November , 2019
Concern over performance of manufacturing
17:17 pm

Dilip Datta

The manufacturing sector serves as an engine of growth of an economy. The positive relationship between the growth of manufacturing outputs and the growth of GDP has been established by economists following Kaldor’s laws. That is why development strategies focus on industrialisation. But then, industrialisation never proceeds independently of the specific institutional and historical contexts. Industrial growth rates depend mostly on the mode of government intervention - both at the state and the central level. Again, a satisfactory growth of the manufacturing sector in a state does not necessarily mean that the state has reaped the benefits of industrial development. When the rate of investment serves as a positive catalyst to the growth of industrial output and the process generates sufficient scope for employment, then the state may be said to have reaped the benefit of industrial development. Understanding that regional imbalance in industrial growth adversely affects the overall growth trajectory of an economy, development strategies focus on increasing the growth rate of industrial output and reducing regional disparities simultaneously. However, the widening gap in State Domestic Product (SDP) across the states raises questions on the attainment of such goals.

The industries in the manufacturing sector in India are grouped according to National Industrial Classification (NIC). The Central Statistical Organisation (CSO) publishes industry level data in the Annual Survey of Industries (ASI) every year. In India, there are fifteen major groups of industries that account for more than 90% of the value of the total output (VO), invested capital (IC) and number of workers (NW). On the same basis, there are sixteen major industrial states in India. In order to boost manufacturing growth, the central government has been taking various measures, since 1991, starting with the announcement of New Industrial and Economic policy. But then, how are the manufacturing industries in India performing?

Productivity measures are generally accepted indicators of industrial performance. However, for a proper judgement, one should assess profitability, liquidity, leverage, debt servicing capacity and management of assets and liabilities of an industry. Certain financial ratios along with productive measures are, therefore, used to capture the productive efficiency.

Outcome of research on the subject based on ASI data for the last twenty years lays bare the real position. Only four industry groups out of fifteen major industries are good performers. They are manufacturers of beverages, tobacco and related products, manufacturers of textile products including wearing apparel, manufacturers of basic chemicals and chemical products except products of petroleum and coal and manufacturers of machinery and transport equipment. Three industry groups are bad performers. They are related to cotton textiles, wool, silk and man-made fibre textiles and jute and other vegetable fibre textiles. Other eight industry groups are at the median level. They are manufacturers of products related to food, paper, rubber, plastics, petroleum and coal, non-metals, basic metal and alloy, parts other than machinery and equipment parts, transport equipment and electricity.

What factors can be attributed to some industry groups performing well and some performing badly? One gets an idea about the characteristic quality of good performing and bad performing industries. The former group is characterised by efficient operating management, better liquidity position, less dependence on loan, higher capacity utilization, higher assets turnover and profit margin of more than 30%. Cash generated from operation of this group meet the entire interest and loan installment obligation. Shareholder’s fund covers more than 50% of total liabilities. On the other hand, characteristics of bad performing industries are just opposite. Cash generated from operation is not adequate to meet interest and loan installment. Shareholder’s fund can hardly cover one third of total liabilities. In brief, amount of outstanding loan of badly performing industries is less than sum total of its fixed capital and working capital and amount of profit earned is less than its interest obligation.

In India, as of now, industries that are performing well account for about 73% of VO, 57% of IC and 62% of NW. Badly performing industries account for 19% of VO, 34% of IC and 28% of NW. The results of empirical analyses based on above indicators are thus disturbing. If there is no turnaround of bad performing industries, about one third of productive assets of industries may be non-performing and about one fourth of total workers are likely to face unemployment. The situation is found to be further grave when cluster analyses are carried out. Results show that there exists heterogeneity in the major Indian states with respect to performance of manufacturing industries. Manufacturing industries in five major Indian states are not performing well. These states are West Bengal, Bihar, Andhra Pradesh, Kerala and Karnataka. They account for about 25% of VO, 30% of IC and 28% of NW.

The current industrial scenario of India is not encouraging. Industrial production index growth has been fluctuating during the last twelve months. It has fallen from 8.4% in October, 2018 to 3% in May, 2019. In 2018, India held the 139th position among 195 countries with respect to per capita GDP (nominal). In the era of globalisation, when the economies are opening up and industrial units are increasingly being exposed to global competitiveness, a capital-poor country like India cannot afford such an alarming situation. It is time that both the central and the state governments take need-based measures, including structural reforms, to ensure economic recovery.

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