Crisis in India’s factories

Critics of consumerist societies might disagree, but ask the average Jai on the street, and he will say that he wants more things in his life, things that make life easier to live. Like refrigerators, air-conditioners, cars, packaged food, geysers, lights, and everything else that is made in modern factories. Access to factory goods is one key way to differentiate a rich from a poor country. And, governments in every developing country try – or, at least, pretend to try – to provide more goods to their citizens.

Between 2016-17 and 2019-20, manufacturing growth has averaged just 4.5 per cent. And this was before Covid caused an economic recession.

Again, most manual workers would prefer a factory job to working on a farm or on a construction site, or even making a precarious living as a ‘self-employed’ service-provider. Factory jobs are regulated, often come with benefits, such as insurance, gratuity, and provident fund. Even hard manual labour in a factory is less back-breaking than working under the scorching sun on a farm, or lifting piles of bricks and cement bags. For blue-collar workers, a factory job is also a source of social prestige and recognition.

That is what the Nehru government set out to do after Independence – expand India’s manufacturing sector to increase the supply of material goods and to help people move out of agriculture to better-paying jobs. Even India’s nascent big-business agreed that they needed the state to build the plinth of infrastructure, power and heavy industries on which private enterprise would later construct an industrial sector that could compete with the developed capitalist world. Industrialisation required the judicious use of capital and natural resources, and planned action by the state was seen as the best policy option.

The global defeat of Keynesian policies in the 1970s, and the rumblings in the Soviet Union in the 1980s, would put paid to Nehruvian ‘socialism’. It would be blamed for India’s slow growth rate and the tepid pace of industrialisation. It would be replaced by neoliberal ‘free market’ economic policies – promoting easy movement of finance, dismantling of tariff protections for domestic industries, deregulation and privatisation of all sectors of industry. These economic ‘reforms’ promised to unleash the ‘animal spirits’ of India’s private sector and make India an industrial powerhouse.

Thirty-five years later, it has become clear that the LPG (liberalisation, privatisation, globalisation) reforms have failed to deliver on their promise. Manufacturing sector growth averaged about 5.8% per year in the 1980s, remained exactly there in the 1990s, rose to an average of 8% in the 2000s, and collapsed to 6% in the 2010s. In fact, in the last four years of the last decade – between 2016-17 and 2019-20 – manufacturing growth has averaged just 4.5%. And this was before Covid caused an economic recession.

The Covid lockdowns and disruptions had a very minimal impact on the annual growth rate in the factory sector. It dropped by just 0.6% in 2020-21, the year India faced the biggest Covid restrictions. Despite the spillover of the killer ‘second wave’ into the first quarter of 2021-22, factory output bounced back sharply, growing by 9.9% that year. This was partly driven by the ‘pent-up’ demand that was unleashed after the lockdowns ended, and partly by ‘revenge spending’ by households who dipped into their savings to buy things.

Despite this, the manufacturing sector is back to the tepid growth it saw in the years preceding Covid. Gross Value Added (GVA) in manufacturing, in the four quarters up to September 2022, has grown just 0.05% compared to the same period a year earlier. This is a period when there were virtually no Covid lockdowns anywhere and there were signs of a big consumption recovery. The affluent were doing well – the markets had already made them richer, real estate prices were rising, and there was a startup boom taking place. Nearly 60% of Indians were being given free ration, which should have freed up some of their household income for other purchases. Still, the manufacturing sector did not budge.

There is more evidence that Indian corporates are not interested in investing in new factories and equipment. According to CMIE data, net fixed assets of Indian corporates have degrown in real terms, when adjusted for inflation in the September quarter of 2022-23, compared to one year earlier, and ‘larger companies in India have effectively stopped increasing their productive base’. This includes service sector companies as well, but the broad point would hold true for those in the manufacturing sector.

Project completions have also stalled. CMIE data shows that the private sector is likely to end up completing fewer projects, in terms of value, in 2022-23, than it did in the previous fiscal. Even in 2021-22, the private sector completed projects worth

Rs 2.6 lakh crore, which was less than the Rs 3 lakh crore in both 2018-19 and 2019-20. This is despite the fact that the Covid disruptions caused a sharp drop in private sector project completions to just Rs 1.2 lakh crore in 2020-21. Even now, most of the projects that are likely to be completed by the private sector this year are driven by government contracts, and not by their own independent initiative.

What has caused this collapse of India’s manufacturing and industrial sector? The answer lies in the reforms process itself. Globalisation made it difficult for Indian manufacturers to compete, as Chinese goods (produced by firms backed and financed by China’s government) flooded the Indian market. Government policies in the 1990s broke the back of India’s electronics hardware industry, which had grown at a fast clip in the 1980s. Increased inequality in the past 30 years has produced a vast majority which can’t afford to buy manufactured goods, and an affluent minority which would rather buy imported goods. As manufacturing has floundered, it has failed to create factory jobs, which would have boosted domestic demand for manufactured goods. It is a spiral that can only take India’s factory sector further down. Pious pronouncements about ‘Make in India’ will not make any difference.

The author is a senior economic analyst