To boost the economy a nation focuses on developing the manufacturing sector. This growth has to be supported by various factors.
This year’s budget will be presented, under the shadow of the Covid third wave. That could lead to imposition of restrictions that would pull back the recovering economy. Thus, the budget induced stimulus should focus on furthering the pace of the recovery.
To enhance the long-term sustainability of economic growth and job creation, the focus should be on the manufacturing sector. It was because of this policy that reduced their poverty, and rapid progress was achieved in East Asian countries.
Out of their GDP, 30% or more come from manufacturing sector. Even the Bangladesh manufacturing sector provides 20% of their GDP. India’s manufacturing sector’s share has stagnated between 14-16%.
Not only has it stagnated, but there are also the signs of premature deindustrialization and rising dependence on imports. This neglect has led to lost opportunities for job creation and persisting poverty.
Through its extensive forward and backward linkages, every direct job in the manufacturing sector creates more indirect jobs. The Make in India campaign launched in 2014 was a good initiative, supported by Aatamanirbhar Bharat Abhiyan launched in 2020.
The PLI schemes launched in the FY22 budget for the key 13 sectors have attracted interest from major domestic and foreign companies. This scheme helps the beneficiaries to exploit the economy and make them more competitive.
It could also help in building productive capacities for key sunrise industries such as mobile handsets, active pharmaceutical ingredients, semiconductors, solar panels etc.
As these industries are the future of the manufacturing sector, making it competitive enough with a solid foundation is important.
The boost for this sector should be supported by exchange rate management. India has a record of always running trade and current account deficits. To supplement it, the exchange rate of the rupee should gradually depreciate on its own.
This would boost the competitiveness of domestically produced goods. But the expanded liquidity in advanced countries tends to find its way to India, pushing the exchange rate up. Overvaluation of the rupee erodes the competitiveness of Indian products.
It brings volatility to the financial market and makes market vulnerable to policy changes in developed countries. To solve this problem of volatility, taxes on short-term capital inflows should be enhanced.
Another way is to maintain a competitive exchange rate. It helps to attract the export-platform investments in the country through MNEs, who are seeking to extend their value chain outside China.
The liquidity support to MSMEs is critical to reviving them, but the rising proportions of non-performing assets in the banking sector show that commercial banks are ill-equipped to cater to long-term lending needs.
The East Asian countries have developed their industries by directing long-term credit. A similar specialised term-lending institution for the special needs of the manufacturing industry is necessary to develop the sector.
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