing - Defence offsets 47

Domestic production capital goods core investment 47

Suggested measures to be taken by Ministries/ Departments engaged in manufacturing 47

Systems for convergence, monitoring and tracking 48

Promotion of Business environment 48

Business regulatory framework 48

Boosting Manufacturing Export 49

Reforming the role and management of Public Sector Enterprises (PSEs) 49

Others (including policy measures) 49

Schemes for the Manufacturing Growth implemented by Ministries/ Departments 50-58

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SECTION-I

INTRODUCTION

Current Economic Situation a Macro Scenario

The global slowdown in 2008-09 has caused the GDP growth in India to moderate from 9.3% in 2007-08 to 6.5 % in 2011-12 as shown in table-1.

Table-1. Rate of growth of GDP and its Sectors (average annual %)

1950-92 1992-97 1997-2002 2002-07 2007-08 2008-09 2009-10 2010-11 2011-12 Agriculture 2.44 4.72 2.43 2.34 5.8 0.1 1.0 7.0 2.8 Industry 5.31 7.29 4.29 9.18 9.7 4.4 8.4 7.2 3.4 Manufacturing 5.17 9.42 3.31 8.57 10.3 4.3 9.7 7.6 2.5 Services 4.96 7.28 7.87 9.37 10.3 10.0 10.5 9.3 8.9 GDP at factor cost 3.95 6.54 5.51 7.8 9.3 6.7 8.4 8.4 6.5 Share of Industry 21.6 25.9 25.7 26.1 28.7 28.1 28.1 27.8 27.0 Share of Manufacturing 12.6 15.2 15.2 15.1 16.1 15.8 16.0 15.8 15.3 Source: Central Statistics Office (CSO)

2. The sectoral picture shows that the decline has been mainly on account of industry and manufacturing. Manufacturing growth rate reduced from 10.3 % in 2007-08 to 2.5 % in 2011-12 The major reasons attributed for this can be attributed to factors like decline in external demand, euro zone crisis, moderation in domestic demand, inflationary pressure, rising input cost etc . In comparison, Services sector which was expected to be also affected, (primarily because services export from India is mainly concentrated to crisis ridden countries), however did show more resilience compared to manufacturing sector, with a relatively lower growth decline

from 10.3 % in 2007-08 to 8.9% in 2011-12.

3. This is not the first time when the global business cycles have directly affected Indian economy and particularly the manufacturing sector; similar trends were recorded during East Asian crisis, 1997. With the growing levels of globalization and increasing interdependence of markets and capital flows, business cycles which advanced countries are periodically subject to are also increasingly impacting the Indian economy, especially the manufacturing and exports.

4. The question arises as to why global slowdown should so severely impact manufacturing in spite of fundamental strengths possessed by the country- strong demographic dividend, large domestic market base, well regulated monetary system etc.? The reasons include constraints and shortcoming in areas like infrastructure, skill development, growing fiscal deficit due to high levels of subsidies, R& D, laws and regulation in sectors like environment, labour, land etc.

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Tight monetary policy and liquidity squeeze with high rates of inflation which touched double digits through most of 2011-12 also contributed to the problem.

5. The services activities did better as they were not constrained by these above factors to the extent manufacturing were impacted. Also the revolution of Information Technology & Communication (ITC) in past two decades facilitated global services outreach. The lower sink cost and relatively less requirement of working capital, to some extent too helped overcome the credit constraints and initial investment requirements. Besides, swelling labour force became a reserve pool for supply cheap labour to service sector especially with easy entry and exit mechanisms. However, if the current economic situation persists, it is possible that the services sector would also probably face similar constraints, which will pull its growth down.

International scenario

6. Table 2 below gives the share of industry and manufacturing value added in GDP and share of industry in total employment across a few countries.

Table 2. Share of Industry and Manufacturing in GDP and Employment in industry

Countries Industry, value added (% of GDP)

Manufacturing, value added (% of GDP)

Employment in Industry (% of total employment)

Thailand 45 36 20

China 44 31 27

Korea Repu. 39 31 17

Malaysia 44 26 27

Japan 27 19 25

Sri Lanka 28 17 25

Brazil 28 15 22

Pakistan 25 15 20

India 26 14 22 US 20 13 17

Indonesia 45 11 19

Bangladesh 29 10 15

Note-Figures are ranging from 2009-2011

Source: World Bank

7. As seen from the table-2, manufacturing value added of GDP is 14 % in India compared to 13% in United States and 31 % in China. (Even though the percentage share of manufacturing value added in US is lower, in absolute terms, the value of manufacturing in US in 2010 is $1771 billion compared to $ 228 Billion in India). The share of employment in industry as percentage of total employment is 22% in India as compared to 27 % in China. The share of employment in industry is 17 % in United States , on account of the fact that the manufacturing workforce tends to get smaller and highly skilled as manufacturing evolves into a more technology intensive

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sector. Also significant amount of outsourcing of jobs as well as investments in different countries have kept the employment share in manufacturing at lower level.

Structural Transition of economic activities

8. One of the most stable views in economic literature is the structural shift of economic activities during the development process, defined by the relative sectoral shares of employment. As evidenced from Table-2 above, it is found that normally, there is a transformation of the economy in terms of relative share of the sectors from Agriculture to Industry and eventually to Services. For example in United States the share of employment in agriculture is as low as 1.6 % as compared to about 17% % in Industry and 81 % in Services. The main derivers of this transformation are many, including the impact of technological innovation, income elasticity of demand and shift in comparative advantage in international trade. Table-3 below shows that structural transition of economic activity of India, China and the US.

Table 3. Sectoral Employment Share India China US

Sectors 1994 2010 1994 2008 2010 Agriculture 61.9 51.1 54.3 39.6 1.6 Industry 15.7 22.4 22.7 27.2 16.7 Services 22.4 26.5 23.0 33.2 81.2 Source: World Bank

9. As seen from the table-3, China has successfully brought down the share of employment in agriculture from 54.3% in 1994 to 39.6% in 2008 compared to 61.9 % and 51.1 % for India between 1994 and 2010. Meanwhile employment in manufacturing in China has risen to 27% and services to 33%. This shows that in the transition of economic growth, India has not been able to fully capture the economic gains to build a strong manufacturing base to enable employment to shift to industry in large numbers from agriculture.

10. In this context , when the applicability of the Lewis turning point is analyzed for India and China, it has been widely agreed that China has been able to reach this turning point, as it appears that excess labor in the subsistence sector is fully absorbed into the manufacturing sector, and further expansion of this sector is likely increase wages. This could be prove to competitively advantageous to India which has a large pool of cheap labour as transition from rural to urban, and agriculture to industry is ongoing , as over 50 % are still employed in agriculture. However constraints like lack of appropriate skill sets and availability of a large manufacturing base prevents transfer of surplus labour to manufacturing Also, the existence of a large unorganized/ informal manufacturing in the rural sector and safety net schemes like NREGA and other subsidies to agriculture, lessens the inducement for urban migration.

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SECTION

II

THE EVOLUTION OF INDUSTRIAL STRUCTURE IN INDIA THROUGH THE PRISM OF PLANNING

Overview of the Industrial Policy

11. India started her quest for industrial development after independence in 1947. The industrial backwardness of Indian economy was evident as only 6.6 % of the national income was earned by Factory Establishments, employing just 1.8 % (i.e. about 2-4 million) of the total of the working population of the country in 1948-49. The Industrial Policy Resolution of 1948 marked the beginning of the evolution of the Indian Industrial Policy. The Resolution not only defined the broad contours of the policy; it delineated the role of the State in industrial development both as an entrepreneur and as an authority. Successive policy resolutions also reiterated this basic tilt in favour of the public sector. The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the economy. It categorised industries, which would be the exclusive responsibility of the State or would progressively come under State control and others. Earmarking the pre-eminent position of the public sector, it envisaged private sector co-existing with the State and thus attempted to give the policy framework flexibility.

12. Since then, the industrial development in the country, in terms of industrial policy and the framework has seen many changes befitting the growing globalization and liberalization of the economy. Besides, industry being in Concurrent List of the Constitution, a simultaneous effort is also made in this direction by the respective State Government. The industrial policy has been deeply embedded into the Five Year Plan (FYP) framework for the industrial development.

13. India s strategy for industrial development witnessed a paradigm shift in 1991. Industrial development until then was largely based on product market regulations, with capacity licensing being its principal instrument. Though this strategy had successfully created an industrial base, it had encouraged rent seeking to a considerable extent. There were limited incentives for product innovation and for a competitive push. Economic reforms initiated in 1991 gradually removed these product market licenses. The new industrial development strategy, therefore, envisaged a significantly bigger role for private initiatives.

14. Industrial Policy since 1991 has been more for facilitating the industrial development rather than anchoring it through permits and controls. Industrial licensing has, therefore, been abolished for most of the industries and there are only 5 industries related to security, strategic and environmental concerns where an industrial license is currently required:

i. Distillation and brewing of alcoholic drinks; ii. Cigars and cigarettes of tobacco and manufactured tobacco substitutes;

iii. Electronic aerospace and defence equipment: all types;

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iv. Industrial explosives including detonating fuses, safety fuses, gunpowder, nitrocellulose

and matches; v. Specified Hazardous chemicals i.e.(i) Hydrocyanic acid and its derivatives, (ii) Phosgene

and its derivatives and (iii) Isocyanates & disocyanates of hydrocarbon, not elsewhere specified (example Methyl Isocyanate)

15. For all other industries, a non-SSI entrepreneur is to file an Industrial Entrepreneurs Memorandum (IEM) to the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy & Promotion (DIPP). Along with the removal of the industrial licensing, reform has also been initiated in areas of reservation of products for exclusive production in the small scale sector. Consistent with the policy of liberalization of domestic industry, the numbers of industries reserved for public sector have also been reduced. Presently there are only two areas which are reserved for public sector viz. Atomic Energy and Rail Transport.

First Five Year Plan (1951-56)

16. Lewis economic growth framework guided First Five Year Plan, where an economy transforms gradually from a low productivity sector (i.e. Agriculture) to a relatively high productivity sector (i.e industry) The first Five Year Plan (FYP) recognized the linkages between Industry and Agriculture sectors . Agriculture could serve industry in terms of sharing its surplus labour force, producing raw material and consuming a part of industrial production. On the other hand the higher productivity in Industry had the potential to generate relatively more savings than Agriculture, which could be further invested.

17. The dominant strategy was guided by Industrial Policy Resolution of 1948 which devised a dual ownership pattern, Public and Private, for the industries and a pattern of industrialization which emphasized on capital goods industries and consumer goods industries. The Industrial (Development & Regulation) Act, 1951 listed 37 industries in its first schedule.

18. As per index of industrial production, the progress of industry during the first five year plan could be counted as satisfactory, though, it did not achieve the requisite objectives, priorities and levels of capacity and production which had been envisaged for different industries when the plan was drawn up.

Second Five Year Plan (1956-61)

19. The first plan period was used as a preparatory work for studying a wide range of problems relating to markets, availability of raw materials and fuels, choice of processes, costs of production and the building up at different levels of the technical and managerial experience required for running undertakings, to give a big push for large-scale industrial development especially heavy industries. This could not be possible without foreign technical assistance for the development of a number of industrial big projects.

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20. The Industrial Policy, 1948 was revised as Industrial Policy, 1956, and gave the States greater responsibility for development of industries. The new policy was to speed up industrialization and, in particular, to develop heavy industries and machine making industries, to expand the public sector, and to build up a large and growing co-operative sector.

21. The industries that got priority were iron and steel, heavy chemicals, including nitrogenous fertilizers, and heavy engineering and machine building industries. Besides, the capacity expansion was envisaged in developmental commodities and producer goods such as aluminum, cement, chemical pulp, dyestuffs and phosphatic fertilizers, and essential drugs. In addition priority was given modernization and re-equipment jute and cotton textiles and sugar.

22. The first two Plans could be considered as a turning point in industrial development in India because of its thrust for building a strong industrial base along with diversification of industry. Besides completing three new steel works, each of one million tons capacity in the public sector and two existing steel works in the private sector , the foundation was also laid down for heavy electrical and heavy machine tools industries, heavy machine building and other branches of heavy engineering, and the production of machinery for the cement and paper industries.

Third five Year Plan (1961-66)

23. The third plan s thrust was to lay the foundation for further rapid industrialization over the next 15 years with focus on basic capital, and producer goods industries and special emphasis on machine building programme accompanied by acquisition of related skills, technical know-how and designing capacity. Besides, the focus was on to increase production of major basic raw materials and producer goods like aluminium, mineral oils, dissolving pulp, basic organic and inorganic chemicals and intermediates inclusive of products of petrochemical origin.

Fourth Five year Plan (1969-74)

24. Industrial progress had been uneven during Third Plan and the subsequent Annual Plans mainly due to low rates of growth in textiles and food industries, metals and machinery industries. The hostilities in 1965 and the two successive droughts, shortage of raw materials and components arising from the pause in external aid in 1965 were responsible for the distortions in business environment. The two year agricultural drought caused a considerable decline in savings, investments and purchasing power, along with shortage of raw material for agro-based industries. The deficiency of demand in the wake of agriculture drought, especially at the time when a substantial capacity in industries had been added, accentuated the problem of unutilized capacity in many industries and more particularly in the capital goods industries.

25. Based on the review of the industrial performance during Third FYP , a modified approach for the industrial development was strategized in the Fourth FYP with three objectives-

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one to achieve speedy self-reliance, second, dispersed industrial development, and third, avoidance of technological un-employment among the workers in traditional industries under the impact of unregulated spread of capital intensive modern technology during the period of transition. In other words, the thrust was to correct imbalances in the industrial structure and optimize the utilization of capacity already built.

26. A review of the licensing system was done to accelerate industrial development and improve administrative efficiency. The Industrial Licensing Policy Inquiry Committee recommended that the licensing should be confined to industries which come within the basic, strategic and critical sectors, for which detailed industry plans should be prepared, and where the major inputs would have to be assured and the targets implemented.

Fifth Five Year plan (1974-79)

27. This plan period witnessed inflationary pressures build up and the worsened balance of payment position on account of steep rise in the prices of imported oil and other materials. Food articles and industrial raw materials accounted for about two-third of the price increase.

28. The industrial growth low fell to as low as 2.5% during 1974-75 and 5.7% during 1975-76 especially in industries like passenger cars, consumer durables and cotton textiles though the basic industries like steel, coal, cement, non-ferrous metals and power generation fared better.

