Vivek Prakash/Reuters - An employee pushes the frame of the cabin of a Mahindra Bolero vehicle at the company's manufacturing plant on the outskirts of Mumbai on this May 23, 2012 file photo.
NEW DELHI — It was supposed to be the motor for the next phase of India’s economic resurgence, but the country’s manufacturing sector has hit a brick wall, according to data released this week.
Dragged down by a sluggish manufacturing sector, India’s economic growth rate slowed to 6.5 percent in fiscal 2011-12, its slowest rate in nine years and well below the 8.5 percent recorded a year earlier.
India's economic growth rate slows
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Many countries would still consider that an impressive performance, but for a country that dreams of emulating China and pulling hundreds of millions of people out of poverty, the slowdown has come as a shock.
Manufacturing grew by just 2.5 percent over the entire year and contracted in the final quarter of the fiscal year compared with a year earlier.
India’s economy had recorded breakneck rates of growth over the past decade, but unlike the other Asian miracle economies, it was built more on a vibrant services sector than on a takeoff in manufacturing.
India’s ailing and overburdened infrastructure, intermittent power supplies, clogged ports and pothole-ridden roads have long added to the costs of manufacturing. But more fundamentally, the government’s failure to keep up with the private sector’s needs may have finally reached a critical point, with archaic land acquisition and labor laws acting as a major drag on the manufacturing industry’s investment and employment plans.
“The reason manufacturing is not doing well in India is reflective of the broader problems in the economy,” said Ruchir Sharma, head of emerging markets at Morgan Stanley and author of “Breakout Nations,’’ a book that questions the notion that the economies of Brazil, Russia, India and China are guaranteed rosy economic futures.
“There is too much land in agriculture, the land acquisition laws are complicated, and labor law is very primitive,” he said.
A stalled plan
As a share of India’s economy, manufacturing has risen only marginally, from 13 percent four decades ago to about 16 percent now — compared with more than 20 percent in many countries, such as Japan and Taiwan, at their peak and nearly 30 percent in China today.
In China, manufacturing has been an employment generator, pulling people away from agriculture and out of poverty, while manufacturing exports have earned the country a massive trade surplus.
By contrast, Indian employment growth has struggled to keep up with a rapidly expanding population. Although there is little reliable data, unemployment levels appear to have risen in the past decade despite rapid rates of economic growth, and the trade deficit has widened sharply as growing consumer demand has sucked in manufactured goods from abroad.
The government says that India needs to create 220 million jobs by 2025 as more young people enter the labor market and that the manufacturing sector will have to carry most of the burden.
Every new manufacturing job creates two or three jobs in related activities, it says, aiming to raise manufacturing’s share of the economy to 25 percent by 2022 under a new national manufacturing policy.
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