If India’s manufacturing sector has not grown effectively so far to justify Modi’s ‘Make in India’ initiative, better core industries’ performance of late seems to have given hopes for a brighter future for the sector. Core industries form the base of the industrial activities and its higher growth indicates higher growth prospects for manufacturing.
One hopes that better core sector performance would lead to higher manufacturing growth as hoped for by Modi’s ‘Make in India’ initiative. This initiative was launched by Narendra Modi as a campaign to boost the FDI in India and to make India a manufacturing hub. Under Make in India, 25 key sectors are identified and special emphasis is given to these sectors. The main idea of the campaign is to make India a manufacturing hub by inviting as many foreign investors to start up their business units in India. It is the effort made by the government to bring employment in India. It includes major new initiatives designed to facilitate investment, promote innovation and build best-in-class manufacturing infrastructure.
To promote the initiative Modi had travelled to a number of countries including Germany, France, US, China, and Japan. The initial response was extremely encouraging. The government of India and Japan signed an agreement in 2015 for doubling of Japanese investment into Indian firms in next five years. German Small and Medium Enterprises (SMEs) have pledged to invest over `3,000 crore for the ‘Make in India’ initiative for setting up of new manufacturing plants and projects. Aerospace major Boeing promised to invest in a brand new factory in India and create an entire aviation ecosystem as far as its ‘Make in India’ plans for its fighter aircraft the F/A-18 Super Hornet were concerned.
So much so, the investor facilitation cell of Make in India under the programme, Invest India is rated as one of the world’s most effective investment promotion agencies by UNCTAD. The platform handholds investors with sector-specific inputs, location identification, expediting regulatory approvals, facilitating meetings with relevant government and corporate officialdom and more.
This has been reflected in the sharp rise in FDI inflows to India. Cumulative FDI equity flows into India reached $118.4 billion during the last two financial years of 2015-16 and 2016-17, according to the latest report by global accounting firm KPMG. This is about 40% higher than the $81.8 billion recorded in the preceding three years, from 2011-12 to 2013-14. In the global reckoning, India has jumped one spot to eighth rank in 2017 in AT Kearney Foreign Direct Investment Confidence Index. India’s reforms to enable a ‘transparent’ and an ‘easy’ business environment have made it an attractive destination for foreign companies, AT Kearney report said.
But despite various growth measures taken by the government and sharp rice in FDI inflows the manufacturing sector’s growth has remained subdued so far and its contribution to GDP has stayed static. Manufacturing’s share in GVA has hovered at around 17% during the last five years, from 2013-14 to 2017-18.
The biggest causality of the poor performance of the manufacturing sector has been the employment generation bid of the government. In fact, one of the basic objectives of ‘Make in India’ initiative was to create jobs. The government’s own statistics show that fewer new jobs have been created in the post-2014 years. In 2015, a year after Modi took charge; some 1.35 lakh new jobs were created in India. It was the lowest in seven years, very much lower than 4.19 lakh new jobs created in 2013 and as many as 11 lakh two years earlier, in 2011.
The slow rate at which India’s job market grows looks pretty scary, at a time when an increasing number of youngsters come out of professional colleges and scout for jobs. Decelerating domestic demand has hit capacity utilization across several sectors in the country and inevitably, job creation.
However even as the manufacturing sector has been performing indifferently and the industry captions themselves appeared doubtful about industry’s growth prospects in the immediate future, the core sector industry has performed significantly better in recent months.
India’s eight core industries grew 6.8% in November from the year-ago period, led by improved performance in refinery products and steel segments. This is the maximum that the core industries have grown in more than a year. The eight infrastructure sectors-coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity grew 3.9% during the April-November 2017 period.
Moreover, the growth has been far more broad-based this time. Except coal – whose production declined by 0.2% in November – all the other seven industries in the sector had a positive growth. The broad-based improvement in core-sector growth is expected to raise the overall index of industrial production too. The core infrastructure industries have a combined weightage of 40.27% in the IIP.
Despite the recent turmoil and the problem of mounting liabilities of the steel companies, the steel production has recorded a spectacular turnaround in 2016-17. Aggregate steel production has crossed the 100 million-mark last year recording a more than 10% increase over the previous year. And the trend has continued this year too. Five times in the first eight months of the current year, between April and November, the steel production grew by more than 5%. Steel production in November has grown by a record 16.6%.
India has now seen as a ‘bright spot’ for the global steel production growth following the government’s move to augment capacity and demand from the construction, automobile and infrastructure sector. Steel majors Steel Authority of India and Tata Steel are expected to drive the growth in steel output according to a recent report by BMI Research, a Fitch group company. “The government has been spearheading the push towards the boost in steel production capacity, with upgrades being made to existing steel mills and state-owned companies stepping in to build new steel plants,” it said. The country’s share of global steel production will accelerate from 5.4% in 2017 to 7.7% in 2021, the report said.
The performance of the core sector industries will cheer up the government following the criticism it faced over economic management after GDP growth declined to 5.7% in the first quarter, triggering a downgrade in growth forecasts for 2017-18 to below 7% and calls for fiscal stimulus. A good performance by the core sector may have given some hopes for industrial recovery.
But if the steel production has been growing steadily over the year, the sharp rise in cement production last November has given hope for an industrial recovery. Cement industry’s future is directly linked to infrastructure and real estate sector, which suffered hugely after demonetisation in 2016 and the implementation of GST in 2017. The cement production too had declined unchecked till October 2017. The production has grown by a record 17.3% in November – the highest among the eight core industries.
The rise in steel and cement production not only suggests good performance by them but it also indicates growth of the industries which use their products as inputs. Since a large number of manufacturers including engineering, automobiles, real estate, infrastructure, to name some, use them as inputs, higher growth in steel and cement production means higher growth prospects for the user industries or the manufacturing sector.