Manufacturing and Value Addition in India

 

The value produced by a country in manufacturing is measured by the manufacturing value added (MVA), which is the net output of the manufacturing sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources¹. MVA is expressed as a percentage of the gross domestic product (GDP), which is the total value of goods and services produced in a country in a given period.

MVA reflects the contribution of the manufacturing sector to the national income, employment, and exports. It also indicates the level of industrialization, technological development, and competitiveness of a country. A higher MVA implies a more diversified and productive economy that can generate more value from its resources and create more opportunities for its people.

In the context of India, the MVA as a percentage of GDP was 13.32% in 2022, which is lower than the global average of 16.3%². This indicates that India’s manufacturing sector has not reached its full potential and has room for improvement. Some of the factors that affect the MVA of a country are:

• The size and structure of the manufacturing sector: A larger and more diversified manufacturing sector can produce more value and capture more market share. The structure of the sector also matters, as different sub-sectors have different levels of value addition, productivity, and profitability. For example, high-tech industries such as electronics, pharmaceuticals, and aerospace have higher value addition than low-tech industries such as textiles, food, and beverages³.
• The quality and quantity of inputs: The availability and affordability of inputs such as raw materials, energy, capital, labor, and technology determine the cost and efficiency of production. A country that has abundant and cheap inputs can produce more value at lower prices. Conversely, a country that faces shortages or high costs of inputs can face challenges in maintaining its competitiveness and profitability.
• The demand and supply conditions: The demand for manufactured goods depends on various factors such as income levels, preferences, tastes, and expectations of consumers, both domestic and foreign. A higher demand can stimulate more production and innovation, leading to higher value addition. The supply of manufactured goods depends on factors such as capacity utilization, inventory management, quality control, and logistics. A higher supply can meet the demand and increase the market share, leading to higher value addition.
• The policy and institutional environment: The policy and institutional environment influences the performance of the manufacturing sector by providing incentives or disincentives for production, investment, innovation, and trade. Policies such as taxes, subsidies, tariffs, quotas, regulations, standards, patents, etc., can affect the cost-benefit analysis of producers and consumers. Institutions such as laws, courts, contracts, property rights, etc., can affect the security and enforcement of transactions and agreements. A favorable policy and institutional environment can foster a conducive climate for manufacturing growth and development.

To increase the value produced by its manufacturing sector, India can make policies that will help in the following ways:

• Enhance the ease of doing business: India ranks 77th out of 190 countries in the World Bank’s Ease of Doing Business Index 2019⁴, which measures the regulatory quality and efficiency of various aspects of business activity such as starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. India can improve its ranking by simplifying procedures, reducing compliance costs, and improving governance. This can reduce the time, cost, and risk involved in setting up and operating a manufacturing business and encourage more domestic and foreign investment.
• Provide incentives and support for innovation, research and development, technology adoption, and quality improvement: India spends only 0.7% of its GDP on research and development (R&D), which is much lower than the global average of 2.2%⁵. India also ranks 52nd out of 129 countries in the Global Innovation Index 2019⁶, which measures the innovation performance and capabilities of various indicators such as institutions, human capital and research, infrastructure, market sophistication, business sophistication, knowledge and technology outputs, and creative outputs. India can increase its spending on R&D and provide tax incentives, grants, loans, and subsidies for innovation activities. India can also facilitate the transfer and diffusion of technology from advanced countries or sectors to emerging ones through joint ventures, licensing agreements, foreign direct investment (FDI), or public-private partnerships (PPPs). India can also promote the adoption and implementation of quality standards and certifications such as ISO, BIS, etc., to enhance the quality and competitiveness of its manufactured products.
• Promote export-oriented and import-substituting industries: India’s share of world merchandise exports was only 1.7% in 2018, which is much lower than the shares of China (12.8%), the US (8.5%), or Germany (8.4%)⁷. India also has a trade deficit of $184 billion in 2018-19, which means it imports more than it exports⁸. India can increase its exports and reduce its imports by focusing on industries that have a comparative advantage or a potential for growth, employment, and skill development. Some of these industries are textiles and garments, leather and footwear, gems and jewelry, pharmaceuticals, automobiles, electronics, chemicals, etc.⁹. India can also create special economic zones (SEZs), production-linked incentives (PLIs), and trade facilitation measures to attract more FDI, improve infrastructure, reduce transaction costs, and enhance market access for these industries.
• Develop globally competitive manufacturing hubs: India has identified 11 manufacturing value chains that have high potential to operate in international markets, power growth, and provide long-term employment and skill pathways for millions. These are food processing; textiles and garments; electronics; capital goods and machine tools; pharmaceuticals and medical devices; automobiles and components; aerospace and defence; renewable energy; chemicals; construction materials; and steel¹⁰. India can develop these value chains into globally competitive manufacturing hubs by providing them with integrated infrastructure, skilled labor, technology, finance, and policy support. India can also leverage its large domestic market, demographic dividend, and strategic location to create economies of scale, scope, and network for these hubs.

By implementing these policies, and complementary actions by manufacturing companies, India can boost its manufacturing sector and make its economy stronger. According to a McKinsey report¹¹, the 11 value chains could more than double their GDP contribution to $500 billion in seven years, while powering extensive job creation at a time when the COVID-19 crisis has pushed millions below the poverty line.