29. Efforts were made to decontrol licensing to revive industrial growth, whereby 21 industries including cotton spinning, basic drugs and industrial machinery were delicensed, 29 selected industries including foreign and MRTP companies were permitted to utilise their installed capacity without limit. Besides, to promote exports of engineering goods, 15 engineering industries were allowed to set up units.

Sixth Five Year Plan (1980-85)

30. Industrial production during first thirty years 1950-1980, was reviewed and it was found that industrial production had increased about five times, with a diversified industrial structure. The average growth rate has been about 4 % per annum during 1970-71 to 1979-80. The major constraints identified includes infrastructural requirements and other vital inputs (such as power, transport, coal, cement), unremunerative administered prices, disturbed industrial relations and to an extent inefficient management during this period.

31. The Industrial Policy Statement of July, 1980 emphasized on improving efficiency and productivity in the industrial sector through optimum utilization of existing capacity. The technological improvements and labor productivity become forefronts for capacity creation.

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Seventh Five Year Plan (1985-90 - ) - paradigm of change the advent of liberalization

32. The major issues faced by industry during the Sixth Plan included power shortage, prolonged labour unrest and insufficient demand in the case of textiles, raw material shortage in the case of jute manufactures, scarcity of coking coal in the case of steel and inadequate availability of the appropriate quality of steel in the case of a number of steel using industries were assigned the major reasons.

33. The main strategy in the Seventh plan was on restructuring of industry by enabling shift from traditional industries to basic metals, fertilisers and industrial manufactures with an increasing share for the emerging technology intensive industries; efficient use of capital; improving infrastructural facilities: modernisation and upgradation of technology and improving productivity. In order further boost the symbiotic and complementary relationship between public and private sectors as visualized in the Industrial Policy Resolution of 1956, public sector investments in infrastructure were expected to provide inputs and facilities as well as markets for private manufacturing and encourage involvement of the private sector for the development of 'sunrise' industries such as telecommunications, computers, microelectronics, ceramic composites and biotechnology. It was also felt that the time had come to inject an element of competition within the public sector and in certain cases with the private sector.

Eighth Five Year Plan (1992-97)

34. The major initiatives undertaken during the Seventh FYP enabled an annual industrial sector growth rate of 8.5% which was much higher than the 3.5% achieved during the Sixth Plan. The growth rate for manufacturing sector was as high 8.9 %.

35. The factor that boosted the industrial growth during Seventh FYP were significant improvements in the performance of the infrastructure viz., power, coal, etc., changes in the area of licensing and procedures; import of technology; higher import of capital goods; better utilisation of installed capacities; and allowing broad banding of products in a number of industries.

36. The liberalisation measures taken during Seventh FYP included raising the assets limit for exemption to companies from the purview of MRTP Act; exempting 83 industries under the MRTP Act for entry of dominant industries; grant of exemption from licensing for industrial units with an investment of upto Rs.50 crores in backward areas and Rs.15 crores in other areas on the basis of a negative list; and delicensing non-MRTP, non-FERA companies for 31 industry groups and MRTP/FERA Companies in backward areas for 72 industry groups.

37. A series of reforms in the industrial, fiscal, trade and foreign investment policies set the path for globalization to de-regulate and allow industry to adjust to the changes in internal as

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well as external environment and meet the needs of a dynamic market, to optimize its operations and improve its competitiveness.

38. There was less emphasis on quantitative targets and the planning became more "indicative" with the shifting to modifications in industrial, trade, fiscal policies and changes in duties and taxes rather than through quantitative restrictions on imports/exports or licensing mechanism.

39. The new Industrial Policy of July 1991 further shifted the paradigm of industrial development by reducing the role of public sector to 8 industries from earlier 29, concentrating on basic and core sectors which were important strategy, security etc.. These reforms were expected to enhance competitiveness, by improving comparative advantage, increase the scale of the companies, and allow greater integration of indigenous production with outside. Joint ventures were allowed to exploit the complementarities of resource endowments in this country and the concerned foreign country.

Ninth Five Year Plan (1997-2002)

40. The beginning of liberalization of policy measures started in 1985 continued during the Ninth five year Plan. A review of the major reforms undertaken during the Eighth plan is given in the Box.

Industrial Policy Reforms and major Initiatives

Number of industries requiring industrial licenses reduced to 6 only 4 industries 0reserved for Public sector

Foreign direct investment policy liberalized

Disinvestment Commission constituted for preparing an overall long term disinvestment programme for PSEs referred to it and the modalities for disinvestment.

Sick Industrial Companies Act (SICA), 1985 amended to bring PSEs within the ambit of SICA,1985 and BIFR

National Renewal Fund set up to protect the interest of workers likely to be affected due to restructuring or closure of industrial units

Growth Centres Scheme taken up to develop infrastructure in backward areas to promote industrialisation

To promote development of specific hilly, remote and inaccessible areas, Transport subsidy scheme extended till March, 2000

Drugs Price Control Order amended to give freedom to private sector including fixation of drug prices Number of drugs under price control reduced from 143 to 72

New National Minerals Policy announced opening Mining industry to private sector including 50 % foreign equity in 13 minerals

Technology Development Board set up to facilitate development of new technologies and assimilation of imported technologies

Source: Planning Commission

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41. The industrial growth was 7.3 % during the Eighth Plan period. The industrial growth doubled from 6.0 % in 1993-94 to 12.1 % in 1995-96 though it slumped to 7.1 in 1996-97.( one reason was the East Asia crisis of 1997)

42. The causes cited for lower growth during the Eighth FYP as compared to Seventh plan included sudden exposure to foreign competition on account of liberalization of imports and a drastic reduction in import duties. The downfall in capital goods sector was caused by reduction in tariffs for imports and postponed investment plans by entrepreneurs expecting more concessions. There was also slowdown of public investment to control the fiscal deficit. Private investment also slowed down drastically under the underdeveloped capital market, high cost of borrowings, and imposition of Minimum Alternate Tax (MAT).

43. Inadequate & quality of infrastructure e.g. power and transportation bottlenecks, inadequate handling facilities at ports increasing imports of basic materials and intermediate goods and components, second-hand machinery due to anomalous tariff structure also affected industrial production.

44. The Ninth Plan emphasized on the quality of infrastructure, exports, review of SSI reservation for critical export industries such as toys, garments and leather goods, labour legislation, disinvestment of PSEs, balances in industrial development, investment in domestic R&D & linking of R&D with industry. Besides, the simplification or streamlining of procedures at State Governments level, the Government also decided to dismantle the administered price mechanism in respect of petroleum products in a phased manner.

Tenth Five Year Plan (2002-07)

45. The industrial growth during Ninth FYP was 4.5 % while that for manufacturing; mining and electricity generation were 5.3 %, 2.5 % and 5.5 % respectively. Internal factors cited for the slowdown were slowdown in domestic and global demand continuing high real interest rates, infrastructure bottlenecks in power and transport, lack of reforms in land and labour markets, decline in private investment and delays in establishing appropriate institutional and regulatory frameworks in some key sectors. The terrorist attacks of 11 September 2001, also had adverse impact on air transport, communications and tourism..

46. The Tenth plan strategy was on providing conducive policy environment though labour, fiscal reforms and streamlining of procedures, legal and procedural reforms, bankruptcy and foreclosure laws, world-class infrastructure, clusters, augment resource base, stronger capital and institutional finance markets/Institutions, attract higher level of FDI, optimize resource allocation , pricing policy, increased flows into high growth areas , leverage resources through effective public-private, release of unproductive resources partnerships, expeditious closure of

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non-revivable PSUs, expeditious divestment of non-strategic PSUs, improving productivity and efficiency of transitional PSUs.

47. It recommended efficiency enhancing policies in the areas of innovations, technology upgradation, modernization, R&D, skill upgradation, export thrust, assist States for updating export infrastructure, Special Economic Zones , standardization, accreditation and certification, market access initiatives, making products/processes/practices eco-friendly, level playing field, rationalization of taxes and duties, cost of finance and credit availability, intellectual property rights regime, world class infrastructure, modernizing patent offices, rationalization of Indirect Taxes etc..

11th Five Year Plan (2007-12)

48. The dynamism in manufacturing during the Tenth plan increased its growth rate to 8.7% compared to 3.8% in the Ninth Five Year Plan. The CAGR recorded at 8% in the Tenth Five Year Plan compared to 4.5% in the Ninth Five Year Plan to. The improved demand in both domestic and external markets was a major contributory factor along with cumulative effect of industrial and fiscal policy changes carried out since the economic reforms of 1991 92. The environment for investment was optimistic.

49. On the employment front, however, the performance of the organized manufacturing sector continued to be a source of concern. The rationalization of staffing and closure of the sick units in the public sector led to a massive decline in employment following in some units. In the early post-reform years, some rise in private sector employment compensated the decline in the public sector however, during the Tenth Five Year Plan the manufacturing employment declined in private sector as well.

50. A conductive investment climate for the industry was attempted through elimination of entry barriers, decontrolling location restrictions from entrepreneurs liberalization of Foreign Direct Investment (FDI) policy, elimination of exit barriers by reforming Chapter V-B of the Industrial Disputes Act 1947 under which units with more than 100 employees cannot exit an unprofitable enterprise without the consent of the concerned State Government. The e-Governance project MCA 21 launched to computerize and speed up the process of registration of companies. The quantitative restrictions on trade had already been progressively eliminated.

51. Against the background of a growing manufacturing scenario, the growth target for 11th

FYP for industry and manufacturing were set at an average annual rate of 9.8%. The emphasis was on creation of world-class Infrastructure, especially on quality of electricity, power, roads, railways, ports, and airports etc. Tax policy recognized as an important determinant of the investment climate since the rates of direct taxes determine the structure of incentives to work,

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save, and invest, while the level and structure of indirect taxes influences the aggregate demand and thus the scale of operations on the one hand and relative prices of different goods and services on the other..

52. The plan recommended efforts to correct inverted duty structure, where there was elimination or reduction of duty on value-added products, while higher duties apply on the raw material and intermediate products increased competition from imports in manufacturing products. These arose due to lowering of customs duties in compliance of Most-Favoured-Nation duties, and / or Regional Trading Arrangements (RTAs) that India. The early introduction of Goods and Service Tax (GST) was recommended.

53. A skill deficit in virtually all areas of manufacturing had emerged as one of the major impediments to growth in manufacturing. Reforms in labour market were recommended for skill development to make the workforce employable in such industries. The manufacturing, employment growth as per 61st Round (2004 05) NSS was 3.9% per annum, raised the sectoral share of manufacturing in employment from 12.13% in 1999 2000 to 12.90%in 2004 05.

Twelfth Five Year (2012-17)

54. An assessment of the performance in the Eleventh Plan showed that it was marked by unfavorable global economic conditions brought about by the financial sector crisis of 2007-09 followed by sovereign debt crisis from mid 2011 onwards. This led to slackening demand, exchange rate volatility, domestic difficulties such as poor implementation and delayed reforms, all of which slowed down the growth in the manufacturing sector.

55. While 2009-10 witnessed a resurgence of manufacturing buoyancy largely on account of sectors like automotive, cotton, leather, food products etc., the growth moderated in 2011-12. India was not able to leverage the opportunities provided by the dynamic sub globalization and the shift of manufacturing capacities to rapidly developing economies unlike China. It is estimated that by 2025, RDE production will account for more than 55% of global production as compared to 36% presently.

56. The manufacturing growth rate peaked at 14.3% in 2007-08 and then started decelerating. The decline in manufacturing growth was primarily responsible for slowed down of GDP in 2011-12, while global economic meltdown, fragile economic recovery in US and EU, rising interest rates and rupee depreciation also contributed to the slow down. The rate of growth of manufacturing in GDP has declined from 10.3% in 2007-08, to 4.3% in 2008-09, revived in 2009-10 and 2010-11 to 9.7% and 7.6% respectively. It is estimated to have declined to 3.9% in 2011-12.

57. As regards employment, manufacturing contributed to 44 million in 1999-2000 and rose marginally 48.54 million in 2009-10. Agriculture still continued to be the major employment

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provider (providing employment to about 240-250 million) but it will not be able to offer employment to 250 million additional job seekers joining the work force in the next 15 years. Therefore unless manufacturing sector is able to absorb at least 100 million additional jobs, the unemployment scenario in the country is likely to severe.

58. The National Manufacturing Policy which was introduced in 2011 has the underline objective of increasing the share of manufacturing in the GDP from 15-16% % to 25% by 2025 and also provide employment to 100 million additional job seekers.

59. The Twelfth plan laid down the essential features of a Manufacturing Eco System that can deliver rapid industrial growth on the lines of strategies that have been adopted by different countries like Korea, China, Japan etc, where a close coordination is there between producers and Government policy makers.

60. The three features of a dynamic manufacturing eco system is, one, - having in depth value addition in manufacturing processes; two, - it must combine four capabilities- human skills, embodied technology, hardware, knowledge (intellectual property) and a large and demanding customer base; Third, it must have a wide range of different seized firms especially small and medium as these firms can eventually specialise and grow into larger firms. Certain processes are important to sustain the above R&D, processes of innovation, regime or standard and IP regime, enabling system wide learning and continuing improvement through quality management.

Strategy and Key recommendations included:

61. Human Resource Development by inducing job creation and reducing the cost of generating employment and developing a supply of qualified human resources to meet demand of additional job creation; Creation of conductive business regulatory framework and enabling institutional architecture for ensuring competitiveness in manufacturing; Ensuring Environment sustainability with industrial growth especially creation of Green Technology Fund, water management, promotion of green products, environment regulatory reforms, voluntary disclosure environment sustainability programme etc..; Land issues-

a land use policy to be developed which will include land mapping, land zoning, and land digitization of land records.

62. The Twelfth Plan lay emphasis on promoting manufacturing though Clustering and Aggregation and setting up of Cluster Stimulation Cell Promotion of Micro Small and Medium Enterprises; reforming the role and management of Public Sector Enterprises etc. It stated that the National Investment and Manufacturing Zones (NIMZs) is an integral part of the National Manufacturing Policy(NMP) and distinct role have been given to Central Government and State Government for setting up of the NIMZ through a Special Purpose Vehicle (SPV). A very important policy initiative is special incentives for green technology in NIMZ.

