India, under the leadership of Prime Minister Narendra Modi, now entering his third term, faces a pivotal moment. With a coalition government in place, it is crucial to focus on comprehensive economic reforms, particularly in the manufacturing sector. As the country continues to urbanize, millions of agricultural workers will migrate to urban areas seeking employment. This transition necessitates a robust manufacturing base to generate low-skilled jobs and mitigate the strain on governance structures. Success in manufacturing will not only bolster domestic trade and employment but also enhance national security, aligning with American interests.
Manufacturing’s Critical Role in India’s Economy
The Modi government, upon assuming office in 2014, ambitiously aimed to elevate manufacturing’s contribution to GDP from 15% to 25% by 2025. Significant reforms, including the 2017 Goods and Services Tax (GST), aimed to streamline state-level tax codes and foster economic growth. However, World Bank data reveals a decline in manufacturing, accounting for only 13% of GDP in 2022. This stands in stark contrast to nations like Vietnam (25%), Bangladesh (22%), and China (28%).
India’s compelling need to fortify its manufacturing base stems from two primary factors: employment generation and addressing the goods trade deficit. Approximately half of India’s labor force remains entrenched in low-productivity agriculture. Successful farming reforms could trigger a mass exodus from agriculture, necessitating alternative employment avenues. Additionally, despite perceptions of anti-trade sentiment, India engaged in over $1 trillion in goods trade in the last year, with a $250 billion deficit. Manufactured goods, including electronics, constitute a substantial portion of imports, exacerbating the trade imbalance.
The United States’ Stake in India’s Manufacturing Success
The United States has a vested interest in India’s manufacturing prowess for two key reasons. First, a robust industrial base enhances India’s capacity to support regional security, particularly in the face of China’s rising aggression. Second, with some manufacturing unlikely to return onshore, a dependable supply chain anchored in friendly nations like India strengthens U.S. economic resilience. Achieving manufacturing success in India, however, demands coordination beyond the central government’s purview. Factors such as electric power, water, sanitation, labor regulations, land acquisition, and environmental regulations primarily fall under state jurisdiction, necessitating a focused policy approach at the state level.
State-Level Business Environment and Reforms
The Modi government’s initial efforts to spur inter-state competition have waned. The “Business Reforms Action Plan (BRAP),” ranking states’ business environments, has not been updated since the COVID-19 pandemic. Additionally, the central government’s initiative to develop model industry laws for states has seen limited success. Nearly half of India’s states are governed by the Bharatiya Janata Party (BJP), while regional parties, with varying degrees of cooperation, control the rest. To drive industrial policy reforms at the state level, the government must employ a strategic mix of incentives and penalties.
Emphasizing job-creating manufacturing sectors like textiles, paper mills, and furniture is essential. Currently, the focus leans heavily towards capital-intensive sectors such as semiconductors and robotics. Diversifying investment targets will create more employment opportunities and foster balanced economic growth.
Enhancing Business Attractiveness and Global Supply Chains
The U.S. can play a meaningful role in enhancing the business appeal of Indian states. This involves expanding engagement with state governments, providing guidance on economic governance, and facilitating investor interactions with state authorities. Senior U.S. officials visiting India should extend their outreach beyond major cities like Delhi, Mumbai, and Bengaluru, engaging with larger states to highlight opportunities arising from the evolving global supply chains.
Conclusion
India’s recent national election serves as a crucial juncture to reassess and redirect policy priorities. The core objectives driving the current manufacturing push—job creation, trade balance, and national security—remain unchanged. While India’s market size and growth rates attract investors, significant work is required at the state level to accelerate the “Make in India” initiative.
Richard Rossow, Chair in United States-India Policy Studies at the Center for Strategic and International Studies (CSIS), emphasizes the necessity of these reforms. With over 25 years of experience in India’s commercial reforms, Rossow’s insights underscore the critical need for a cohesive, multi-faceted approach to strengthen India’s manufacturing sector.
Summary:
| Key Learning Points | Description |
|---|---|
| Importance of Manufacturing Reforms | Vital for economic growth, trade balance, and national security. |
| Employment Generation | Essential for accommodating the transition of agricultural workers to urban employment. |
| Trade Deficit and Manufacturing | Addressing the goods trade deficit by boosting domestic manufacturing capabilities. |
| State-Level Business Environment and Reforms | Focus on state-level policy enhancements and industrial reforms. |
| U.S. Stake in India’s Manufacturing Success | Enhancing regional security and securing reliable supply chains for the U.S. |
Sunil Garnayak is an expert in Indian news with extensive knowledge of the nation’s political, social, and economic landscape and international relations. With years of experience in journalism, Sunil delivers in-depth analysis and accurate reporting that keeps readers informed about the latest developments in India. His commitment to factual accuracy and nuanced storytelling ensures that his articles provide valuable insights into the country’s most pressing issues.
