What is the current state of the manufacturing sector in India and how does the Indian manufacturing sector compare with the rest of the world?

As per the world bank data, the world manufacturing output, value-added (in current US$) stood at 14.17 trillion US$ in 2018. And India's manufacturing output, value-added (in current US$) stood at 403.05 billion US$. In other words, India's manufacturing output, value-added (in current US$) was 2.84% of the world's manufacturing output, value-added (in current US$).

China, which has come to be known as the world's factory contributed nearly 28.25% to the world's manufacturing output, value-added (in current US$). Overall, Chinese manufacturing output, value-added (in current US$) stood at nearly 4.003 trillion US$ in the year 2018. The Chinese nominal GDP in 2018 was 13.608 Trillion US$ (Current US$). Therefore, manufacturing contributed nearly 29.42% to the Chinese economy. Chinese exports were 19.51% of the Chinese GDP. Or in other words, China exported approximately 2.655 trillion US$ worth of Goods.

Here is a chart showing the top 10 countries by share of world manufacturing output in 2018:

As can be seen from the above chart, the Chinese manufacturing output was nearly 10 times the Indian manufacturing output in 2018.

With nearly the identical population size, China has clearly taken a massive lead over India when it comes to the manufacturing sector.

And since 2014, India's manufacturing output has slowed down considerably. While from 2004 to 2014, India's manufacturing output grew at a CAGR of 10.59%. And since 2014 when the Make in India program was launched, the manufacturing output grew at a CAGR of 7.02%.

During the same period, the Chinese manufacturing output grew at a CAGR of 17.68% from 2004 to 2014. And since 2014, the Chinese manufacturing output grew at a CAGR of 5.89%.

The Chinese manufacturing output has slowed down from the period of 2004 - 2014 to 2014 - 2018 because of rising wages in China. It is clearly understandable.

However, what explains the slowing down of India's manufacturing output from the period of 2004-2014 to 2014-2018? While Chinese manufacturing is slowing down due to rising wages in China, other emerging countries like Bangladesh, Vietnam, etc. have grabbed the opportunity to boost their manufacturing output. And India has lagged behind because of a lack of preparedness.

The government of India launched the Make in India program in 2014. However, the program just focused on top-down manufacturing approach. The automotive industry nearly contributes about 50% to India's domestic manufacturing output. However, automotive manufacturing is a top-down manufacturing approach. A large automotive company sets up a plant in India after assessing the demand and the size of the Indian market. Thereafter ancillary component manufacturing companies come up to supply different components to the automotive company. This approach is known as top-down manufacturing approach. Robots and high-tech machinery are used in this kind of manufacturing to produce final products. Therefore, employment generation is not high in this kind of manufacturing approach.

The Make in India program failed to focus on the bottom-up manufacturing approach. And no wonder, India's manufacturing output growth has slowed down since 2014. Simple common household goods are not manufactured in India. Instead, these goods are sourced from China. Indian entrepreneurs are becoming traders and not manufacturers. Simple common household goods such as Diwali Lights, Toys, Electrical items, electronic items, etc. that are consumed on a daily basis are not manufactured in India. No big company will make these products. Only a startup entrepreneur can manufacture these goods. However, there is no policy framework or manufacturing infrastructure to support this kind of bottom-up manufacturing in India. And no wonder, Indian entrepreneurs do not manufacture these simple common household goods in India.

It is high time the Make in India Program focuses on bottom-up manufacturing to boost manufacturing output in India. Given the population size in India, the Indian manufacturing output shall be close to 2 trillion US$ and not 400 billion US$. The focus on bottom-up manufacturing will not only generate employment on a large scale but also boost India's consumption and exports thereby giving a fillip to India's sagging economy.

Macro and Micro level solutions for India to achieve double-digit economic growth for the next 2 decades

Macro

The Indian economy has slowed down. And it has been slowing down for the last several quarters now.