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63. The plan emphasized on key manufacturing sectors that need to be focused on like:

o Sectors of strategic importance

relating to national security and self reliance- defence

equipment, aerospace, capital goods, electronic system, ship building etc.

o Sectors of basic inputs

which provide raw material - industries engaged in production of steel, cement, fertilizers, minerals etc.

o Sectors for depth and value addition- knowledge and technology intensive industries automobile, pharmaceutical, petro chemicals, electronics etc.

o Sectors for employment generation- textiles, leather, food processing, gems and jewellery etc. Based on the mandate of providing 100 million additional jobs in the next ten years. The manufacturing strategy should accordingly be formulated in each of this above sectors to deliver the required outcomes.

18

SECTION III

TRENDS IN MANUFACTURING SINCE INDEPENDENCE

Phases of growth in manufacturing in India since independence

Before 1990

64. Three important phases of the industrial growth can be identified in the pre 90s era. - the first phase is from 1950-51 to 1964-65, second from 1965-66 to 1970 s, and third from 1979-80 to 1989-90.

65. The first phase of industrial growth is tagged as phase of rapid industrial growth i.e. from 1950-51 to 1964-65. The manufacturing sector grew at an average rate of 5.8 % in first half of fifties and 6.5 % in the second half of the decade. The growth was mainly on account of the thrust given in the second five year plan of building a strong capital base through investment in public sector especially as the Private sector was in the nascent stage.

66. The Second phase is tagged as deceleration phase of industrial growth. The late sixties and seventies, saw a moderation in manufacturing was due to emergence of macro political-economic uncertainties such as wars with Pakistan and China, rising prices, oil prices shocks, licensing requirements for investment, reservation of industries in Public Sector. etc. The manufacturing sector grew at an average rate of 4.3 % during this period compared to 6.5 % during the second and third Plan together.

67. The third phase saw a revival of industrial growth with the gradual withdraw of constraints and controls through sequential policy reforms. The table-4 below shows that growth rates in manufacturing between the period 1950-51 to 1989-90.

Table 4. Phases of Industrial Growth in India since Independence

Sectors 1950-51 to 1955-56 1956-57 to

1965-66 1966-67 to

1979-80 1981-82 to 1989-90 Manufacturing 5.8 6.5 4.3 5.8 Registered 6.2 8.2 4.5 7.6 Unregistered 5.6 4.5 4.1 3.4 Industry 6.0 6.7 3.9 6.0 GDP 3.6 3.6 3.4 5.6

Source: CSO

68. There was an improvement in manufacturing growth during 1980s but it was during 90s that a major shift in manufacturing growth took place on account of onset of liberalization and gradual globalization of the economy.

19

Post 1991- Paradigm Shift in Industrial Policy and Manufacturing

69. Industrial Policy since 1991 has been more for facilitating industrial development rather than anchoring it through permits and controls. Industrial licensing was abolished for most of the industries and there are only 5 industries related to security, strategic and environmental concerns where an industrial license is currently required.

70. Along with the removal of the industrial licensing, reforms were initiated in areas of reservation of products for exclusive production in the small scale sector. By virtue of reservation of a product for production in small scale sector, entry of a domestic large scale player was not permitted though the product could still be imported. Government has also enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 stepping up the investment limit to Rs.5 crore for small enterprises and Rs. 10 crore for medium enterprises so as to reduce the regulatory interface with the majority of the industrial units.

71. Manufacturing grew at an average growth rate of 7% during nineties and at 7.4 % during first decade of millennium century as seen from the table -5 below:

Table 5. Phases of Manufacturing Growth in India

Sectors 1992-93 to 2000-01 2001-02 to 2011-12 Manufacturing 7.0 7.4 Registered 7.4 9.1 Unregistered 6.4 5.7 Industry 6.2 7.4 GDP 6.2 7.5

Source: CSO

72. To sum up, the industrial growth can be characterized with two trends; one, industry had been generally growing faster than the economy as a whole, and second, within manufacturing, registered manufacturing was outperforming the unregistered.

Structural changes in manufacturing

73. Table-6, gives an analysis of structural changes in industry subgroups as reflected from the National Accounts Statistics.

20

Table 6. Structural Changes in Manufacturing Sector

Description 1950-51

1955-56

1965-66

1979-80

1989-90

2000-01

2009-10

Food Products 25.3 23.0 15.2 9.1 10.8 9.5 8.2

Beverages and Tobacco Products 1.3 1.2 1.5 2.3 2.3 2.7 2.8

Textile Products 21.6 23.2 18.7 18.0 15.2 16.1 14.0

Leather & Fur Products 1.4 1.1 0.9 2.1 1.7 1.9 1.3

Wood and Wood Products, Furniture, Fixtures Etc

47.0 42.6 42.3 26.3 11.3 6.0 3.9

Paper and Printing Etc. 1.6 1.7 2.3 3.3 4.0 2.8 2.9

Rubber, Petroleum Products Etc. 1.7 2.6 2.6 5.7 10.1 10.5 11.3

Chemical and Chemical Products 3.6 3.5 4.6 6.5 8.5 12.0 13.0

Non-Metallic Products 1.5 1.6 2.5 4.3 5.7 6.6 7.3

Basic Metals 13.2 11.5 19.1 11.4 11.0 13.1 10.3

Metal Products and Machinery 1.9 2.7 5.8 11.3 11.7 10.3 11.8

Electrical Machinery 0.2 0.2 0.7 1.4 2.8 3.3 6.4

Other Manufacturing 7.9 7.9 7.3 3.3 5.5 5.2 5.3

Transport Equipment 3.6 4.8 5.4 5.5 5.8 6.6 8.2

Gross Domestic Product in manufacturing 100 100 100 100 100 100 100

Source: National Accounts Statistics

74. The Table shows that structural changes in manufacturing have taken place since 1950s wherein the relative share in manufacturing GDP, of traditional industries like food products, textiles, wood etc have show a decline while modern industries like machinery, transport equipment , chemicals, metal products etc has improved its share.

21

SECTION -IV

MANUFACTURING TRENDS IN THE LAST FIVE YEARS - 2007-08 to 2011-12

Index of Industrial Production (IIP)

75. The most well known and most quoted indicator of manufacturing is the Index of Industrial Production (IIP) which is compiled on a monthly basis by Central Statistical Office (CSO). Since IIP uses a fixed weight frame, fixed base index, it is revised on a decadal basis to realistically reflect the industrial performance and capture the structural shifts in this sector. CSO has revised the base year of IIP from 1993-94 to 2004-05 and the new series was launched in June 2011. The new series has an enlarged with more representative basket to better capture the industrial scenario. The weighting diagram for the new series has also been redrawn in line with the relative importance of the sectors in GDP and is based on the National Accounts.

76. The new series of IIP with 2004-05 as its base covers the broad sectors of industry, viz., mining, manufacturing and electricity. The IIP is also categorized by Use Based Classification. The table -7 below indicates the sectoral and used based growth rate for the last five years.

Table 7. Index of Industrial Production (IIP) Growth Rates (Base: 2004-05)

Groups 2007-08 2008-09 2009-10 2010-11 2011-12

Mining & Quarrying 4.6 2.6 7.9 5.2 -2.0 Manufacturing 18.4 2.5 4.8 9.0 3.0 Electricity 6.3 2.7 6.1 5.5 8.2 General Index 15.5 2.5 5.3 8.2 2.9 Use Based Basic goods 8.9 1.7 4.7 6.0 5.5 Capital goods 48.5 11.3 1 14.8 -4 Intermediate goods 7.3 0.0 6.0 7.4 -0.8 Consumer goods 17.6 0.9 7.7 8.6 4.4 i) Consumer Durables 33.1 11.1 17 14.2 2.6 ii) Consumer Non

Durables 10.2 -5.0 1.4 4.3 5.9

Source: Central Statistics Office

77. The industrial growth measured in terms of IIP, witnessed significant growth of 15.5 % in 2007-08 but moderated to 2.9% in 2011-12. Manufacturing grew at 18.4 % in 2007-08.The global crisis led to a severe moderation in growth rate to 2.5 % in 2008-09. However, the manufacturing sector showed a swift recovery from the global slowdown in the last two years by

22

registering growth rates at 4.8 % and 9% % respectively in 2009-10 and 2010-11. Notwithstanding the recovery in 2010-11, the manufacturing started decelerating in 2011-12 with a meager growth rate of 3%.

78. The Capital Good and Intermediate Goods which forms the core investment for manufacturing has moved into the negative trajectory during 2011-12 and decelerated at -4.0 % and -0.8 % respectively. The Consumer Goods especially Consumer Non- Durable has performed relatively better with a 5.9 % growth rate in the same year. Table -8 captures the growth rate in 22 major industry groups of Manufacturing.

Table 8. IIP Growth Rate- by industry Groups (in %)

Cumulative figures (Apr-Aug)

Description Weights 2006-

07 2007-

08 2008-

09 2009-

10 2010-11

2011-12

2011-12 2012-13

Food products and beverages 72.8 15.9 12.5 -8.2 -1.4 7.0 15.4 16.5 -0.1 Tobacco products 15.7 1.8 -4.4 4.4 -0.6 2.0 5.4 -3.6 -6.0 Textiles 61.6 7.8 6.6 -3.6 6.1 6.7 -1.3 -1.6 7.6 Wearing apparel; dressing and dyeing of fur 27.8 20.3 9.3 -10.2 1.9 3.7 -8.5 -8.9 -3.5 Luggage, handbags, 22oderni, harness & footwear; tanning and dressing of leather products

5.8 14.4 5.8 -5.1 1.3 8.1 3.7 6.2 4.1

Wood and products of wood & cork except furniture; articles of straw & plating materials

10.5 18.0 17.5 4.9 3.1 -2.2 1.8 -4.4 -2.9

Paper and paper products 10.0 4.4 1.4 4.8 2.6 8.6 5.0 5.4 -0.1 Publishing, printing & reproduction of recorded media

10.8 8.0 14.2 1.6 -6.0 11.2 29.6 9.1 14.7

Coke, refined petroleum products & nuclear fuel

67.2 11.9 6.2 3.2 -1.3 -0.2 3.5 5.9 3.5

Chemicals and chemical products 100.6 9.3 7.2 -2.9 5.0 2.0 -0.4 0.7 1.5 Rubber and plastics products 20.2 6.6 13.4 5.1 17.4 10.6 -0.3 -1.1 3.5 Other non-metallic mineral products 43.1 10.9 9.3 3.3 7.8 4.1 4.8 2.9 3.2 Basic metals 113.4 14.7 17.9 1.7 2.1 8.8 8.7 15.5 1.4 Fabricated metal products, except machinery & equipment

30.8 19.9 7.8 0.1 10.2 15.3 11.2 14.5 2.2

Machinery and equipment n.e.c. 37.6 19.7 22.6 -7.6 15.8 29.4 -5.8 -1.7 5.1 Office, accounting & computing machinery 3.1 7.0 6.0 -9.7 3.8 -5.3 1.6 12.0 -5.7 Electrical machinery & apparatus n.e.c. 19.8 12.7 183.5 42.3 -13.5 2.8 -22.2 2.0 -32.7 Radio, TV and communication equipment & apparatus

9.9 155.0 93.1 20.3 11.3 12.7 4.3 1.1 14.3

Medical, precision & optical instruments, watches and clocks

5.7 9.9 6.3 7.5 -15.8 6.8 10.9 -5.3 12.6

Motor vehicles, trailers & semi-trailers 40.6 25.3 9.5 -8.7 29.8 30.2 10.8 15.5 -3.0 Other transport equipment 18.2 15.2 -2.9 3.8 27.7 23.2 11.9 17.4 -1.8 Furniture; manufacturing n.e.c. 30.0 -3.9 18.7 7.4 7.1 -7.5 -1.8 1.8 -7.7 Mining 141.6 5.2 4.6 2.6 7.9 5.2 -2.0 -0.5 -0.6 Manufacturing 755.3 15.0 18.4 2.5 4.8 9.0 3.0 6.0 0.0 Electricity 103.2 7.3 6.3 2.7 6.1 5.5 8.2 9.5 4.8 General 1000.0 12.9 15.5 2.5 5.3 8.2 2.9 5.6 0.4 *Industry codes are as per National Industrial Classification 2004 Source: Central Statistics Office, (CSO)

23

79. As seen from the table above , the low growth in the manufacturing sector during 2011-12 was primarily driven by the steep fall in industry groups like Electrical machinery & apparatus (-22.2%), Machinery & Equipment (-5.9%), Textiles (-1.4%), Wearing Apparel (-8.5%), Chemical (-0.4%) and Furniture Manufacturing (-1.8%). In the current year the cumulative industrial growth during April

August, 2012-13, recorded at 0.4 % as compared with 5.6 % growth during corresponding period of the last year so as the manufacturing recorded no growth and 6% respectively.

Trends in Growth of Eight Core Industries

80. The growth of the eight core sector industries has been fluctuating as seen from the Table 9 below:

Table 9. Growth in the production of Eight Core Industries (average annual growth in %) April- August Sector Weight 2005-

06 2006-

07 2007-

08 2008-

09 2009-

10 2010-

11 2011-

12 2011-12 2012-13 Coal 4.379 6.6 5.9 6.3 8 8.1 -0.2 1.2 -2.3 6.3 Crude Oil 5.216 -5.2 5.6 0.4 -1.8 0.5 11.9 1 6.1 -0.6 Natural Gas 1.708 1.4 -1.4 2.1 1.3 44.6 10 -8.9 -8.9 -12.1 Refinery Products

5.939 2.1 12.9 6.5 3 -0.4 3 3.2 4.7 4.3

Fertilizers 1.254 0.6 3.1 -7.9 -3.9 12.7 0 0.4 1.2 -7.9 Steel 6.684 7 12.8 6.8 1.9 6 13.2 7 9.9 2.7 Cement 2.406 12.4 9.1 8.1 7.2 10.5 4.5 6.7 4.1 5.4 Electricity 10.316 5.1 7.3 6.3 2.7 6.2 5.6 8.1 9.4 4.9 Overall Index

37.903 3.9 8.4 5.2 2.8 6.6 6.6 4.4 5.5 2.8

Source: Office of the Economic Adviser, DIPP

81. The growth declined to its lowest level to 2.8% in 2008-09, the crisis year compared to better growth of preceding years at 5.2% in2007-08 and 8.4% in 2006-07. The growth of the core sector was improved to 6.6 % during two subsequent years i.e. 2009-10 and 2010-11, before declined to 4.4 % in 2011-12. The poor growth in Coal production during 2010-11 and 2011-12 has been a cause of concern. Besides, low growth in Crude Oil during last five years except 2010-11; negative growth in natural Gas in 2011-12; and negative or low growth in fertilizers except 2009-10. Among the core industries the Steel, Cement and Electricity has performed relatively better. During April to August, 2012-13 the growth rate of core sector industries is recorded at 2.8 % compared to 5.5% during corresponding period of previous year.

