The Case for Improving Manufacturing Productivity

Article By

V.P. Nandakumar,

MD & CEO, Manappuram Finance Ltd

To sustain growth momentum in the long run, the government and the industry along with financial institutions should roll out a synchronised policy to boost productivity in the key manufacturing sector that will generate quality jobs, higher income and enhanced demand

There are no two opinions that Indian economy is expanding at a faster clip than projected earlier with National Statistics Office (NSO) revising up its FY ’24 GDP growth forecast in January.  According to the First Advanced Estimates of National Income published by the NSO, the Indian real economy will grow at a faster pace of 7.3% this fiscal compared to the 7.2% it clocked during the previous fiscal. This is the most optimistic projection made by any agency so far and tops even the 7% predicted by the Reserve Bank of India (RBI) in its December policy statement.

Arguably, services sector has become the rock star of India’s economic growth leading the league table with a projected reading of 7.7% in FY ’24, followed by a 6.5% expansion in manufacturing activity (up from 1.3% in the previous fiscal.) Of course, the spike in manufacturing activity is indeed commendable. But one needs to go beyond these numbers to get the real story on the manufacturing sector out. For this, one needs to look into the productivity growth in the core manufacturing sector. Since the statistical office does not give the productivity data, one may turn to the next best alternative; that is the Gross Value Added (GVA) which could be used as a proxy for productivity numbers. GVA is the value that different producers add to the value of goods at various stages of a product cycle.

Going by the NSO numbers, the productivity growth in manufacturing is forecast to decline with GVA set to shrink to 4.4% (at current prices) in the current fiscal, from 7% in the previous fiscal. And this should be a concern for policy makers, especially when the nation is eyeing to become a developed economy by 2047. The point to note here is that a developed country by definition is a highly industrialised country with the lion’s share of national income or output coming from the core manufacturing.

This takes us straight to the heart of the task in hand which, in my view, is a shared concern of all stakeholders. It is a truism that to sustain a higher growth momentum at above the 7% on a durable basis, the productivity expansion in manufacturing sector is key. By productivity, I mean the ratio of output to inputs including both capital and labour which is also called as total factor productivity in economic literature. Improving productivity in manufacturing is critical for the economy to grow at a higher rate since it lands the economy in a virtuous cycle with optimum resource mix leading to optimum output enhancing the competitiveness of the goods produced. Higher productivity also helps firms to enhance margins, scale and sometimes even scope of the production.  This will lead to higher resource flow into the business vertical concerned.

In other words, enhanced productivity will not only reduce the cost of manufactured goods in the domestic market leading to elevated demand, but also increase the scope of exports. This will help swell the foreign exchange coffers of the nation and shrink the import bill to a great extent. Another point to note here is that manufacturing creates more employment ensuring higher wages and salaries for the workers. This, in turn, will translate into higher consumption. This is very critical to sustain faster economic expansion since private final consumption (PFC) is the single largest contributor to economic growth. Going by the NSO data, private consumption contributes above 60% of the GDP growth. It goes without saying that private consumption is the fulcrum of Indian economy and faster growth of this variable can take India much closer to the developed nation status sooner than later. If any proof is needed, one only has to rewind to the Chinese economic growth a few decades ago to find voluminous testimonies to corroborate the manufacturing productivity hypothesis. The icing on the cake is that high productivity in manufacturing will trigger a fresh cycle of foreign capital inflows in the form of Foreign Direct Investments (FDI).

Therefore, it is my suggestion that the government and the industry along with financial institutions should roll out a synchronised policy to boost productivity in the key manufacturing sector that will generate quality jobs, higher income and enhanced demand putting the economy on a higher growth trajectory. On its part, policy makers should give a serious thought about extending the ambit of Productivity Linked Incentive (PLI) schemes to more verticals while business leaders should burn midnight oil to figure out ways to improve shop level productivity.  On their part, financial institutions should reduce the cost of funds to individual firms based on not just their balance sheet strength but considering productivity gains at the firm level. Together, such a concerted effort will see the India’s transition to a developed economy at a much faster rate.

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