Manufacturing SMEs In A Transit To Growth

The most recent Purchasing Managers Index (PMI) reflects a contraction in the manufacturing activity in India in December.

#DigitalErra Thought Corner

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Expectations from India’s manufacturing sector are high. These include, among other objectives, job creation, exports and a force that will drive future economic growth. The report of the Sixth Economic Census (6th EC) that came out in March sheds light on some of the key trends in the sector; trends which raise more questions than answers.

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The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) fell to 49.6 in December, the first time it hit below the 50-mark in 2016, from 52.3 in November. A reading below 50 implies contraction while one above 50 indicates expansion.

Reasons for Contraction in Manufacturing Activity

Labor reforms and laws pertaining to land markets remain restrictive for investment and competitiveness to grow. The reforms largely helped in favor of service industry but could not enable the rise of the manufacturing industry, which, in addition, required critical linkages like electricity, water and reduction in burdensome regulations.

The inability to provide a stable environment for investment in manufacturing to take place is one of the primary factors to perform poorly on the composite index.

Third, another major factor for India to consider over the medium to long term is automation. The Make in India national manufacturing policy aims to create 100 million additional jobs by 2022. Even if the manufacturing sector has a multiplier of 5, generating 20 million jobs is not easy.

Increased competition from imports, lack of demand from industrial sectors and original equipment manufacturers (OEMs) and shortage of credit are some of the major constraints which are affecting the expansion plans.

The recent demonetization took a toll on manufacturing output. “PMI data for December indicated that the rupee demonetization took a toll on manufacturing performance,” the report by Nikkei said. “Companies saw new work and output dip for the first time in 2016. In turn, quantities of purchases were scaled back and employment

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lowered. Meanwhile, input costs increased at a quicker rate, whereas output charge inflation eased.”

Solutions For Manufacturing SME Prowess

Factoring market reforms even at the state level will go a long way in boosting manufacturing competitiveness. Some states have taken the lead; others need to follow.

Making India a manufacturing hub by locally manufacturing products that it currently imports, lifting manufacturing sector growth to 12-14% p.a. by developing technological depth in manufacturing with the help of foreign investment.

Skill Development for Inclusive Growth program which envisages setting up of at least 1500 to 2000 training centers and training as many as 10 lacs rural youths, to create appropriate skill sets among rural migrants essential to bolstering India’s manufacturing prowess.

A branding and mindset reset is needed to India's image to stress on quality, excellence and innovation.

There are other significant trends pertaining to structure and financing of establishments that need to be studied further.

Conclusion

A greater focus on strengthening SMEs is suggested, along with measures to help enterprises to grow. Creating formal jobs on a large scale is required to get workers to shift out of tiny, unproductive household units which they may have set up in the absence of opportunities.

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