Trends in Employment in Manufacturing

82. The NSSO conducts periodical surveys estimates inter alia sector wise share of employment based on Usual Principal and Subsidiary Status of employment. Principal activity status is one on which the person spends relatively longer time during the 365 days preceding the date of survey and Subsidiary Status refers to the same person who may have pursued some

24

economic activity during the reference period of 365 days. The Table-10 below shows the sectoral share of employment as compiled from various NSSO rounds, 1987-88 onwards to 2009-10.

83. During past two decades there has been about 13 percentage point reduction in the employment share in agriculture despite no increase in manufacturing share in employment. In fact there has been a decrease in the share of employment in manufacturing between 2004-05 and 2009-10. Though industry (comprising of manufacturing, electricity, mining and construction), as a sector has shown an increase in employment between the same period, this is mainly on account of construction, which has grown from 2.3 % in 1987-88 to 11.4 % in 2009-10. However, service sector has registered a significant increase in employment of about 7 percentage points between 1987-88 and 2009-10 (table-10).

Table 10. Sectors Share in Employment NSSO Rounds Reference Year Agriculture Manufacturing Industry Services

66th (2009-10) 51.8 11.4 21.9 26.3 61st (2004-05) 56.5 12.2 18.7 24.8 55th (1999-00) 60.1 11.0 16.3 23.6 50th (1993-94) 64.3 10.5 14.8 20.9 43rd (1987-88) 64.5 11.2 16.1 19.4

Source: Computed from various rounds of NSSO

The table-11 below shows the trends in rural and urban employment

Table 11. Manufacturing ( number of persons employed in Millions) NSSO Rounds Reference Year Rural Urban Total

66th (2009-10) 24.12 28.23 52.35 61st (2004-05) 27.76 28.30 56.06 55th (1999-00) 22.99 21.99 44.98 50th (1993-94) 19.55 17.90 37.45 43rd (1987-88) 19.73 19.16 38.88 38th 1983 15.84 14.65 30.49 32nd (1977-78) 14.47 15.34 29.82

Share of manufacturing in Total Employment NSSO Rounds Reference Year Rural Urban Total

66th (2009-10) 7.2 23.0 11.4 61st (2004-05) 8.1 24.5 12.2 55th (1999-00) 7.4 22.7 11.0 50th (1993-94) 7.0 23.6 10.5 43rd (1987-88) 7.2 26.1 11.2 38th 1983 6.8 26.9 10.6

32nd (1977-78) 6.2 28.0 10.4

Source: Computed from various rounds of NSSO

25

84. As seen from the table -11, the decline of number of persons employed in manufacturing from 56 million in 2004-05 to 52 million in 2009-10 implies that about 4 million workers have withdrawn from the manufacturing sector during this period despite 6.8 % average growth in manufacturing during the 11th plan. Of this, rural employment accounts for 98 % of the total workers who have left manufacturing. This is also reflected in the decline in rural employment in absolute numbers, which has fallen from 28 million to 24 million in this period.

85. Some of the reasons for the decline in rural manufacturing employment may be the sluggish global demand for major export items like textiles, handicrafts, leather which are labour intensive. The massive rural employment generation by MGNREGS might have bearing on withdrawal of workers from rural manufacturing. A research study on Tradeoff of workers between MGNREGS and Manufacturing shows that the vocationally educated persons in rural sector or those who have an acquired skill by hereditary are more likely to work under MGNREGS. This could also be a contributory reason for the fall in the manufacturing employment in the rural sector.

86. The Plan document indicates that a major decline was observed in labour intensive industries which account for 68 % of the total employment in manufacturing in 1999-2000. The industries that showed decline between 1999-00 and 2004-05 to 2009-10 are given below in table- 12:

Table 12. Change in Employment Across manufacturing (figure in Millions)

Sectors 1999-00 to

2004-05 2004-05 to

2009-10 Food products and beverages -0.3 -0.15 Tobacco products 0.25 -0.52 Textiles 2.25 -1.7 Wearing apparel; dressing and dyeing of fur 5.26 -1.62 Recycling 0.07 0.01 Wood and products of wood & cork except furniture; articles of straw & plating materials 0.7 -1.62 Paper and paper products 0.36 -1.15 Publishing, printing & reproduction of recorded media 1.1 Coke, refined petroleum products & nuclear fuel -0.28 -0.84 Chemicals and chemical products 0.24 -0.39 Rubber and plastics products 0.70 Other non-metallic mineral products 1.07 -0.16 Basic metals -0.12 0.37 Fabricated metal products, except machinery & equipment 0.53 -2.01 Machinery and equipment n.e.c. 1.6 Office, accounting & computing machinery 0.1 Electrical machinery & apparatus n.e.c. -0.21 0.05 Radio, TV and communication equipment & apparatus 0.2 Medical, precision & optical instruments, watches and clocks 0.83 -3.14 Motor vehicles, trailers & semi-trailers 0.5 -0.42 Other transport equipment 0.8 Furniture; manufacturing n.e.c. 0.6 2.89 Total Manufacturing Employment Change 11.7 -5.07 Source: Planning Commission 12th Plan Draft (computed from NSSO various Rounds)

26

SECTION V

FACTORS AFFECTING MANUFACTURING GROWTH

Some Determinants of Manufacturing

87. There are long and short term factors operating which determine the performance of the manufacturing. While some factors are domestically generated, there are others which are global in nature.

Investment

88. The average annual growth of new investment in industrial sector has been 11.8 % (2004-10), as against the growth of GDP which averaged 8.6 % during this period. The rate of growth of gross capital formation (GCF) for mining, registered manufacturing and electricity sector was even higher. There was a decline in the rate of growth of GCF in 2008-09, which could be considered as an abnormal year because the global economic meltdown had affected the investor sentiments resulting in lesser investment and also deferment of investment decisions. The internal accruals of the corporate sector were also adversely affected. A decline in stock market indices also affected valuation gains and a combined effect of these factors led to a decline in GCF in industry (table-13).

Table 13. Gross Capital Formation (GCF) in Industry (Rs in crore at 2004-05 prices) 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 CAGR

Mining 37,322

52,260

60,412

68,470

59,266

96,079

20.8

Manufacturing (Registered) 2,45,984

3,42,671

3,80,294

5,21,967

3,81,056

4,77,202

14.2

Manufacturing (Unregistered) 98,533

62,376

91,929

89,502

36,915

86,431

-2.6

Electricity 53,300

64,673

76,366

85,040

95,533

98,908

13.2

Total 4,35,139

5,21,980

6,09,001

7,64,979

5,72,770

7,58,620

11.8

Total GCF 10,11,178

11,83,485

13,65,019

16,06,013

15,42,642

17,31,209

11.4

Share of GCF in Industry 43.0

44.1

44.6

47.6

37.1

43.8

Source: Central Statistical Office (CSO)

89. The parameters that drive growth have also witness moderation in the last three years. As given in the table-14 below, there has been a decline in the rate of growth of Private Final Consumption Expenditure and Gross Fixed Capital Formation (GFCF). High inflation and rising interest rates has lowered growth in private final consumption expenditure to 5.5 % in 2011-12 from 8.1 % in 2010-11. Gross Fixed Capital Formation grew at 5.5 % in 2011-12 compared to 7.5 % in 2010-11. The under performance of the construction sector, which is the lead indicator of capital formation, also contributed to the moderation of GFCF. A decline in the rate of growth of capital formation and consumption expenditure has affected the demand for both capital goods

27

and consumer goods. Industry outlook and business perception parameters also indicate of moderate expectations.

Table 14. Rate of growth of Select Macroeconomic parameters (%) Macroeconomic Parameters 2007-08

2008-09

2009-10

2010-11 QE

2011- 12 RE

Private Final Consumption Expenditure

9.4 7.2 7.2 8.1 5.5 Gross Fixed Capital Formation 16.2 3.5 6.8 7.5 5.5 Industry 9.7 4.4 8.4 7.2 3.4 Manufacturing 10.3 4.3 9.7 7.6 2.5 Construction 10.8 5.3 7.0 8.0

5.3

GDP at Factor Cost 9.3 6.7 8.4 8.4 6.5 Source: Central Statistics Office (CSO)

Investment Intentions

90. While GCF indicates actualization of investment, investment intentions indicated in the Industrial Entrepreneurs Memoranda (IEM) filed are sort of lead indicators of likely investment flows to industry and of entrepreneurs perception. The investment intentions also provide the sectoral preferences of investors and shifts in these preferences over time.

91. During 2001-2011, overall investment indicated in the IEMs filed increased at an average annual rate of 36.9 % (table-15). Metals, machinery, cement, chemicals and auto sector continue to dominate as the preferred industries. There was, as expected, a decline in investment intentions in 2011 indicating the subdued business sentiments.

Table 15. Investment indicated in the IEMs filed (Rs in crore)

2005 2006 2007 2008 2009 2010 2011 2012 (Jan-June)

CAGR (2001-11)

Food 40098 62845 10520 15924 15637 19663 30848 7925 18.4 Fermentation industries

2888 8008 5171 8230 4566 3139 6644 3582 1.9

Textiles 21605 26325 22193 10730 9200 26566 26174 4743 24.9 Wood 163 - 105 622 96 122 488 32 37.9 Paper 5473 8199 4649 5841 6037 6264 5315 3366 19.3 Leather 209 148 266 106 106 161 474 0 40.7 Chemicals 28350 45722 34352 155756 27661 56110 57097 77083 34.9 Rubber 1102 2403 1191 2867 2118 5819 8292 877 42.1 Cement 11800 42406 76906 125948 53742 101318 81406 22843 37.5 Metals 101730 144128 180973 364978 254285 391805 268895 60040 57.1 Machinery 87340 165227 375276 556635 503651 955091 815030 114220 66.1 Transport 2059 10688 11314 24862 5048 12290 9695 17551 39.7 Others 25707 48669 69583 207842 95958 80368 218777 36748 40.1 Fuel 25432 23782 35001 42225 61743 73015 8575 1708 -16.0 Total 353956 588550 827500 1522566 1039848 1731731 1537710 350718 36.9

Source: DIPP

28

Foreign investment

92. The foreign investment in a year in Indian manufacturing has doubled from USD 12 billion in 2007-08 to USD 24 billion in 2011-12. The total foreign investment is therefore added to USD 102 billion up to 2011-12 in manufacturing. The foreign investment is not uniformly coming in all manufacturing whereas the targeted manufacturing activities are Machinery & Equipment, Chemicals, Telecommunication, Power and other Manufacturing and Transport & Equipment etc.

Table 16. FDI Inflows Industries (US$ million)

1991-2002 2002-07 2007-08 2008-09 2009-10 2010-11 2011-12 Total Equity flowsShare (%)

Food products 972.6 392.2 80.7 150.5 348.7 246.9 239.67 2431.32 2.4

Fermentation Industries 51.1 216.3 270.1 144.7 112 57.7 69.7 921.57 0.9

Texti les 249.2 327.2 186 157.4 150.6 129.8 164.74 1364.9 1.3

Wood Products 0.1 0.6 0.4 11.3 6.5 1.6 29.6 49.98 0.0

Paper 327.2 139 104.2 310.1 86.9 44 454.74 1466.07 1.4

Leather 43.4 16.8 7.5 3.3 5.1 9.3 8.3 93.63 0.1

Chemicals 1810.4 1934.1 582.3 992.5 616.1 734 10745.5 17406.45 17.0

Rubber, Plastic & Petroleum Products (including oi l exploration)342.1 464.7 1441.9 497.2 289.7 573.6 389.42 4006.93 3.9

Non Metal l ic Minerals 515.8 877.9 143 944.2 43.8 657.3 309.99 3492.02 3.4

Metals and Metal Products 223 548.7 1176.9 960.9 419.9 1098.1 1786.14 6213.64 6.1

Machinery and Equipments 5232.8 8360.3 3907.1 5086.5 2592.9 1846.7 4147.45 23707.65 23.2

Transport Equipments 431.1 1130.8 674.8 1151.7 1214.8 1286.1 922.99 6812.26 6.7

Others Manufacturing 2834.2 1184.7 704.3 1566.1 1177.9 1495.3 850.47 9812.88 9.6

Mining (including mining services) 7.8 55.8 458.3 34.4 174.4 79.5 142.65 953.02 0.9

Power 1885.8 398.5 1011.2 1070.1 1894.3 1464.4 2104.55 9828.75 9.6

Telecommunication 2140.4 1505.9 1261.5 2558.4 2539.3 1664.5 1997.24 13667.1 13.4

 

Total 17066.9 17553.5 12010.2 15639.3 11672.9 11388.7 24363.15 102228.2 100.0

Source: DIPP excludes services and other FDI inflows such as RBI-NRI schemes, Acquisition of shares and advance inflows.

Inflation in Manufacturing Sector

93. The inflation rate as per WPI for manufacturing sector has shown an increase from 5.7% in 2006-07 to 7.3 % 2011-12. The product groups which have shown an increase in inflation in 2011-12 as compared to 2010-11 include Food Products, Beverages, and Tobacco Products, Basic Metals and Alloys, Wood and Wood Products, Leather and Leather Products, Chemical

29

and Chemical Products, non-metallic Mineral Products, machinery and machine tools as shown in Table-17.

