Key Trend: Manufacturing Losing Ground to Services
- Over the decade ending 2023-24, manufacturing’s share in India’s economy has declined significantly.
- While not outright de-industrialization, the shift toward services is unmistakable and increasingly difficult to reverse.
- India appears to have skipped the classic industrialization phase, transitioning from an agrarian economy directly to a service-based economy.
Why This Matters: Capital Formation and Economic Sustainability
- Services are less capital-intensive compared to manufacturing.
- This shift affects long-term sustainable growth, as manufacturing typically drives higher capital formation.
- The national goal of making manufacturing contribute 25% of GDP looks increasingly elusive.
Manufacturing Sector Data: 2013-14 vs. 2023-24
- Share in Gross Value Added (GVA) has dropped from 16.5% to 14.3%.
- Share in gross capital formation has fallen from 17.3% to 15.7%.
- Ratio of value added to gross output (a measure of productivity) declined from 21.6% to 20.6%.
Key Challenges Facing Manufacturing
Supply-Side Issues:
- Freer trade policies make importing products easier, dampening domestic manufacturing competitiveness.
- Mobile phone assembly dominates, with true domestic production still limited, despite PLI schemes.
- Imports continue to dominate in several sectors; domestic manufacturing progress remains slow.
Demand-Side Issues:
- Shift in consumption patterns:
- Share of manufactured goods in final consumption dropped from 57.2% to 48.8%.
- Services like health, transport, and education gained preference.
- Decline in non-durable goods consumption and only a marginal rise in durable goods consumption (from 2.8% to 3.2%).
- Weak demand leads to underutilized capacity and low private investment in manufacturing.
Where Investments Are Flowing Instead
- Investment is moving towards:
- Construction: Share increased from 4.8% to 8.1% (housing and infrastructure).
- Trade, hotels, restaurants, transport, communication: Share rose from 15.3% to 22.2%.
- Railways: Capital formation doubled from 1.3% to 2.7% due to government expenditure.
- The share of private non-financial corporations in capital formation decreased from 36.6% to 32.4%.
Government Efforts: Supply-Side Push
- Make in India campaign aimed to promote domestic manufacturing.
- PLI (Production-Linked Incentive) schemes were launched with substantial budget support.
- Fiscal measures:
- Corporate tax reductions.
- GST rationalization to ease the business environment.
- Despite these efforts, the demand-side shift toward services continues to dominate.
What Needs to Change
- The demand challenge cannot be solved with supply-side measures alone.
- Manufacturing companies must:
- Innovate and produce cost-effective products.
- Align with consumer preferences influenced by higher incomes and service-sector lifestyles.
- A more consumer-centric strategy is essential to regain manufacturing momentum.
Way Forward
- India’s economy is experiencing a structural shift towards services at the cost of manufacturing.
- While government initiatives have focused on supply-side support, consumer demand for manufactured goods remains weak.
- To rejuvenate manufacturing, India needs both innovative production strategies and strong domestic demand, ensuring that the sector remains a vital contributor to sustainable economic growth.
