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India Headed for Jobless Manufacturing?

Even if India were to raise its manufacturing from 16% to 25% of GDP, doubts linger whether it can solve the country’s unemployment crisis.--By Ashish Gupta

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Macro numbers tell their own stories and those emerging from the organized manufacturing sector aren’t happy ones. A detailed study of the numbers pertaining to the companies in the sector from the past 20 years shows most are in bad shape. The numbers provided by the Annual Survey of Industries show that performance in labour productivity growth, fixed capital-output ratio, return on capital employed, etc. have fallen. Capacity utilisation or plant load factor is at just 70%-75%.

Add to all this the poor financial performance of these companies, it is unlikely their promoters would be considering investing further in future expansion, which means that employment generation is unlikely to take off in the sector. Take the case of growth in labour productivity, or more simply defined as the economic output of a worker per hour.

An analysis by chief economist Devendra Kumar Pant and principal economist Sunil Kumar Sinha at credit rating agency India Ratings and Research shows that labour productivity growth in the five-year period of FY01-FY05 increased to 9.6%, and then accelerated to 10.3% in FY06-FY10. Then the fall began. The following five-year period, FY11-FY15, saw productivity growth slip to 7.4% and further to 3.7% in FY16-FY18. It is worrying, for the fall is not exclusive to some pockets of the manufacturing sector but to the entire gamut: from food and beverages to paper and paper products, from fabricated metal products to machinery and equipment.

Even in the labour-intensive industries like textile and apparel, productivity growth, which was 10.3% in FY11-FY15 slid to 3.7% in FY16-FY18. The leather and leather products industry to has witnessed a similar decline from 14% in FY06-FY11 to 6.9% in FY11-FY15 and then to just 4.4% in FY16-FY18. Thus, the real issue is to figure out why labour productivity is declining despite increased use of technology and automation in these industries.

What it implies is that if labour productivity is not rising in sync with increasing spend on automation, there is no incentive to use more labour for increasing production. Also, companies now need to spend more capital to maintain the same level of output. The value of output to fixed capital ratio, or the value of output per unit of capital, which rose from 2.6 times in FY01-FY05 to 3.1 times in FY06-FY10, however, declined to 2.8 times in FY11-FY15 and further to 2.4 times in FY16-FY18. Here’s the catch.

Higher capital intensity—more use of capital for one unit of production—may be acceptable in high-technology industries, or even in capital-intensive industries like petrochemicals, mining and metallurgy, etc., or in countries that lack adequate labour force. But what we are witnessing is a similar trend even in India’s labour-intensive industries. “It raises alarm bells because over time these so-called labour-intensive industries too will transform into capital-augmenting  and labour-displacing industries, thereby ruling out higher employment of labour in these industries” says Sinha of India Ratings.

That’s not the end of the bad news for the organised manufacturing industry. The return on capital employed, or profit per unit of capital, too, is showing a downward trend in recent years. It has fallen quite dramatically from 232.45 crores a year in FY08 to `130.85 crores a year in FY18. It means that industrialists have to invest far more to get a similar return. Unemployment in the country has been hovering around 7% over the past few months. In January 2020 it was at 7.16%, data from the Centre for Monitoring Indian Economy (CMIE) shows.

Anything above 3%-3.5% is very high, says Mahesh Vyas, MD and CEO, CMIE. The government has plans to increase the manufacturing sector’s contribution to the GDP from 16% to 25% and create 100 million jobs by 2022, according to India Brand Equity Foundation, a trust founded by the Department of Commerce. Amid a sputtering economy, it won’t be easy. Now with industry efficiencies on a downward trend and the absence of pick-me-ups in the Budget, it looks like a tall ask.

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