Table 17. Rate of Inflation (WPI) in Manufacturing

Weight

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

All Manufactured products 64.97 2.4 5.7 4.8 6.2 2.2 5.7 7.3 (i) Food products 9.97 1.2 5.3 3.5 8.7 13.5 3.7 7.1 (ii) Beverages, tobacco & tobacco

products 1.76 4.7 5.1 6.5 9.5 6.1 7.4 11.7 (iii) Textiles 7.33 -1.1 1.9 0.7 1.6 3.4 12.1 7.5 (iv) Wood & wood products 0.59 5.7 5.8 6.7 9.5 9.6 4.0 8.1 (v) Paper & paper products 2.03 3.6 4.6 3.0 4.2 2.2 5.3 5.4 (vi) Leather & leather products 0.84 4.3 8.0 3.1 5.5 4.9 -1.0 2.3 (vii) Rubber & plastic products 2.99 1.9 5.6 4.3 4.5 0.7 6.7 6.0 (viii) Chemicals & chemical products 12.02 3.8 5.0 3.6 4.6 -0.3 5.3 8.6 (ix) Non-metallic mineral products 2.56 3.4 11.6 11.2 2.6 7.0 2.7 5.7 (x) Basic metals, alloys & metal

products 10.75 2.2 9.3 10.3 12.0 -6.1 8.7 11.1 (xi) Machinery & machine tools 8.93 3.6 6.3 3.7 2.9 0.5 2.8 3.1 (xii) Transport, equipment & parts 5.21 2.7 2.2 2.5 5.4 3.1 3.0 3.5

Source: Office of the Economic Adviser, DIPP

Monetary Policy

94. Monetary policy plays crucial role in maintaining the liquidity in the economy through growth of bank credit to the industry and keeping the costs of borrowings at competitive rate. RBI needs to reduce its policy rate to induce investment. The current focus on controlling inflation through a tight monetary policy should be balanced with the requirements for investment & growth. Savings to be encouraged to flow into financial systems like bank deposits, pension and insurance funds as it helps investment and capital formation; Encourage substitution of investment in gold with other financial investment options that can divert savings into productive channels.

Trends in Deployment of Gross Bank Credit (GBC)

95. The table -18 shows the industry wise GBC deployment in absolute terms and in terms of Compound Annual growth rate (CAGR).

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Table18. Industry-wise Deployment of Gross Bank Credit (Rupees Billion)

CAGR (%) Year 2005 2006 2007 2008 2009 2010 2011 2012 1990-99 2000-2005 2006-12

1 . Coal 21.4 41.5 77.0 - - - - - 35.8 13.7 -- 2. Mining and Quarrying including Coal 41.5 77.0 75.8 122.8 142.4 180.8 228.6 325.0 0.0 27.3 27.1 3 . Iron and Steel 357.4 509.9 637.4 827.0 991.6 1274.6 1631.9 1927.5 36.4 13.7 24.8 4 . Other Metal and Metal Products 112.7 149.1 199.9 249.0 296.0 354.7 467.1 628.8 21.5 12.4 27.1 5 . All Engineering 289.3 348.8 437.6 158.4 658.1 738.2 933.7 1135.7 9.5 4.6 21.7 Electronics 91.1 110.0 135.1 544.4 189.1 221.0 249.9 319.9 24.8 12.2 19.5 6 . Electricity - - - - - - - - 32.5 -- -- 7 . Cotton Textiles 227.8 297.8 380.5 477.5 513.1 612.3 741.4 810.4 19.1 14.3 18.2 8 . Jute Textiles 9.1 10.5 9.7 10.8 14.7 13.8 15.7 13.9 16.4 0.4 4.8 9 . Other Textiles 194.5 245.8 358.1 422.9 435.2 471.0 582.1 660.5 24.0 8.4 17.9 10 . Sugar 69.3 87.8 115.5 160.8 173.1 192.6 250.8 311.6 31.5 12.6 23.5 11 . Tea 16.3 18.5 23.4 24.8 27.3 20.0 23.7 23.2 6.3 9.5 3.8 12 . Food Processing 240.3 309.5 400.1 494.0 537.8 656.8 849.3 1024.1 28.5 32.0 22.1 13 . Vegetable Oils (including vanaspati) 35.9 50.8 61.1 72.4 67.6 103.8 133.7 143.5 25.3 4.0 18.9 14 . Tobacco and Tobacco Products 19.4 40.0 47.7 - - - - - 17.6 14.4 -- 15 . Paper and Paper Products 68.6 91.5 115.9 134.7 159.8 190.7 211.4 251.1 13.9 16.9 18.3 16 . Rubber and Rubber Products 39.7 72.5 92.5 112.1 135.9 156.2 219.2 257.5 14.1 14.0 23.5 17 . Chemicals, Dyes, Paints,etc. 390.2 486.4 559.0 87.8 755.6 857.1 945.3 1125.0 19.7 10.7 15.0 Drugs and Pharmaceuticals 123.4 162.7 186.5 235.0 297.6 359.8 415.7 472.0 31.9 16.7 19.4 Fertilisers 81.7 105.7 98.4 625.6 142.7 138.5 105.4 151.9 22.2 12.3 6.2 Petro-Chemicals 71.8 69.7 83.2 91.9 87.8 100.5 123.7 184.4 38.2 3.0 17.6 18 . Cement 80.1 78.0 94.1 125.4 192.2 247.2 285.6 371.9 21.8 17.2 29.7 19 . Leather and Leather Products 32.6 44.9 47.7 57.4 61.5 62.3 71.2 74.5 18.2 4.1 8.8 20 . Gems and Jewellery 141.6 205.6 238.5 251.0 285.4 317.5 394.3 503.7 22.6 21.2 16.1 21 . Construction 83.2 133.0 200.0 279.5 385.1 442.2 501.4 567.0 15.3 24.9 27.3 22 . Petroleum 152.6 251.5 358.9 420.7 681.5 785.8 575.7 700.6 85.1 11.2 18.6 23 . Automobiles including Trucks 120.5 186.3 208.6 293.2 346.4 387.8 444.9 516.1 24.5 18.5 24 . Computer Software 27.6 36.4 51.6 - - - - - 22.0 -- 25 . Infrastructure 727.0 1128.3 1429.9 2053.3 2699.9 3798.9 5266.1 6190.9 58.6 32.8 Power 429.6 601.3 733.0 950.8 1244.5 1878.4 2692.0 3288.6 67.2 32.7 Tele communications 129.6 184.6 196.2 382.8 503.3 593.6 1004.3 935.9 45.4 31.1 Roads and Ports 167.8 197.0 250.5 344.8 470.6 735.7 925.7 1143.8 53.6 34.1 Other Infrastructure - 145.5 250.2 375.0 481.6 591.2 644.2 822.5 0.0 33.5 26 . Other Industries 845.1 809.8 979.8 907.0 1020.3 1248.2 1507.1 2204.1 21.5 17.7 18.2 Industry (Small, Medium and Large) of which : 4231.4 5504.4 6973.4 8583.4 10543.9 13114.5 16208.5 19659.8 22.2 16.2 23.6

Source: RBI

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96. It is seen that both in terms of absolute outflow of credit the GBC has increased from Rs. 4231.4 billion in 2005 to Rs. 19659.8 billion in 2012, which is over 4.5 times increase in last seven years. In terms of CAGR credit deployment to industry increased from 16.2 during 2000-05 to 23.6 in the period 2006-12. However, certain industries such as food processing, Fertilizer, Gems & Jewellery and Automobiles etc. reflected a decline in credit growth.

97. There has been hardening of interest rates from February 2010 to October, 2011, the Reserve Bank of India revised the policy rates 13 times resulting in an increase in the policy rates. This increase in the policy rates considerably raised the interest cost of financing new projects. Further since the inflation is expected to be moderated in next six months, with a likely moderation in interest rates, there has been a significant postponement of investment.

98. Not only there has been an increase in the cost of capital, tight monetary policy pursued by RBI has also resulted in moderation in the rate of growth of flow of credit to industry. This is reflected in the flow of GBC in the last two years as given in the table 19 below.

Table 19. Growth rate in Gross Bank Credit

Industry-wise Sr.No Industry Variation (Year-on-Year)

Aug 26, 2011 / Aug 27, 2010

Aug 24, 2012 / Aug 26, 2011

% % 2.1 Mining & Quarrying (incl. Coal) 39.7 38.0 2.2 Food Processing 25.5 16.5 2.3 Beverage & Tobacco 30.4 14.3 2.4 Textiles 18.9 7.5 2.5 Leather & Leather Products 18.3 7.2 2.6 Wood & Wood Products 23.0 20.3 2.7 Paper & Paper Products 17.5 20.3 2.8 Petroleum, Coal Products & Nuclear Fuels 6.8 -3.0 2.9 Chemicals & Chemical Products 12.5 21.4 2.10 Rubber, Plastic & their Products 34.6 23.4 2.11 Glass & Glassware 0.1 25.7 2.12 Cement & Cement Products 16.9 17.8 2.13 Basic Metal & Metal Product 35.2 16.4 2.14 All Engineering 26.3 24.6 2.15 Vehicles, Vehicle Parts & Transport Equipment 26.8 22.6 2.16 Gems & Jewellery 32.6 16.5 2.17 Construction 9.8 20.3 2.18 Infrastructure 23.0 15.1 2.18.1 Power 35.8 19.1 2.18.2 Telecommunications -5.3 -2.3 2.18.3 Roads 27.2 17.6 2.18.4 Other Infrastructure 15.0 17.1 2.19 Other Industries 27.2 13.4 2 Industries Total 23.6 15.8 Note: Data are provisional and relate to select banks which cover 95 % of total non-food credit extended by all scheduled commercial banks.

Source: RBI

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99. As can be seen from the Table-19 above, the year on year growth rate of deployment of credit to industry between August 2010 over August, 2011 was 23.6 % which has declined to 15.8 % in August, 2011 over 2012. During the same period decline in credit was observed in employment intensive sectors like Textiles, food processing industry, Tobacco, Leather & leather products, gems and jewellery, rubber etc.

Fiscal policy & Industrial Growth

100. The process of fiscal consolidation is reducing fiscal deficit through expenditure management, debt management, and tax reforms. The rationalization of subsidy; (option of direct cash transfers to be examined) early implementation of GST); measures to control black money; implementation of Direct Tax Code, fine tuning the policy on Service tax and implementation of GST are high on the agenda.

101. The fiscal consolidation process has significant bearing on industrial growth. Tax Reforms with respect to implementation of GST /DTC should be expedited. More importantly, the subsidy regime needs a relook, so that it does not distort the market forces in determining the prices of goods and commodities especially diesel, petrol, fertilizer etc. The quantum of subsidy provided under the above sectors during 2010-11 and 2011-12 as well as amount allocated for 2012-13 is given in the table -20 below:

Table 20. Central Government Expenditure on Subsidy (in Rupees crore) Actual Revised Budget

2010-2011 2011-2012 2012-2013 1 Total Fertilizer Subsidy 62301.21 67198.94 60974.10

i Imported fertilizers 6453.91 13883.00 13398.00 ii Indigenous fertilizers 15080.73 19108.00 19000.00 iii Sale of decontrolled fertilizers with

concessions to farmers 40766.57 34207.94 28576.10

2 Food Subsidy 63843.79 72823.00 75000.00 3 Petroleum Subsidy 38348.99 68458.00 43554.00

i Subsidy to LPG and Kerosene for PDS 2904.26 3000.00 3050.00 ii Subsidy to Oil Companies for supply of

Natural Gas to North East Region 444.73 458.00 504.00

iii Compensation to Oil Companies for Under Recovery on Account of sale of Diesel and PDS Kerosene and LPG

35000.00 65000.00 40000.00

Total 164493.99 208479.94 179528.1

Source: Budget Document 2012-13

102. As can be seen from the table above there has been an increase in subsidies from Rs. 164493 crore in 2011-12 to Rs. 179528 crore in 2012-13. In addition if costs of providing subsidized food grains under the proposed National Food Security Bill 2011 to general and priority households in rural and urban areas, is also taken into account, and estimated additional amount of Rs. Rs.95000 crore per annum needs to be added to the subsidy bill. Also,

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schemes like MGNREGA which are basically cash transfers without commensurate addition to productive assets also cost the exchequer at least Rs. 30000- 40000 crore per annum. 103. In view of the huge outflows to subsides and the growing fiscal deficit , the need to adopt alternative means to reach the more marginalized sections of the population need to be explored like direct assistance through transfer of money rather than through subsidy which has the risk of distorting market forces /pricing mechanism and encouraging corruption.

Quality Standards & Manufacturing Growth

104. The measurable quality of the product is an important aspect of competition in the domestic and international market. The domestic manufacturing may not necessarily have any incentive for the self disclosure of the information about quality, safety and environment compliance unless it is costless or the per unit profit from the disclosure is more than non-disclosure. The ignorant and price conscious consumer is another reason for the manufacturer not to voluntary discloses the quality information.

105. Conforming to the WTO rules, the tariff barriers for all products are being progressively decreased in India. This has opened the Indian market for the imported goods. The increase in import to GDP ratio clearly indicates that the declining tariffs have considerably increased the import to India. The national treatment clause under WTO makes compulsory country to give national treatment to the imported goods once it enters into Indian Territory. In the absence of the quality standards for the domestic products it is almost impossible to regulate the imports of the sub-standard products to India. The growing imports from China in sectors like Pharmaceuticals, Chemicals, electrical equipment etc are a serious threat to domestic industry. This is evidenced by the increasing complaints of the dumping of such products. The anti-dumping and safeguards measures can only play a limited role to arrest this trend.

106. The trade losses that can accumulate to a country which has not imposed quality standards can be significant. If a country imposes high domestic standards it can avert the import of substandard by putting appropriate quality restrictions. Conversely, a country having no domestic standards cannot object the substandard imports domestically. Therefore a country without standards suffers by not able to restrict substandard imports and suffers losses exports due to quality restrictions by a better domestic standard country. The high quality standards of industrial goods are imposed on the Indian exports by US and European countries, therefore the quality standards, safety, environmental etc. non-tariff barrier become a hurdle for Indian exports to these countries. However, the low quality standards or missing domestic quality standards for industrial goods in India make it helpless in stopping substandard Chinese imports.

107. India is in the process of notifying the standards for the domestic manufacturing. This time lag between developed and developing countries in the development and enforcement of the

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standards for the manufacturing will certainly give an edge to the developed countries to cut down the imports from developing countries and to dump their sub-standard products. The NTMs including health, safety and environmental in the form of sanitary and phyto-sanitary (SPS) and technical barriers to trade (TBT), are being used by trading partners.

108. For mandatory standards, a notification can be issued under Section 14 of the Bureau of Indian Standards Act, 1986 which empower the Central Government, after consulting the Bureau, that if necessary in the public interest the Government may notify any article or process of any scheduled industry which shall conform to the Indian Standard. The expression scheduled industry shall have the meaning assigned to it in the Industries (Development & Regulation) Act, 1951. However, there are many industries other outside the ambit of Scheduled Industries of Industries (Development and Regulation) Act, 1956, therefore cannot be mandated for standards compliance e.g. toys etc. There is an amendment proposed in Section 14 of the Bureau of Indian Standards Act, 1986, to authorize the Government to issue notification making the standards mandatory with respect to any article or processes thereby widening the scope beyond the items included in the first Schedule to the Industries (Development & Regulation) Act, 1951. The standards can be voluntary also. For the voluntary disclosure and compliance the quality standards can be notified without any amendment to the BIS act.

