The manufacturing muddle {Economic Development}


Without closing the loop of consumer demand and supply, neither GDP growth nor job growth will quicken.

Inverted duty structure

Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods. For example, suppose the tariff (import tax) on the import of tyres is 10% and the tariff on the imports of natural rubber which is used in the production of tyres is 20%; this is a case of inverted duty structure.

When the import duty on raw materials is high, it will be more difficult to produce the concerned good domestically at a competitive price. Several industries depend on imported raw materials and components.

High tax on the raw materials compels them to raise price. On the other hand, foreign finished goods will be coming at a reduced price because of low tax advantage. In conclusion, manufactured goods by the domestic industry becomes uncompetitive against imported finished goods.

Advantage China

A strategic industrial policy it followed for two decades, stolen a march on India in labour-intensive manufacturing exports. But India’s policy structure failed to utilise its labour advantage to grow labour-intensive manufacturing exports.

The result: while China reduced the absolute numbers and percentage of the poor in the population by absorbing surplus labour in manufacturing, India’s poverty reduction was much slower.

A major reason: while China’s agricultural and rural income growth was much higher as it sustained consumer demand, it also generated industrial jobs much faster.

Last Decade report

Customs duties have been raised on capital goods and electronics, and silica for use in manufacture of telecom grade optical fibre.

 A number of chemicals where the inverted duty structure exists, it is also present in the marine goods sector.

Consequence on job

In the beginning of 2000, the number of those joining the labour force grew sharply to 12 million per annum till 2004-05; as domestic manufacturing employment growth was slow, they could only be absorbed in agriculture or traditional services; and informal employment grew even more than ever before.

However, with GDP growth picking up from 2003-04 onwards, non-agricultural jobs began to grow at 7.5 million per annum.

The share of the workforce in agriculture has been falling steadily, from 60% in 1999-2000 to 49% in 2011-12, but the fall has slowed sharply after 2011-12, when the pace of non-agricultural job growth slowed along with GDP growth.

Between 2004-05 and 2011-12, the numbers in agriculture had been at a rate of 5 million per year.

Looking Ahead

The GST, especially its inter-State component, has resulted in a neutralisation of the IDS, which had come to prevail. It has also, as the Economic Survey 2018 has rightly claimed, led to a formalisation of some informal firms, and hence workers (by registration in the Employees’ Provident Fund Organisation).

The resolution of the twin balance sheet problems (of companies being over-leveraged and banks unable to lend due to mounting non-performing assets), together with the Insolvency and Bankruptcy Code, should now open the floodgates for new manufacturing investment. 

 Source: The Hindu

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