Manufacturing sector’s ‘missing middle’
Mains Paper 3: Economy
Prelims level: India’s industrial policy
Mains level: Highlights of the India’s industrial policy
The contribution of manufacturing to GDP in 2017 was only about 16
per cent, stagnating since the economic reforms began in 1991.
In India, manufacturing has never been the leading sector in the
economy other than during the Second and Third Plan periods.
But no major country managed to reduce poverty or sustain growth
without manufacturing driving economic growth. India needs an Industrial
Policy, which it has not had since 1991.
Features of the India’s industrial policy
India’s manufacturing sector has been characterised by the missing
middle: a concentration of small/micro firms at one end of the spectrum, and
some large firms in each sector at the other.
One purpose of an industrial policy is for the government to
encourage scale economies, by encouraging growth of small firms into bigger
ones to fill the missing middle.
India has almost 5,000 clusters spread across the country where
most unorganised segment manufacturing employment is concentrated.
It accounts for 40 per cent of manufacturing GDP and over 50 per
cent of exports.
Also, cluster programmes are administered by several ministries
(Textiles, Leather, Food, MSME, Heavy Industry (auto)) under different terms
This fragmentation of policy must end. Serious planning for
clusters requires industrial planning, both at the Central and State levels.
There are at least four sets of actions required for cluster
programmes by the Centre technology upgradation, skill development, market
information facilitation, and design improvement.
The Planning Commission (2013), in the 12th Plan, made an
excellent recommendation to set up a Cluster Stimulation Cell at the apex
level in the MSME Ministry, that will work to promote cluster associations.
But this kind of cell will need replication at the State level,
and mechanisms to make them operationally effective at the district level.
This requires funds. Effective cluster development has been very
important to China’s industrial development (as well as in late-industrialiser
There are as many as 100 clusters in China only producing socks!
About 1,234 manufacturing clusters are in urban locations mostly,
and as unorganised segment enterprises.
In addition, there are others: handicrafts and other manufactures
3,110; handloom 573, thus a total of 4,917.
They are mostly in small towns (< 0.5 million population) or in
small (0.5-1 million) and medium cities (1-4 million).
Cluster Development programme
India’s Cluster Development programme, which took off only in
2005, will need much more than the ₹1,000 crore per annum, the budget of the
Ministry of Micro, Small and Medium Enterprises, for the 5,000 clusters in
Also notable is the biased nature of the MSME Ministry’s
incentives, financial and non-financial which favour micro and small capital
investment enterprises to the detriment of their growth into medium-sized
The modern industry clusters will need much greater access to
institutional sources of credit. The limited resources of the Small
Industries Development Bank of India (SIDBI) cannot suffice.
The skills factor
To raising cluster productivity requires skills. At local cluster
level there are few vocational or training centres available.
If new vocational education/training were focussed at cluster
level, newly educated youth will get employment at cluster level, close to
This equally applies to girls, as for cultural reasons their
parents will not let them live away from home; gender parity at secondary
level with GER at 80 per cent now requires a new focus on vocational
training at cluster level to make these boys and girls employable.
With rising education levels, the government should promote other
These brownfield clusters could benefit hugely from the spread of
internet and online sales to utilise the educated youth in rural/semi-urban
areas. Online trade is an example of how technology shapes the geography of
jobs. Technology can enable clusters of business to form in under-developed
and rural areas.
For instance, in China, rural micro e-tailers began to emerge in
2009 on Taobao.com Marketplace, one of the largest online retail platforms
in China owned by Alibaba.
These clusters referred to as “Taobao Villages” spread rapidly,
from just three in 2009 to 2,118 across 28 provinces in 2017. India’s
50,500-odd clusters can benefit from similar activities.
India’s smartphone users are upwards of 350 million at present,
and e-commerce can enable MSMEs to access larger markets and source cheaper
Apart from Central interventions, States with an Industrial Policy
(Karnataka, Andhra Pradesh, Kerala, Telangana, Tamil Nadu, Chhattisgarh,
Punjab, Madhya Pradesh, Uttar Pradesh) should focus on job creation through
However, the shares of agriculture and industry in the credit by
commercial banks declined from the 1990s onwards.
As a share of non-food gross bank credit, lending to SSIs fell
from 15.1 per cent in 1990-91 to 6.5 per cent in 2005-06, 5.7 per cent in
2010-11, and only 4.9 per cent in 2017-18.
This is over and above the high cost of interest (11 per cent
versus 4 per cent in China).
But government needs to employ blockchain technology to help SMEs
in such clusters in financing.
Thus Mahindra Finance, currently uses blockchain in SME financing
by connecting suppliers, OEMs, and financiers for sharing data securely over
the network chain to request and approve transactions.
Q.1) With reference to the International Energy Agency (IEA) Bioenergy
Technology Collaboration Programme (TCP), consider the following statements: 1. It is an international platform for cooperation and information exchange
2. It works under the aegis of the United Nations.
3. India has recently joined the IEA Bioenergy TCP.
Which of the statements given above is/are correct? (a) 1 and 3 only
(b) 1 only
(c) 2 and 3 only
(d) 1, 2 and 3
Q.1) What are the steps require to be taken by the government to revamp
the manufacturing sector in India?