Trade Policy and Industrial Growth

109. With increasing levels of globalization comes the increasing dependency of the export sector for fuelling economic growth. A significant amount of exports is provided by Micro Small and Medium Enterprises (MSMEs) which is second largest employment generator after agriculture and therefore foreign trade policies and agreements has to factor in this determinant to make country s growth inclusive. Table 21 shows the trends of export and import and balance of trade.

Table 21. Exports, Imports & Balance of Trade(Value in US $ billion)

Year Merchandise

Exports Growth Rate

(%) Merchandise

Imports Growth Rate (%)

Balance of Trade

2002-03 52.7 16.9 61.4 16.3 -8.7 2003-04 63.8 21.1 78.1 27.2 -14.3 2004-05 83.5 30.9 111.5 42.8 -28 2005-06 103.1 23.5 149.2 33.8 -46.1 2006-07 126.4 22.6 185.7 24.5 -59.3 2007-08 163.1 29.0 251.6 35.5 -88.5 2008-09 185.3 13.6 303.6 20.7 -118.3 2009-10 178.8 -3.5 288.4 -5.0 -109.6 2010-11 251.1 40.4 369.8 28.2 -118.7 2011-12 303.7 21.0 488.6 32.1 -184.9

Source: Department of Commerce

110. As seen from the Table 21, the growth of merchandise export was 29% in 2007-08 but moderated to 13.6 % in 2008-09 and moved into negative growth rate of -3.5 % in 2009-10

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mainly on account of global slowdown. Though the exports revived substantially to 40.4% in 2010-11, it has again moderated to 21 % in 2011-12. As regards merchandise imports, the growth has been quite significant except in 2009-10 where it dipped to -5%. However, it has picked up to 28 % and 32% respectively in 2010-11 and 2011-12. The reasons for this are slowdown I global demand and also depreciation of rupee against dollar. The balance of trade has accordingly reflected these trends with USD -184.9 billion in 2011-12 compared to USD-118.7 billion in 2010-11.

111. The slowing down in the Indian export growth along with the more costly inelastic imports (such as crude oil, fertilizer, defence procurement etc.), primarily due to substantial depreciation in the Rupees against Dollar, has contributed in the rise of Current Account Deficit (CAD) to uncomfortable level. However, the high foreign exchange reserves and better FDI scenario are the major factor for the confidence as a policy stance to breath well even if the foreign Debt situation deteriorates further. The high CAD along with high fiscal deficit has created the situation of twin deficit. The only way forward of from this situation is to remove the inefficiencies in the economy, most efficient use of each penny of public money, curbing the menace of corruption, targeting subsidies and efficient implementation and timely completion of the existing projects.

112. Causes of uncertainty in the Indian export growth are slowing down world GDP growth, shrinking import demands in the major export markets of India i.e. US and European Union, violent fluctuation in the international currency market therefore grim scenario of export credit, stalled international trade negotiations, along with weakening policy coordination among countries. Domestically, the prolonged high interest rate regime leaded the crippling the export competitiveness, the erratic & violent capital flights from India are drying down the industry finance in India, low investment sentiments in industry are some prominent reasons for slowdown in the export sector.

113. The inverted duty structure, if exists, reverses the effective rate of protection to the domestic industry against imports. The effective rate of protection is inversely associated with duty on imported input and the share of the imported input in the value of product (finished product). A high input tariff relative to finished product adds in cost of production, and cuts competitiveness of the domestically produced product vis a vis the imported finished product. Therefore inverted duty structure promotes the import of finished products at the cost of domestic industry. In a way it takes employment opportunities away from the country and would be responsible for decline in value addition in domestic industry, if not corrected.

114. The Tariff Commission report and the FICCI survey has found evidences of inverted duty structure in the products like Naphtha , and sectors such as Pumps for liquids under machinery

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& Mechanical Appliances , Technical Textiles , Electronic hardware , Electrical Equipments , Aluminum and articles , Medical Instruments , and Tyre Sector .

115. In an in-house research study titled Impact of the Surge in Chinese Import on Indian Manufacturing Sector

analysis the trends in imports and corresponding domestic production of

268 items of IIP for which DIPP compiles information. These products accounted for 23 % of the total Import to India in 2010-11. As per the study it is estimated that the import index has been growing consistently faster than the index of corresponding domestic production and their Exports. There is a surge in the import growth in 2010-11.

116. When the imports from China was analyzed it was found that the Chinese import index for these 268 items has grown to 4718.4 in 2010-11 over the base of 100 in 2005-06, which is even faster when compared to overall Import index.. The Chinese import share of these items in the total Chinese imports to India jumped to 41.3% in 2010-11 from 26.3% in 2005-06. This indicates that India is progressively sourcing imports of these items from China and domestic production is increasingly being replaced by Chinese imports in these selected items.

117. As mentioned in the earlier section on Quality Standards the lack of quality standards or weak quality standards makes the country vulnerable to substandard imports which is causing injury to domestic industry and a situation of dumping in the domestic market. . The problem is worsened by the fact that other countries impose strict quality standards and therefore a mass producer like China will search for markets like India which are easy to penetrate due to lack of quality standards.

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Labour preferences and Manufacturing

118. The prevalence of rigidities in labour market not only restrains employing more labour, it also promotes R&D preferences towards development of the technology cutting labour cost. The skewed education expenditure pattern towards higher education, and better returns for skilled service worker compared to manufacturing, have moved labour preferences towards services sector. Broadly the play inter-sectoral dynamics has been reflected in terms of high and rising share of the services in GDP.

119. Most services such as transportation, insurance, communication etc, are primarily a part of transaction costs, which facilitates the production and exchanges in the economy. The high and rising share of the services could also reflect the increasing formalization and commercialization of the existing services in the economy whereas the relatively decreasing production structure (includes industry and agriculture), which alerts about the declining production base. The declining share of production structure is also indicative of increasing distributive activities, rather than production activities. Since, the services bank upon industry and agriculture to provide their services, unless these sectors too develop and expand their base, to sustain the services activities, the growth of the services sector is likely to decline in the coming years.

120. A question often posed is that why has manufacturing employment declined over the years. There are many studies which cite different reason to explain these unexpected employment trends in manufacturing in India. One strands of the literature blames the rigid institutional structure e.g. rigid labour laws, demographic, technology, social and cultural factors while other strand of literature highlights the rising cost of labour, substitution of capital for labour, rising labour productivity etc.

121. The increasing informalization of the organized manufacturing sector itself, subcontracting temporary and contract workers has created a dichotomy between casual worker in manufacturing and regular worker. It is argued that labour market reforms tend to increase the creation of regular jobs, while import competition tends to raise casual employment among workers with education above primary. The results also show that education enhances the probability of getting a regular job (Goldar, B. and Suresh Aggarwal, C., 2010). According to Tendulkar S. D., it is essential to upgrade the skill and education base of the growing working age population and raise their work participation to reap the benefits of the demographic dividend for rapid economic growth.

122. The long winding labour regulations area another reason for preferring casual labour to regular workers. For example, as per the Industrial Disputes Act(IDA) (1947), establishments employing more than 100 employees have to seek permission from the government in case of

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layoffs, retrenchments and closures. Hence, in order to retrench a single worker, the employer has to seek the permission of the labour commissioner. Regarding any dispute between employers and employees the labour commissioner is expected to be informed (Nagaraj (2007). The protection of interest of the worker by State would lower their output, investment and employment and led to poverty (Besley and Burgess, 2004). However, IDA is only applicable to the 6% of the labour force which is in the organized sector and not on the 94 % unorganized sector.

123. Other factors that impact manufacturing are skill availability and the need for skilling the population. The present strategies for supply of qualified human resources to meet demand of additional job creation- need to be relooked with private sector participation through PPP for skill development; improving ITIs etc.

Conducive Business environment

124. The creation of a conducive business environment is another crucial factor that boosts manufacturing. World Bank Report 2012 on Doing Business in a more Transparent World has ranked India at 132 out of 183 countries in 2012 as compared to 139 in 2011. Further analysis shows that India has slipped ranks between 2011 and 2012 in 5 indicators viz. registration of property, getting credit, protecting investors, trading across borders, resolving insolvency. The Report also shows that India features in the lowest quartile for two sectors

dealing with construction permits (181 rank) and enforcing contracts (182 rank) mainly on account of large number of procedures and time taken.

.

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SECTION VI

INITIATIVES TO BOOST MANUFACTURING IN THE LAST FIVE YEARS

125. Manufacturing has shown a fluctuating growth trend measured in terms of the Index of Industrial Production in the last few years while there has been both moderation and decline growth, (IIP), in the last few months as shown in the previous sections.

126. Government has taken a number of initiatives and confidence building measures for improving the industrial climate and boosting manufacturing in the country. Government had approved the National Manufacturing Policy (NMP) in October, 2011 with the objectives of enhancing the share of manufacturing in GDP to 25% by 2022 and creating additional 100 million jobs. One of the instruments in the NMP is the creation of National Investment and Manufacturing Zones (NIMZ) as planned integrated industrial townships. Nine NIMZs have been announced, eight of which are along the Delhi Mumbai Industrial Corridor (DMIC). Other measures for facilitation of industrial investment include promotion of foreign direct investment through consolidation of press notes into a single document; development of industry relevant skills and regular meetings with industry associations and stakeholders to fast track implementation of industrial projects. The details of some of the measures taken are below:

National Manufacturing Policy

127. The Government of India notified the National Manufacturing Policy on 4th November, 2011 with the objective of enhancing the share of manufacturing in GDP to 25% within a decade and creating 100 million jobs. It also seeks to empower rural youth by imparting necessary skill sets to make them employable. Sustainable development is integral to the policy and technological value addition in manufacturing has received special focus. The policy is based on the principle of industrial growth in partnership with States. The Central Government will create the enabling policy frame work, provide incentives for infrastructure development on a Public Private Partnership (PPP) basis through appropriate financing instruments, and State Governments will be encouraged to adopt the instrumentalities provided in the policy. The proposals in the policy are generally sector neutral, location neural and technology neutral except incentivisation of green technology.

128. One of the instruments in the NMP is the creation of National Investment and Manufacturing Zones (NIMZ) as planned integrated industrial townships. Nine NIMZs have been announced, eight of which are along the Delhi Mumbai Industrial Corridor (DMIC). Approval, in

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principle, has been secured for setting up of the ninth NIMZ at Nagpur. Apart from NIMZs, NMP also applies to manufacturing industry throughout the country including wherever industry is able to organize itself into clusters and adopt a model of self-regulation as enunciated.

129. Policy instruments for manufacturing industry are applicable to both NIMZ and Clusters. These include Rationalization/simplification of business regulations; simple/expeditious exit mechanism for non viable units; Technology development, including green technologies; Industrial training and skill upgradation measures; Incentives for MSMEs; Special Focus Sectors; Leveraging infrastructure deficit and Government procurement; and Trade Policy.

130. Major feature of NMP is the rationalization and simplification of regulations based on the basic tenet of self regulation of industry to the extent possible. The Central/State Governments will suspend operation of particular provisions wherever such powers exist subject to an alternative mechanism, annual audits by concerned departments and third party certification. Other features include delegation of powers to a single body in case of other provisions, Combined application forms and common registers as far as possible and Systematization of inspections through third party certification.

131. Some of the important initiatives undertaken/ being undertaken under NMP, include formulation of a scheme on Job Loss Policy; simplification of forms / register / returns under 13 central Labour Laws into 3 Forms; setting up of Technology Acquisition and Development Fund (TADF) for acquisition of appropriate technologies including environment friendly technology.

132. For the effective implementation of the NMP, a number of institutional structures have been constituted. These include Manufacturing Industry Promotion Board (MIPB), under the Chairmanship of Commerce & Industry Minister; High Level Committee (HLC) under the Chairmanship of Secretary, DIPP; Board of Approval (BOA) under the concerned Joint Secretary. In addition Green Manufacturing Committee (GMaC) has also been set up to promote green technology for manufacturing under NIMZ.

Delhi Mumbai industrial corridor (DMIC)

133. As part of the Japan India Special Economic Partnership Initiative for developing requisite infrastructure and facilitating investment , DMIC Project was conceptualized to take benefit of the high quality rail and road connectivity offered by 1483 km long Delhi Mumbai Dedicated Rail Freight Corridor (DFC), existing rail passenger- cum- freight corridor and National Highways. The vision of DMIC is to create strong economic base on both the sides of the Dedicated Freight Corridor with globally competitive environment and state-of-the-art

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infrastructure to activate local commerce, enhance foreign investments and attain sustainable development.

134. The Government of India accorded in principle approval to the project outline of DMIC Project in August, 2007. Twenty four Investment Regions/ Industrial Areas across the six States of Uttar Pradesh, Haryana, Madhya Pradesh, Rajasthan, Gujarat and Maharashtra were identified for development in DMIC. An institutional framework with a dedicated Special Purpose Vehicle (SPV) viz. Delhi Mumbai Industrial Corridor Development Corporation (DMICDC) was set up for project development, coordination and implementation of the numerous projects.

135. As the Master Plans progressed, it was felt necessary and essential that new industrial cities must be created on the back of world class trunk infrastructure i.e. drainage, sewage, solid waste, water supply, internal roads. Without the trunk infrastructure the development of PPP projects in Greenfield cities was not feasible and may lead to real estate development without trunk infrastructure and a developed backbone. The Government of India, therefore, in September, 2011 restructured the DMIC Project with an Implementation Fund of Rs.17,500 crore to be utilized over a period of five years and an additional project development Fund of Rs.1000 crore. The land for the new industrial cities will be the contribution of the State Government. The Japanese Government have also announced their financial support for DMIC project to an extent of US $ 4.5 billion for projects with Japanese participation in the first phase of the project.

136. Looking at the magnitude and diversity, the entire project has been planned to be implemented in phases. Initially, the following industrial cities have been taken up for development as industrial cities:

(i) Ahmedabad-Dholera Investment Region, Gujarat; (ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra; (iii) Manesar-Bawal Investment Region, Haryana; (iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan; (v) Jodhpur-Pali-Marwar Industrial Area, Rajasthan; (vi) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh; (vii) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; (viii) Dighi Port Industrial Area, Maharashtra.

(ix) In addition one more NIMZ is being considered near Nagpur.

