Beyond Growth: the Importance of Inclusion

01, Aug 2023 219

The performance of the industry and manufacturing sector including MSME is critical for unleashing the full potentiality of growth of the economy. Though the economy has been picking up fast, the weakness is visible in the industry and manufacturing sectors. The economy grew well in the last five years and surpassed the pre-covid level. GDP in India moved from 6.5 percent in FY19 to 3.9 in FY20, to -5.8 during covid year FY21 (degrowth), 9.2 percent in FY22 and 7.2 percent in FY23 crossing pre-covid growth levels.

A break up of sectoral annual growth trends of GVA of the economy shows that the agriculture sector grew from 2.1 percent in FY19 to 4.1 percent in FY21 and settled at 3.3 percent in FY23. But the industry growth has gone down from 4.9 percent to 0.9 percent to 1.7 percent during the same period. As part of the industry sector, the manufacturing sector lost traction in growth during the period. It went down from 5.4 percent to 2.9 percent and then steeply went down to 0.6 percent now causing concern to stakeholders. The services sector however has been pulling its recovery lever better. It moved from 7.1 percent to -7.9 percent to 9.3 percent now.

Debilitating industry sector:

The headline PMI for the manufacturing sector moderated to 57.8 in June 2023 from 58.7 in May due to a deceleration in new orders, output, and stocks of purchases. The annual Report of RBI indicated that during 2022-23, the industrial sector’s growth moderated amidst lingering global uncertainties. The organised manufacturing sector which benefitted from the lower base as well as softer raw material costs during 2021-22 faced the brunt of rising raw material costs.

The supply chain bottlenecks following the war in Ukraine coupled with elevated raw material costs, impacted the profitability of manufacturing companies. Industrial output measured by the index of industrial production (IIP) expanded by 5.1 percent during 2022-23 as compared to 11.4 percent last year. Manufacturing activity moderated to 2.4 percent in H2:2022-23, affected by a slowdown in global demand.

The integral part of the industry, the micro, small and medium enterprises (MSMEs) segment is on a modest footing with its revenue projected to exceed the pre-COVID level in 2022-23 by 25 percent. With 99.8 percent of MSMEs being unregistered accounting for a sizeable share of the unorganized sector output but the government support is not adequately reaching them despite various policy measures introduced to support the sector. Educating the MSME units to register with the government and seek financial support is necessary to unleash its full potential.

Flow of bank credit growth:

As a result of the lack of proactivity of industry units, either the demand for credit is subdued or the financial institutions are not able to tap bankable units to lend. The RBI data on sectoral deployment of credit for the period 2019-23, shows that the industry sector has not been able to get adequate institutional credit despite many sectors working hard to recover from the covid crisis.

During FY19, the annual credit growth to agriculture was 7.8 percent, Industry 6.4 percent while the service sector ended up at 14.8 percent. Credit growth during FY21 – pandemic year, the annual credit growth was 10.3 percent, 0.8 percent, and 1.9 percent. Except for agriculture, all other sectors experienced a slowdown in credit deployment. By 2022-23, the sectoral growth stood at 16 percent, 6 percent, and 21.4 percent in the respective sectors. Bank credit growth to the industry has been the lowest at 6 percent.

This is despite the introduction of the Emergency Credit Line Guarantee Scheme (ECLGS), the credit growth to the sector has not been in sync with the overall economic growth. Deprivation of institutional credit will increase the sector’s informal units to depend more on moneylenders charging usurious interest rates and exploiting them preventing their growth. Institutional lending is always a two-way interface – the sector should demand credit and banks should find the demand bankable. Any gap in such synchronization can deprive them of a very useful credit enabling the sector to grow to its potentiality contributing to the growth of the economy.

Government initiatives:

Right from ‘Make in India’ launched in September 2014, the focus has been on making India a preferred global manufacturing hub which is still a work in progress. The multipronged ‘Atmanirbhar Bharat Aabhiyaan’ provided a combination of policies to boost industrial growth. Calling for ‘Vocal for Local’ and ‘Vocal for Global’ to turn India into an export hub. Funds of Rs. 20.97 lakh crores has been allocated to focus on the supply side and long-term reforms in agriculture, labor, mining, and defense sector to attract private sector investment.

The productivity-linked Incentive (PLI) scheme for 14 key sectors of manufacturing, establishing a special textile manufacturing zone and the Scheme for Integrated Textile Park (SITP) are some of the long-drawn projects to pump prime industrial growth. Ease of doing business, reduction of compliance burden public procurement policy, and phased manufacturing program (PMP) are some more support carved out for the sector. Simultaneously, PM Gati Shakti- National Master Plan for Multi-Model connectivity is closely monitoring various infrastructure projects under execution and progress in the implementation of the National Infrastructure Pipeline (NIP), National Monetization Plan (NMP), India Industrial Land Bank (IILB).

Task ahead:

The data more than amply demonstrates that industry focus requires more coordinated and inclusive efforts of stakeholders. Government, regulators, banks, and all financial institutions and non-government bodies will have to introspect as to why the industry growth is sluggish despite the network of policies and support mechanisms in place. The East of doing business is not reaching out to units.

The MSME units are not getting registered and seeking institutional credit. Maybe, the lending procedures need more simplification in documentation, and the use of vernacular language will be needed. The people manning the financial institutions should be conversant with the local language, customs, and practices to effectively communicate the nuances of lending schemes to the target group of potential borrowers.

Unless all the sectors of the economy work in tandem, unleashing full growth potentiality may not be possible. Industrial growth is a larger link in the economy with human-intensive activities built in the sector. Implementing the policies and developmental schemes at the grass root level both in letter and spirit will be essential with a focus on quantified outcomes.

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Beyond Growth: the Importance of Inclusion

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