India’s Manufacturing Ecosystem Decoded

Before making fiscal and administrative policy the government needs to take cognisance of India’s very peculiar manufacturing ecosystem. 

India has been under the world's strictest lockdown to try and prevent the spread of the coronavirus. Even before the lockdown was put in place, several economic indicators were on a downturn. The lockdown has accelerated the downturn and crippled the economy. At this point in time, the GDP is close to nothing. It follows that serious measures will be needed to revive the economy. The government has so far announced a fiscal package to ease demand side pressures (cash transfers and rations to ease the pressure on consumers) and the RBI has announced measures to ease strains on the supply side (lower interest rates to encourage banks to lend to businesses money that they can invest to increase or restore supply). However, there is still a long way to go. News sources indicate that another financial package is underway aimed at the revival of industries.  This article (linked at the end) explains why any such package must be designed keeping in mind the complex and unique ecosystem of the manufacturing sector in India.  All firms perform a series of activities that transform an idea into a finished product that can then be sold in the market. These activities, in order from A to Z, form what economists refer to as a value chain. In India, value chains criss-cross between the formal sector and the informal sector. (For a rough understanding of the difference between the two sectors, see https://www.sociologygroup.com/formal-informal-sector-differences/.) To illustrate the strong interdependence between both the formal and informal parts of the economy as well as between different sizes of manufacturing firms, consider the e.g. of a mid-sized textile production unit employing 100 people and catering mainly to exports. Let us suppose this Firm T receives an export order for 25,000 T-shirts from a retailer in USA. In order to fulfil the order, the firm would need to procure the cloth needed to manufacture the T-shirts. The cloth however, would follow a long journey through several mid-sized and small informal and formal units, before Firm T can convert it into T-shirts. For e.g. the yarn might come from a another mid-size formal unit and be spun at a small formal unit elsewhere. The spun cloth will then need to be dyed and printed - both these activities are likely to be carried out by separate small informal units.  Another way to understand the strong interdependence is to consider statistics - Out of the 60.02 million workers employed in the manufacturing sector in India, only 12.3 million are employed in the formal sector. This means that over 80% of India's labour force is in the informal manufacturing sector. In terms of production, the informal sector accounts for anything between 40 to 70% of the manufacturing output.  Data also reveals that most formal manufacturing units in India are relatively small. 2,370,684 factories are registered in India, out of which only 33% are registered as large corporates. The remaining 1,590,520 factories are registered as individual proprietorships, partnerships, cooperatives, etc, which are mostly small or mid-sized units. On an average, a large Indian corporate manufacturing unit employs only 112 workers, and a mid or small-sized non-corporate firm employs 22 workers in their manufacturing unit. This further goes to show that most manufacturing units are not vertically integrated or self-sufficient and depend heavily on other manufacturing units.  A thorough understanding of the ecosystem of manufacturing in India is important because different parts of the sector have been impacted differently by the lockdown. For e.g. informal units are most likely to have suffered damages due to a lack of financial reserves and access to credit, amongst other reasons. This is exacerbated by the fact that the country is now divided up into red, orange, and green zones with different sets of rules applying to different zones.  The manufacturing process in India is made of many, many links and is only as good as its weakest link. All policy - whether fiscal or administrative - must take into account its complex realities in order to successfully provide an urgent boost to the sector.  Read more here: - 

https://blogs.lse.ac.uk/southasia/2020/04/30/dont-forget-the-informal-sector-reviving-the-manufacturing-sector-in-india/

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Image credit - CC-BY-2.0 - Fabrics for Freedom