137. The overall perspective plan for the entire DMIC Region has been completed. The Master Planning of the first six industrial cities mentioned above have been completed. The concerned State Governments have initiated the process of Land pooling/ procurement/ acquisition for the industrial cities as well as for the Early Bird Projects. Project Development of four (04) Gas Based Power Projects is complete including the final Environmental clearance

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Promotion of Business environment

Promoting FDI

138. Significant changes have been made in the FDI policy regime in the recent times to ensure that India remains increasingly attractive and investor-friendly. Some of the main changes have been as follows:

Consolidation

139. For ease of reference, all existing regulations on FDI were integrated into one consolidated document. The consolidation involved integration of 178 Press Notes, covering various aspects of FDI policy since 1991, as also other regulations governing FDI. The document was released as Circular 1 of 2010 , effective 1 April, 2010.

Rationalization and liberalization

140. In order to make the FDI policy more liberal and investor-friendly, further rationalization and simplification has been carried out since. Accordingly, a number of clarifications were issued on various subjects, including interalia the concepts of controlled conditions for FDI in Agriculture/Animal Husbandry etc., value-addition in case of mining and mineral separation of Titanium bearing minerals and introduction of a specific provision for downstream investment through internal accruals .

141. Subsequently, significant policy changes were introduced in Circular 1 of 2011

effective from 1.4.2011. These include: (i) flexibility in fixing pricing of convertible instruments through a formula, rather than upfront fixation (ii) Inclusion of fresh items for issue of shares against non-cash considerations, including import of capital goods/ machinery/ equipment and pre-operative/ pre-incorporation expenses (iii) Removal of the condition of prior approval in case of existing joint ventures/technical collaborations in the same field (iv) simplification and rationalization of guidelines relating to down-stream investments and (v) development and production of seeds and planting material, without the stipulation of having to do so under controlled conditions . FDI has also recently been permitted in Limited Liability Partnerships

(LLPs), subject to specified conditions.

Recent Announcements

142. Recently on 14.9.2012, the Government has decided the following to boost FDI inflows to the country:

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(i) Permitting foreign investment, up to 49 percent (FDI & FII) [FDI limit of 26 per cent and

FII limit of 23 per cent of the paid-up capital], in Power Exchanges, in compliance with SEBI Regulations; Central Electricity Regulatory Commission (Power Market) Regulations, 2010; and other applicable laws/ regulations; security and other conditionalities.

(ii) Liberalising the policy on foreign investment, for companies operating in the broadcasting sector, as below:

Teleports (setting up up-linking HUBs/Teleports): Direct to Home (DTH); Cable Networks (Multi-System-Operators operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability): Currently, foreign investment, up to 49 percent, is permitted in these activities. It has been decided to now increase the foreign investment limit from 49 percent to 74 percent.

Mobile TV: There was no specific dispensation under FDI policy for mobile TV. It has now been decided to permit Foreign Investment (FI) up to 74 percent.

In both the cases FDI, up to 49 percent, will be permitted under the automatic route and FDI beyond 49 percent and up to 74 percent will be permitted under the Government route.

(iii) Permitting foreign airlines to make foreign investment, up to 49 percent in scheduled and non-scheduled air transport services.

(iv) Permitting FDI, upto 51%, under the Government approval route, in multi-brand retail trading, subject to specified conditions.

143. Amendment of the existing policy on Foreign Direct Investment in Single-Brand Product Retail Trading, with a view to aligning it with the global practices being followed by Single-brand retailers

e Biz in line single window

144. In order to enable businesses and investors to save time and costs and in order to improve the business environment in the country, an online single window was conceptualized in the form of the eBiz Mission Mode Project under the National eGovernance Plan. This project aims to create a business and investor friendly ecosystem in India by making all business and investment related regulatory services across Central, State and Local governments available on a single portal, obviating the need for the investor or the business to visit multiple offices or a plethora of websites. It is envisaged that eh services offered on eBiz will eventually cover the entire life cycle of a business

right from the its establishment, through its ongoing operations, to even its possible closure.

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145. The core value of this transformational project lies in radical shift in the Governments service delivery approach from being department-centric to customer-centric. eBiz will not only create a 24x7 facility for information and services, but will also offer joined-up services where a single application submitted by a customer, for a number of permissions, clearances, approvals and registrations, will be routed automatically across multiple governmental agencies in a logical manner. An inbuilt automated payment gateway will also add value by allowing the all payments to be collected at one point and then apprortioned, split and routed to the respective heads of account of Central / State / Parastatal agencies along with generation of challans and MIS reports. At present 22 services are ready to go live and more services across States and Central Government Departments are being integrated. The project is expected to go live in September, 2013 with the Andhra Pradesh Single Window consisting of 24 State Services, 8 Central Services and an inbuilt payment gateway.

Other Ministries engaged in manufacturing

146. There are number of Ministries/ Departments which implement various policies, programme, schemes that contribute to growth of manufacturing. These include Ministry/ Departments of Micro Small & Medium Enterprises, Heavy Industry, Steel, Textiles, Food Processing Industries, Chemical & Petro Chemicals, Fertilizers, Pharmaceuticals, Petroleum & Natural Gas, Defence Production, Electronic & IT, Shipping etc. On an estimate about 30 schemes relating to manufacturing are being implemented by these Ministries/ Depts.

147. Efforts are on to discuss with these Ministries/ Departments, feasible measures to reverse the current slow down on manufacturing and achieve the goals of the NMP. Efforts are also on to build databanks of schemes/ programmes, training institutes / agencies, R&D and centres of excellence to provide a common knowledge platform and enable sharing of common facilities/ resources/ inputs.

148. MSMEs play a crucial role in driving growth of manufacturing, export and creating employment. Traditional labor intensive sectors like textiles, leather, manufactures, handicrafts and carpets have huge potential in this regard. Manufacturing sector needs a boost with special emphasis given to SMEs. Besides NIMZ, SEZs are key tools for facilitating the growth in the manufacturing sector. Annexure gives an illustrative list of the Ministry / Departments/ Schemes engaged in manufacturing.

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SECTION- VII

ROAD MAP TO BOOST MANUFACTURING

149. Based on the analysis of manufacturing trends and factors impacting it s growth and taking into account the initiatives and other confidence building measures undertaken by the Government, a road map for boosting manufacturing is proposed. The road map will involve addressing crucial determinants for manufacturing growth such employment and skill development, improving business environment, deepening technology in manufacturing, systems for convergence, monitoring and tracking of projects, inter ministerial schematic coordination etc.

I. Skill Building and human resource development

India has a strong demographic dividend where 65% of the population is estimated to be in the working age group by 2022. Some of the initiatives that can be taken include:

Industrial Training and skill upgradation skill building of minimally educated workers;

vocational training through it is including PPP mode ;

specialized skill development through poly techniques ;

Establishment of instructors training in NIMZ.

Leveraging the training institutions under different Ministries/ Depts. To coordinate skill development

Inducing job creation by reducing the cost of generating employment

Companies may be allowed to retrench employees with a fair severance benefits; reform process of engaging labour, simplify labour laws etc.

Providing social protection to low income work force-through unemployment benefits and increasing penetration of existing schemes.

Improving industry work force relationship.

II. Shifting employment from informal sector to manufacturing

Creation of appropriate skill sets for rural migrant and urban poor to make growth inclusive

Increase domestic value addition and technological depth in manufacturing of traditional products

Skill building amongst minimally educated workforce

including Farm to Work and School to work programmes targeted towards the workforce entering non agricultural sector for the first time and seeking seasonal employment .Skill gaps will be identified

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low skill categories as loaders, cleaners, skills on basic operations on the shop floor, basic machine operations, etc

Skill building will also cover behavioral aspects urban industrial work culture- timeliness, reporting ability to work in organized set up ;Training in simple user friendly local languages

Short term training courses based on modular employable skills so that opportunity cost of being away from productive work opportunities is minimized during training period

Scaling up efforts Private sector through their non profit arms to undertake skill upgradation through provision of incentives and infrastructural support ,

In National Industrial Manufacturing Zones , SPV will provide skill upgradation with preference for local residents ; undertake adequate awareness an publicity campaign ; provide boarding and lodging, transport to trainees.

III. Enabling jobs/ employment

Support to employment intensive industries- textiles, garments, leather footwear, food processing , gems and jewellery etc

Small and medium enterprises growth over diverse geographies ; skill development, employment opportunities for self employment and jobs;

Policy intervention in SME in areas like manufacturing management , accelerated adoption of IT; skill development ; access to capital; marketing ; procedural simplification and governance reform IT; access to capital etc

National Manufacturing Competiveness program being implemented by MSME be strengthened and efforts to be made for creation of a separate fund with SIDBI, strengthening of NSIC. Modification of lending norms and inclusion of MSMEs under priority sector .

IV. Supporting Unorganized Sector

More than 94% of MSMEs are unregistered with most of them in the informal/unorganized sector. There is need to address issues such as marketing, raw material access, credit, technology upgradation etc. It should also focus on providing social security to unorganized workers in terms of the mandate of Unorganized Workers Social Security Act.

V. Technology upgradation, systems for transfer of technology, incentivizing and green production and R&D

NMP guidelines - leverage existing schemes / incentives to introduce green mechanisms and incentives ;

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Technology Acquisition and Development Fund;

enabling systems for transfer of technology to industries by existing institutes of research/

excellence ( coordination with D/Science and Technology,)

FDI to be used an enabling instrument for transfer of technology

VI. Credit Access

For SME initiatives of venture capital funds; liberalization of RBI norms for this ;

creation of a separate fund in SIDBI ;

making SME a priority sector lending; relief on capital gains tax on sale of residential property for startup SMEs ( has been included in budget 2012-12 )

Linking up with Self Help Groups / federations already engaged in economic activity to upscale them into small industries.

Regulation of micro lending institutions to make them viable instruments of lending

VII. Exploring new areas of manufacturing - Defence offsets

Private sector is eligible for defence offsets of 30% of capital acquisitions for Buy ( global) or Buy and Make with Transfer of Technology

A multiplier provision of 1.50 is being made for micro, small and medium industries in the newly announced Defence Offset guidelines

VIII. Domestic production capital goods core investment

DIPP has pursued for promotion of domestic capital goods production. COS has decided that import of second hand machinery may be prohibited under TUFS, EPCG. Hence the import of machinery more than five years old may be disallowed unless permitted by DOC in consultation with the Ministries.

Specific measures are needed to boost the sales and exports of Heavy commercial Vehicles

Incentives to increase sale of domestically produced textiles , cement and sugar machinery

IX. Suggested measures to be taken by Ministries/ Departments engaged in manufacturing

Setting up of databanks (to provide a common knowledge platform and enable sharing of common facilities/ resources/ inputs )

List of schemes/ programmes which directly deal with manufacturing activities or provide the requisite infrastructure or technological inputs to improve the competitiveness of

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manufacturing. Annexure gives the illustrative list of schemes of different ministries engaged in manufacturing

listing all the training institutes / agencies under Ministries/ Departments

list of R&D and centres of excellence

X. Systems for convergence, monitoring and tracking

A convergence mechanism to be developed for manufacturing schemes dealt in different Ministries/Departments. NMCC may formulate the mechanism along with monitoring system.

Specific Action plan formulated with monitorable indicators by the concerned Ministries/ Departments in consultation with the Industry Associations/ stakeholders to address the problems of industries which show a declining production trend in the last two years.

Expeditious Implementation of big ticket projects to be identifies by each Ministry/ Department

XI. Promotion of Business environment

Schemes for Investment Promotion

Invest India to provide guidance to investors; e Biz under the National e-governance Plan to act an online single window for service delivery.

FDI in multi brand retail for back end infrastructure such as cold chains to be revived.

XII. Business regulatory framework

The key objectives of business regulatory framework are to reduce compliance cost for business, simplify existing regulatory systems and ensure fair competition. For this it is necessary to Rationalization and simplification of regulations

Basic philosophy: Industry to self regulate to the extent possible.

Central/State Governments to suspend operation of particular provisions wherever such powers exist subject to an alternative mechanism, annual audits by concerned departments and third party certification.

Delegation of powers to a single body in case of other provisions.

Combined application forms and common registers as far as possible.

Systematization of inspections third party certification

Promotion of Clusters and providing technical assistance to State Governments in cluster formation and develop strategies for different types of clusters for different sectors. It should also expand the scope of capacity building by improved market linkages, access to credit, quality etc.

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to develop monitoring systems to monitor the performance of clusters and share best practices across them.

XIII. Boosting Manufacturing Export

The key strategies to provide world class infrastructure, reduction of transaction cost for exporters, simplifying export procedures, addressing non-tariff barriers etc. The FTA processes need to be further reformed in consultation with stake holders; provision of fiscal incentives to exporters; attracting FDI in the country; focusing on unexplored markets and products; building a brand promotion strategy for export products; focus on moving towards high-tech exports from current low-tech exports.

XIV. Reforming the role and management of Public Sector Enterprises (PSEs)

Some of the recommendations include disinvestment in areas where private sector is capable of producing the same product/service; man power planning exercise to identify skill and talent requirement, streamlining the governance structure especially at the board level. PSEs should also be encouraged partner in joint ventures and PPP with private sector.

Investment in Physical infrastructure (Power, road, railway, port), Social infrastructure (health, sanitation, education, skill development) and investment in Agriculture (power supply, irrigation, R&D, cold storage, supply chain, marketing, horticulture, development of mega food parks, agro-processing etc.) will help in providing forward and backward linkages to boost the overall economy of the country

XV. Others (including policy measures)

Closely monitor status of implementation of important infrastructure projects by the Committee on Infrastructure

To encourage and facilitate FDI inflow through appropriate policy initiatives

Measures to contain inflation through increased production; reduction in transaction costs; efficient supply chains ; fiscal policy measures of reducing fiscal deficit through reduction in subsidy;( option of direct cash transfers to be examined) rationalization of direct(DTC) and indirect taxes (GST) ; measures to control black money;

RBI to focus not only on inflation as a barometer for rate cuts but also focus on the equally important need of promoting industrial investment.

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Annexure:

Schemes for the Manufacturing Growth implemented by Ministries/ Departments

1. Ministry of Food Processing Industries

Mega Food Parks Scheme (MFPS)

The primary objective of the MFPS is to provide adequate / excellent infrastructure facilities for food processing along the value chain from the farm to market. It will include creation of infrastructure near the farm, transportation, logistics and centralized processing centers. The main feature of the scheme is a cluster based approach. The scheme will be demand driven; pre marketed and would facilitate food processing units to meet environmental, safety and social standards.

