Gross domestic product (GDP) statistics released last month confirmed fears of an impending economic slowdown in India. The decline in growth to 5.4% in the second quarter of 2024-25, part of a six-quarter downward trend, may have set off alarm bells, but signs of trouble have been visible for some time.
This includes manufacturing, where the growth rate was only 2.2%. The debate over whether this is cyclical or structural will likely continue, but there is certainly cause for concern as far as the manufacturing industry is concerned.
Detailed estimates from the National Accounts (NA) are available until 2022-23. These suggest that the sector grew by a meager 2.5% per annum from 2017-18 to 2022-23. Growth has been just 1.8% a year since 2018-19, the last full year before the pandemic.
The net result is that manufacturing will account for a lower share of national income in 2022-23 than in 2017-18. But national accounts are only part of the problem.
Fortunately, detailed data is now available for both the unorganized and organized segments of this field. Earlier this year, the National Statistics Office (NSO) released its annual survey on unorganized sector enterprises (ASUSE) for 2022-23.
The last report on unorganized manufacturing was in 2015-16. From 2015-16 to 2022-23, the number of manufacturing enterprises in the unorganized sector increased from 17.2 million to just 17.8 million. Almost all of this increase was attributable to the smallest enterprises, characterized as “self-accounting enterprises,” which are essentially small family-run businesses.
Among larger companies employing workers, the number fell from nearly 2.8 million in 2015-16 to less than 2.3 million in 2022-23. The total number of workers employed by the company decreased from 34.9 million in 2015-16 to 30.6 million in 2022-23. Labor-employing enterprises employed 14 million workers in 2015-16, falling to 11.5 million in 2022-23.
The situation has not improved in the organizational sector either. Recently, NSO released its annual industry survey and data for 2022-23. From 2017-18 to 2022-23, the number of companies in the organized manufacturing sector grew by 1.3% per year. Compare this to the company’s annual growth rate of 5.4% from 2004-2005 to 2014-2015.
In fact, the annual growth rate slowed from 2014 to 2015 to just 1.2%. The number of workers in the organized factory sector grew by 3.5% annually from 2014-15 to 2022-23. In 2017-18 and 2022-23, it fell further to just 2.5%.
This represents a significant decline in the annual growth rate of workers from 13.2% in 2004-05 and 2014-15. The estimates also confirm a trend toward an increasingly contracted workforce, with more than two-fifths of workers expected to be employed as contract workers by 2022-2023.
How were the workers treated? In the unorganized sector, gross value added (GVA) per worker increased by 1.5% per annum in real terms, while remuneration of employed workers increased by only 1% per annum over the past seven years.
In the organized sector, wages per worker day increased by 0.42% per year from 2014-15 to 2022-23. The corresponding growth rate for the period 2004–2005 to 2014–2015 was 1.3% per year. GVA growth rate has declined in both organized and unorganized sectors.
India’s manufacturing problems have been worsening for a long time. It is also clear that as far as GVA is concerned, not only is the contribution decreasing in both organized and unorganized sectors, but employment absorption is also decreasing.
This trend confirms a reversal of the economy’s structural transformation, with workers returning from factories to farms, as seen in other data such as the Periodic Labor Force Survey. Also, the double shock of demonetisation and GST implementation has exacerbated some of these trends.
Although it may be premature to treat these as signs of deindustrialization, the protracted crisis in manufacturing deserves more attention. That this has happened despite several government incentives such as the Production-Linked Incentive (PLI) scheme and the Make in India campaign is indicative of a structural problem.
A lack of demand in the economy may have contributed to the manufacturing woes, and the double shock of demonetization and GST exacerbated the situation.
India’s recent economic slowdown may be cyclical. But the return to growth will not be sustainable unless manufacturing revives. This requires an analysis of the structural factors plaguing the sector, not just superficial changes in GST and other grand plans.
