Manufacturing-led vs Service-led Growth
Couple of days back the External Affairs minister, S Jaishankar, at a book launch, made an interesting statement –
“I have always believed that this focus on services was actually an elegant excuse for being incompetent in manufacturing…There is no major country in the world which has sustained or enhanced its global position without some commensurate build up of manufacturing’’
The debate between manufacturing-led and service-led growth has been a contentious one in the context of India’s economic development. While some argue that India should focus on boosting its manufacturing sector to create more jobs and increase its exports, others contend that India’s strength lies in its services sector, which has shown remarkable resilience and innovation in the face of global challenges.
Manufacturing-led growth is based on the premise that industrialization is the key to economic transformation and poverty reduction. By producing more goods domestically, India can reduce its dependence on imports, improve its trade balance, and generate more income for its workers. Moreover, manufacturing can create positive spillovers for other sectors of the economy, such as infrastructure, logistics, and research and development. Manufacturing can also foster technological learning and innovation, which can enhance productivity and competitiveness. Some of the advantages quoted in favor of manufacturing-led growth argument are –
It can create more employment opportunities for low-skilled workers, especially in labor-intensive industries such as textiles, garments, leather, and footwear. According to a recent report by McKinsey Global Institute (MGI), India could create up to 90 million jobs in manufacturing by 2030 if it raises its share of manufacturing in GDP from 17% to 25%.
It can increase India’s export potential and diversify its export basket. Currently, India’s exports are dominated by services (38%) and low-value-added products (28%), while high-value-added products account for only 15%. By expanding its manufacturing base, India can tap into new markets and increase its share of global trade.
It can boost India’s domestic demand and consumption. As more people earn higher incomes from manufacturing jobs, they will spend more on goods and services, creating a virtuous cycle of growth.
But unfortunately, these decades old arguments haven’t been translated into actual outcomes, which necessitates deeper reflection of structural challenges to manufacturing-led economic growth in India. Some of the structural challenges to manufacturing opined by experts are –
Manufacturing requires significant investments in infrastructure, skills, technology, and innovation. India lags behind many of its peers in terms of physical infrastructure (such as roads, railways, ports, power), human capital (such as education, training, health), and institutional quality (such as governance, regulation, ease of doing business). These factors affect the cost and efficiency of production and deter private investment.
It faces stiff competition from other countries that have already established themselves as manufacturing hubs. Countries such as Vietnam, Bangladesh, Indonesia, and Thailand have also emerged as attractive destinations for manufacturing, beyond China, due to their low labor costs, favorable policies, and strategic location.
This leads to a different growth strategy, propounded by leading economists such as Raghuram Rajan, which prioritizes doubling down on India’s strength – which are service exports. Economists argue that the positive impact of liberalising services offers massive potential in reducing inequality in industrial economies and also contributing towards climate action. Services, unlike manufacturing, can be distributed across a country and reduce pressure on megacities.
The debate between manufacturing and service led growth strategy is here to stay. India would do well not to create unfair disadvantages for one at the expense of others as both growth strategies are ultimately expected to lead to economic prosperity for all.
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