The expected outcome is increased realization for farmers, creation of high quality rural processing infrastructure, reduction in wastage, capacity building of the producers and processors and creation of an efficient supply chain along with significant direct and indirect employment generation.

Cold Chain, Value Addition and Preservation Infrastructure

Scheme for Setting up/ Up-gradation of Quality Control/ Food Testing Laboratory/ R&D and Promotional Activity

2. Ministry of Textile

Comprehensive Powerloom Cluster Development Scheme (CPCDS)

The guiding principles underlying the design of clusters would be to create world class infrastructure and to integrate the production chain in a manner that caters to the business needs of the local Small and Medium Enterprises (SMEs) to boost production and export. In brief, the main objective of setting up these mega clusters is to assist the entrepreneurs to set up world-class units with modern infrastructure, latest technology, and adequate training and Human Resource Development (HRD) inputs along with appropriate market linkages. SPV is designed in such a way, which will have Standard Models of units of SSI, SME with infrastructure that is customized to give a competitive edge and these centers have greater potential to become globally competitive.

Comprehensive Handloom Cluster Development

The objective is to develop Mega Handloom Clusters that are located in clearly identifiable geographical locations that specialize in specific

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Scheme (CHCDS)

Mega Handloom Cluster

products, with close linkages and inter dependents amongst the key players in the cluster by improving the infrastructure facilities, with better storage facilities, technology up-gradation in pre-loom/on-loom/post-loom operations, weaving shed, skill up-gradation, design inputs, health facilities etc. which would eventually be able to meet the discerning and changing market demands both at domestic and at the international level and raise living standards of the millions of weavers engaged in the handloom industry.

Comprehensive Handicrafts Cluster Development Scheme (CHCDS)

The objective is to develop these two clusters with world-class infrastructure. The guiding principle behind the design of clusters would be to create world-class infrastructure that caters to the business needs of the local artisans & SMEs to boost production and export. In brief, the main objective of setting up these clusters is to assist the artisans & entrepreneurs to set up world-class units with modern infrastructure, latest technology, and adequate training and HRD inputs, coupled with market linkages and production diversification. SPV is designed in such a way, which will have Standard Models of units of SSI and SME with infrastructure that is customized to give a competitive edge and these centers have greater potential to become globally competitive.

Technology Upgradation Fund Scheme (TUFS)

Ministry of Textiles has launched a Technology Upgradation Fund Scheme (TUFS) for Textile and Jute Industries, w.e.f. 1.4.1999 for a period of 5 years, i.e., up to 31st March 2004 which was subsequently extended upto 31.3.2007, i.e., till the end of tenth five year plan. Benefits under the scheme: 5% interest reimbursement of the normal interest charged by the lending agency on RTL. Or 5% exchange fluctuation (interest & repayment) from the base rate on FCL. Or 15% credit linked capital subsidy for SSI sector. Or 20% credit linked capital subsidy for powerloom sector (An option for front ended subsidy provided w.e.f. 1st October,

2005). Or 5% interest reimbursement plus 10% capital subsidy for specified Processing machinery.

The Scheme for Integrated Textile Parks (SITP)

The Scheme for Integrated Textile Parks (SITP)

was launched by merging two schemes; namely, Apparel Parks for Exports Scheme (APES)

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and the Textiles Centre Infrastructure Development Scheme (TCIDS).

1.2 Primary objective of the SITP is to provide the industry with world-class infrastructure facilities for setting up their textile units. The scheme would facilitate textile units to meet international environmental and social standards.

1.3 SITP would create new textile parks of international standards at potential growth centres. This scheme envisages engaging of a panel of professional agencies for project identification and execution.

1.4 Each Integrated Textile Park (ITP) would normally have 50 units. The

3. Ministry of Small Scale & Medium Enterprises (MSME)

Scheme of Fund for Regeneration of Traditional Industries (SFURTI)

Government has recently launched the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) under which 100 traditional industry clusters (of khadi, village industry and coir) would be taken up for comprehensive development over 5 year. The KVIC and the Coir Board are the nodal agencies for the Scheme, which will be the first comprehensive initiative for regeneration of the khadi and village industries sector, based on the cluster development methodology.

Guidelines of International Cooperation Scheme -

Technology infusion and/or upgradation of Indian micro, small and medium enterprises (MSMEs), their 52odernization and promotion of their exports are the principal objectives of assistance under the International Cooperation Scheme.

Rural Industries Service Centre (RISC)

To provide infrastructure support for individual units to upgrade their production, quality, skills, marketing,

Scheme for Assistance to Training Institutions

The Scheme envisages financial assistance for establishment of new institutions (EDIs), strengthening the infrastructure of the existing EDIs and for supporting entrepreneurship and skill development activities. The main objectives of the scheme are development of indigenous entrepreneurship from all walks of life for developing new micro and small enterprises, enlarging the entrepreneurial base and encouraging self-employment in rural as well as urban areas, by providing training to first generation entrepreneurs and assisting them in setting up of enterprises. The assistance shall be provided to these training institutions in the form of capital grant for creation/strengthening of infrastructure and programme support for conducting entrepreneurship development

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and skill development programmes.

Rajiv Gandhi Udyami Mitra Yojana (RGUMY)

The objective of scheme is to provide handholding support and assistance to the potential first generation entrepreneurs, who have already successfully completed EDP/SDP/ESDP or vocational training from ITIs, through the selected lead agencies i.e. Udyami Mitras , in the establishment and management of the new enterprise, in dealing with various procedural and legal hurdles and in completion of various formalities required for setting up and running of the enterprise

Marketing Assistance Scheme through National Small Industries Corporation (NSIC)

Ministry of Micro, Small & Medium Enterprises, inter-alia, through National Small Industries Corporation (NSIC), a Public Sector Enterprise of the Ministry, has been providing marketing support to Micro & Small Enterprises (MSEs) under Marketing Assistance Scheme.

To enhance marketing capabilities & competitiveness of the MSMEs.

3.2 To showcase the competencies of MSMEs.

3.3 To update MSMEs about the prevalent market scenario and its impact on their activities.

3.4 To facilitate the formation of consortia of MSMEs for marketing of their products and services.

3.5 To provide platform to MSMEs for interaction with large institutional buyers.

3.6 To disseminate/ propagate various programmes of the Government.

3.7 To enrich the marketing skills of the micro, small & medium entrepreneurs

Prime Minister s Employment Generation Programme (PMEGP)

Implemented by Khadi and Village Industries Commission (KVIC) Objectives

9. To generate employment opportunities in rural as well as urban

areas of the country through setting up of new self-employment ventures/projects/micro enterprises. (ii) To bring together widely dispersed traditional artisans/ rural and urban unemployed youth and give them self-employment opportunities to the extent possible, at their place. (iii) To provide continuous and sustainable employment to a large

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segment of traditional and prospective artisans and rural and urban unemployed youth in the country, so as to help arrest migration of rural youth to urban areas. (iv) To increase the wage earning capacity of artisans and contribute to increase in the growth rate of rural and urban employment

National Manufacturing Competitiveness Programme (NMCP) Under Xi Plan

S.No.

Name of the Sub-Scheme

1 Marketing Support/Assistance to MSMEs(Bar Code)

2 Support for Entrepreneurial and Managerial Development of SMEs through Incubators

3 Enabling Manufacturing Sector to be competitive through Quality Management Standard & Quality Tech. Tools (QMS/QTT)

4 Building Awareness on Intellectual Property Rights (IPR) for MSME

5 Lean Manufacturing Competitiveness Scheme for MSMEs

6 Mini Tool Rooms proposed to be set up by Ministry of MSME (MTR)

7 Design Clinic Scheme for design expertise to MSMEs Manufacturing sector (DESIGN)

8 Marketing Assistance & Technology Up-gradation Scheme in MSMEs.

9 Technology and Quality Upgradation Support to MSMEs

10 Promotion of ICT in Indian Manufacturing Sector (ICT)

Micro & Small Enterprises

Cluster Development Programme (MSE-CDP)

The Ministry of Micro, Small and Medium Enterprises (MSME), Government of India (GoI) has adopted the cluster development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of Micro and Small Enterprises (MSEs) and their collectives in the country. Clustering of units also enables providers of various services to them, including

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banks and credit agencies, to provide their services more economically, thus reducing costs and improving the availability of services for these enterprises.

Objectives of the Scheme:

i.

To support the sustainability and growth of MSEs by addressing common issues such as improvement of technology, skills and quality, market access, access to capital, etc.

ii.

To build capacity of MSEs for common supportive action through formation of self help groups, consortia, upgradation of associations, etc.

iii.

To create/upgrade infrastructural facilities in the new/existing industrial areas/ clusters of MSEs.

iv.

To set up common facility centres (for testing, training centre, raw material depot, effluent treatment, complementing production processes, etc).

Credit Linked Capital Subsidy Scheme for Technology Upgradation

The Scheme was launched in October, 2000 and revised w.e.f. 29.09.2005. The revised scheme aims at facilitating Technology Upgradation of Micro and Small Enterprises by providing 15% capital subsidy (12% prior to 2005) on institutional finance availed by them for induction of well established and improved technology in approved sub-sectors/products. The admissible capital subsidy under the revised scheme is calculated with reference to purchase price of Plant and Machinery. Maximum limit of eligible loan for calculation of subsidy under the revised scheme is also been raised Rs. 40 lakhs to Rs. 100 lakh w.e.f. 29-09.2005.

Credit Guarantee Scheme-

Collateral free loans upto a limit of Rs.50 lakhs

for individual MSEs.

Purchase and Price Preference Policy

This is administered through the Single Point Registration Scheme of NSIC. Under this, 358 items are reserved for exclusive purchase from MSME by Central Government. Other facilities include tender documents free of cost, exemption from earnest money and security deposit and 15% price preference in Central Government purchases

for individual MSMEs

4. Department of Research & To set up World class infrastructure to test vehicles and

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Heavy Industry Development in

Automotive Industry

Implementation of National Automotive and R&D Infrastructure Project

(NATRIP)

components against existing and emerging standards mandated by the Govt. to significantly enhanced vehicular safety, performance and ameliorated its impact on public health. Deepening of automotive manufacturing in India, promoting larger value addition and thereby significantly enhancing employment generation in this sector. India s emergence as a global outsourcing base for automobiles and auto Components in furtherance of Auto Policy.

Various Schemes for capacity Augmentation of plants & Machinery

5. Department of Chemical & Petrochemicals

Scheme for Setting Up of Plastic Parks

1. Increase the competitiveness, polymer absorption capacity and value addition in the domestic downstream plastic processing industry through adoption of modern, research and development led measures. 2. Increase investments in the sector through additions in capacity and production, creating quality infrastructure and other facilitation to ensure value addition and increase in exports. 3. Achieve environmentally sustainable growth through innovative methods of waste management, recycling, etc. 4. Adopt a cluster development approach to achieve the above objectives owing to its benefits arising due to optimization of resources and economies of scale.

6. Department of Fertilizer

Public Sector Undertakings

Capital Subsidy for conversion

Investments for Joint Ventures abroad

Revival of Closed Units

7. Department of Pharmaceuticals

Central Public Sector Undertakings

There are five Central Public Sector Undertakings (CPSUs) viz Indian Drugs and Pharmaceuticals Limited (IDPL), Hindustan Antibiotics Limited (HAL),

Bengal Chemicals and Pharmaceuticals Limited (BCPL), Bengal Immunity Limited (BIL) and Smith Stanistreet Pharmaceuticals Limited(SSPL). Earlier Karnataka Antibiotics & Pharmaceuticals Limited. (KAPL) was a joint venture between Hindustan Antibiotics Limited (HAL) and State Government of Karnataka and Rajasthan Drugs and Pharmaceuticals Limited (RDPL) was a joint venture of Indian Drugs and Pharmaceuticals Limited (IDPL) and the State

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Government of Rajasthan. But in order to sustain the growth & development of KAPL & RDPL, Government has approved de-linking of both these companies from HAL & IDPL respectively

8. Ministry of Petroleum & Natural Gas

Exploration and Production of the Oil & Natural Gas

ONGC, Oil India Limited

9 Department of Defence Production

Defence Offset Policy

10. Department of Electronics and Information Technology

Scheme of Manpower Development for Software Export Industry

The Projects under the scheme are aimed to create course contents, generate mentors & quality faculties and skilled graduates in the information Technology sector at various locations across India with a view to increasing the employability of the students. The Scheme covers Training of the Trainer s Program, Enhancement of quality of IT education in colleges, Virtualization of Technical Education, conducting specialized short term courses in IT/ITES sector, Setting up of National On-line Test System for Graduates Engineers in Information technology, etc. The duration of the above projects varies from 18 months to 3 years:

R&D Funding Scheme

Technology Incubation and Development of Entrepreneurs

Multiplier Grants Scheme

Support International Patent Protection in Electronics & IT (SIP-EIT) Scheme

STPI Scheme

Special Economic Zones (SEZ) Scheme

Electronics Hardware

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Technology Park (EHTP) Scheme

Export

Oriented Unit (EOU) Scheme

Export Promotion Capital Goods (EPCG) Scheme

Duty Exemption and Remission Schemes

11. Ministry of Shipping

Promotion of Shipbuilding Industry

Capacity Augmentation of major Ports

12. Ministry of Steel SHIPBREAKING

Public Sector Undertakings (PSUs) under the administrative control of the Ministry

Steel Authority of India Ltd., (SAIL), New Delhi 2. Rashtriya Ispat Nigam Ltd.(RINL), Visakhapatnam 3. NMDC Ltd., Hyderabad 4. MOIL Ltd., Nagpur 5. KIOCL Ltd, Bangalore 6. Hindustan Steelworks Construction Ltd. (HSCL), Kolkata 7. MECON Ltd., Ranchi 8. MSTC Ltd., Kolkata 9. Ferro Scrap Nigam Ltd. (FSNL), Bhilai, (A subsidiary of MSTC Ltd.)

promotion of Research & Development in Iron and Steel sector

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Annual Conference on Economic Growth and Development, December 16-18, 2010, Indian Statistical Institute, New Delhi

3. Nagaraj (2007), Labour Market Issue in India , 5th Annual Global Development Annual conference, Asian Development Bank, New Delhi, 2004.

4. Planning Commission, Five Year Plan documents, various issues. 5. Singh, Jitender (2012), Tradeoff of workers between MGNREGS and Manufacturing ,

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