Growth in Indian manufacturing has been stunted. Manufacturing contributed 17.4 percent of Indian GDP in fiscal year 2020 which was slightly higher than its contribution to GDP over the last two decades. Unfortunately, employment in manufacturing increased by “just one percentage point, compared with a five-point increase for the services sector”. (Dhawan and Sengupta, 2020) Several emerging countries around the world have doubled their growth in manufacturing during the similar period. With automation and new manufacturing technologies, productivity growth is seen to be coming from such new investments rather than from labour productivity. The worrisome picture is that labour productivity in manufacturing seems to be declining over the last eight years. (Jethmalani, 2019) There is one other fact that needs some attention. In Japan, small and medium enterprises account for 99.7 percent of all enterprises, 70 percent of employees, and more than 50 percent of the amount of value-added (in the manufacturing industry). They are the backbone of the Japanese economy. However, “as per the ASI, an overwhelming 72 percent of the firms in India have 0-49 employees, although the output share of such firms is just 6.9 percent.”(Jethmalani, 2019) So how does a nation grow its manufacturing gross value add per worker, how does it increase the involvement of more employees in the manufacturing sector in light of growth in new technologies, and how does it grow its labour productivity?
It is our estimate that if we want to have about 50 medium size companies in manufacturing (with at least INR 250cr turnover), we will need about 5,000 small enterprises to progress towards becoming medium in size. To get 5,000 enterprises to become stable small enterprises, about 50,000 would need to be started. This is a staggering estimate as the mortality rates of Indian manufacturing is high. Interestingly, as many more become medium sized, the number of startups required decreases since most small startups grow as part of subcontracting network and employment opportunity increases. Growing such an ecosystem of interdependent firms has the potential to grow the manufacturing activity especially when capital available for manufacturing is highly irregular. There has been a belief amongst the policy makers in India that if they can convince large producers globally to make India as part of their manufacturing supply chain, it would lead to growth in gross value added as well as employment. While the end result could become true, what they fail to recognize is that large global firms get attracted to a country where the ecosystem of suppliers and skilled manpower exists strongly. This often comes from medium enterprises.
Let us look at how venture investments have been supporting startups in manufacturing in India which is the starting point for building of a sizeable ecosystem of medium enterprises (See Figure 2.1). While India ranks third in terms of venture capital (VC) investments (across all sectors including services) behind US and China, it is an order of magnitude lower than what they have received. VC Investment in India is about 14 percent of what China received and about 11 percent of what was invested in the US. The growth in investment in China has been 31 times as opposed to 3 times in India over a five year period ending in 2018. I hope the policy makers are asking, why?