India GDP Growth rate last 10 years:

Data Source: Ministry of Statistics & Programme Implementation

As can be seen from the above chart that the quarterly GDP growth rate is consistently falling since Jan - Mar 2018 quarter. In other words, the quarterly GDP growth rate numbers are falling for the last 7 quarters. This consistent fall in GDP growth rate for the last 7 quarters has raised the concern that problems in the Indian economy are structural and not cyclical.

• Therefore, what are these structural problems in the Indian Economy?

As we all know, the GDP comprises of 4 major components:
Economy E = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X=Exports-Imports)
Here is the data for each of the 4 components of the Indian economy:

Exports as a percentage of GDP of India:

Imports as a percentage of GDP of India:

As can be seen from the above charts that the Consumption and Investment comprise roughly 90% of India's GDP. And Consumption is plateauing. Whereas Investment rates are falling consistently.

Therefore, at a macro level, the problems are identified. The problems are plateauing consumption and falling investment rates.

• Now, the question is, how can this trend of plateauing consumption, as well as falling investment rates, be reversed? 

One suggested solution is to give money in the hands of the people, especially rural people, in the form of PM Kisan, MNREGA, etc. The rural people with money in hand spend spontaneously thereby raising the consumption. However, is this solution really sustainable?

The other suggested solution is employment generation. This is a good idea as this will not only give a boost to consumption but also raise investment rates. Construction, infrastructure, manufacturing are 3 sectors that can certainly generate employment at a large scale.

• The construction sector though is going through a bad phase with many stuck and delayed projects. The union government has recently announced a stress fund to revive the construction sector. This is a step in the right direction. 
• The infrastructure sector is plagued with land acquisition issues. Within the infrastructure sector, roads, highways, railways have been given a special focus. The union government recently announced that 100 Lacs Crores worth of Infrastructure projects will be started in the next 5 years. However, both these sectors namely construction and infrastructure will take time to fructify. 
• The third sector that can generate employment at a large scale in India is the manufacturing sector. However, years after years, the manufacturing sector has not boomed in India.

Micro

The manufacturing sector has the potential to transform the Indian economy. Focus on the manufacturing sector and in particular on the Make in India initiative can set India on a path to achieve double-digit growth for the next 2 decades.

However, to boost the manufacturing sector in India, we need to differentiate between top-down manufacturing and bottom-up manufacturing.

Since 2014, the FDI inflows in India in absolute number terms have increased. However, FDI inflows as a percentage of GDP are below 2%. 

Moreover, FDI inflows go into various sectors of the economy. And even within the manufacturing sector, the FDI inflows go into the top-down manufacturing. 

In a top-down manufacturing approach, automation has resulted in a lack of employment generation. Robots and high-tech machinery are deployed to produce goods. 

Therefore, the bulk of the employment generation is only possible in bottom-up manufacturing. However, even the Make in  India program failed to focus on bottom-up manufacturing. And this is where our policymakers lack attention to details. Focus on bottom-up manufacturing will not only generate millions of jobs but also reduce India's trade deficit with China. Focus on bottom-up manufacturing will facilitate Indian entrepreneurs to manufacture simple common household goods in India rather than trading these goods from China. Simple common household goods such as toys, electrical items, electronic items, Diwali Lights, Plastic products can be easily manufactured in India. However, Indian entrepreneurs trade these goods from China. To support bottom-up manufacturing, the policymakers need to focus on developing manufacturing infrastructure in India. And this manufacturing infrastructure can be easily developed in a span of 2-3 years. All it needs is attention to detail. Now, the question that arises is 'How can this manufacturing infrastructure be developed'? Part of Government Spending (G) must be geared towards developing the manufacturing infrastructure. Once bottom-up manufacturing kicks-up in India, the private investment in the bottom-up manufacturing will rise regularly. However, the government needs to provide a trigger point.

Once this manufacturing infrastructure is in place, the Indian entrepreneurs will manufacture globally competitive common household goods in India. New manufacturing jobs will be created. This will not only boost India's own consumption but also give a boost to exports while reducing the imports from China.

Net-net, the Indian economy can boom by focusing on bottom-up manufacturing.