FOR an emerging economy that needs to grow at rates of eight to 10 per cent annually to pull millions of people out of poverty and provide employment for the tens of millions of youngsters entering the job market every year, a sector that cannot be neglected is the secondary one, or industrial.

Unfortunately in India, while the tertiary (services) sector has been faring well in recent years – and even the primary (agriculture) sector has seen good growth of late – the manufacturing sector has lagged behind.

The United Progressive Alliance (UPA) government, ever since it came to power in 2004 – and was re-elected five years later – has been focusing primarily on the farm sector, unveiling ambitious, multi-billion-rupee plans to provide employment to the rural poor (through the Mahatma Gandhi National Rural Employment Guarantee scheme), or other expensive social sector schemes, where much of the funds are swallowed by middle-men and corrupt local politicians.

The services sector, including IT, ITeS and hospitality, does not overly depend on government help or funding for growth, and has been maintaining a more than arm’s length distance from Delhi, which has perhaps helped it expand at a rapid clip.

It is the industrial sector that has been neglected by the UPA regime in recent years and which has performed miserably. The sector needs low-cost funds – both for acquiring assets and for working capital – but the Reserve Bank of India, the country’s central bank, has persisted with its policy of maintaining high interest rates, in a futile bid to slay the demon of inflation.

The high-cost of funding has had a disastrous impact on the industrial sector. Other problems that have strangled growth include the difficulties in acquiring vast tracts of land for new factories, warehouses and other facilities, infrastructure bottlenecks – especially at ports, airports, railways and along major roads; erratic and expensive power supply and archaic labour laws that prevent them from reducing manpower, relocating to areas where labour costs are cheap, or from cutting back on costs during downturns.

Not surprisingly, many Indian entrepreneurs are increasingly looking at outsourcing their products from countries such as China, where none of these problems exist. In fact, many manufacturers have shut down their plants in India and relocated them to China, where labour laws are flexible, infrastructure standards are world-class, and input costs are low.

And many of the large industrial houses in India prefer to invest money abroad, either acquiring companies, or setting up new manufacturing units across the globe. The result: Indian industry is stagnating, and a country that should have geared up to
meet the huge domestic market for manufactured goods, is increasingly relying on imported stuff.

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LAST week, the government came out with figures that highlighted the continued decline of Indian industry. The Index of Industrial Production (IIP) for July expanded by a mere 0.1 per cent, down from 3.7 per cent in July 2011. In June, it had declined by 1.8 per cent.

According to the government’s Central Statistics Office, the manufacturing sector – which accounts for more than 75 per cent of the IIP – fell by 0.2 per cent in July, as against a 3.1 per cent growth last year in the same month. The mining sector reported a negative growth of 0.7 per cent, as against a marginal 0.7 per cent expansion last July.

The capital goods sector, a key indicator of the nation’s industrial health, dropped by a sharp five per cent in July; last July though, it had fallen by 13.7 per cent.

Finance minister P. Chidambaram admitted the figures were ‘disappointing,’ but promised that the government would move quickly to remove the hurdles that have staunched growth in the sector. “These IIP estimates reveal that the performance of the economy continues to be disappointing,” said Chidambaram. “While the general index for July 2012 (over July 2011) is positive at 0.1, it is too early to claim that this is a sign of a turnaround.”

Industry bodies were quick to lay the blame at the doors of the RBI. Most of them have demanded a significant cut in rates by the central bank, which will unveil its mid-quarter review of monetary policy on Monday.

“The positive 0.1 per cent growth in IIP is insignificant since both the capital and intermediate goods category are in negative territory,” said R.V. Kanoria, president, Federation of Indian Chambers of Commerce and Industry (FICCI). “The negative growth in capital goods will have lag effect implying that industrial growth will remain subdued in coming months.”

What was worrisome was the fact that only eight out of 22 industry groups have shown positive growth in July as compared to 14 industry groups in June. “This will have implications for employment also as the deceleration becomes more broad-based,” he added. “Fiscal deficit remains an area of concern and is a major factor leading to weak investment climate in the country and low business sentiments.”

The Confederation of Indian Industry (CII) also noted with ‘the deepest concern,’ the continuing slowdown of the industrial sector. “This is even lower than expectations,” said a spokesman. “While monetary intervention in the form of repo rate cut has been due for a while, the economy is in need of sentiment boosters. Investments have dried up, which are evident from the performance of the capital goods sector. It is imperative that non-legislative policy measures are announced at the earliest, which could help improve confidence levels in the economy.”

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BUFFETED by growing corruption charges, crippled legislatively by an obstructionist opposition led by the Bharatiya Janata Party (BJP) which has not allowed parliament to function, and virtually held to ransom by unreliable and anti-reforms allies, the UPA government appears to trudge aimlessly, waiting for 2014, when general elections are due.

Last week though, the government did make feeble attempts to revive sentiments by trying to push ahead with some reforms, especially to slash the growing fiscal deficit. On Thursday, the government went ahead and hiked the price of diesel and introduced reforms in the distribution of highly-subsidised liquefied petroleum gas (LPG) cylinders to households, by imposing a ceiling of six units in a year.

Expectedly, the move has been opposed vehemently by the BJP – which when it was in power had also slashed subsidies on fuel – and even the UPA’s allies such as the Trinamool Congress. The government may ultimately be forced to roll-back the hike either fully or partially, which could be disastrous for the bleeding oil companies, having to subsidise all the petroleum products that they sell.

Another proposal of the government, which if implemented properly by the states could also give a boost to the manufacturing sector, was unveiled last week. Anand Sharma, the commerce and industries minister, urged state governments to take a proactive role in acquiring land for setting up industrial townships.

Last October, the government unveiled yet another ambitious plan, its National Manufacturing Policy (NMP), which would raise the share of the manufacturing sector from 16 per cent of the GDP at present to 25 per cent by 2020, besides creating 100 million new jobs.

The government envisages the setting up of national investment and manufacturing zones (NIMZs) under the NMP, with each integrated industrial township having a minimum of 5,000 hectares (about 50 sq km) of land with state-of-the-art infrastructure.

The government’s earlier special economic zone (SEZ) plan has been a disaster as many of the promoters faced problems in acquiring land. The SEZ policy has been a virtual non-starter and the government has had to quickly come out with a new policy.

Acquiring even 100 acres of land for an industrial/investment zone poses problems for governments in several states, so the
possibility of acquiring 5,000 hectares for NIMZs will surely pose a formidable challenge.

“Land is a major issue and states have to play the major role,” says Sharma. “Their participation is very important in that.” He urged state governments to create land banks for the new zones and many have already begun the process.

According to the minister, about 200 million young people would be ready to join the work force over the next few years.

“Beyond a point, the services sector cannot create employment for these many people. We have to focus on the manufacturing sector.” A difficult task indeed, considering the enormous problems confronting industries.