Illustration: Ramandeep Kaur | ThePrint
Illustration: Ramandeep Kaur | ThePrint
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There is much angst among policymakers over the failure of India’s manufacturing story. The Atmanirbhar Bharat initiative is indirect admission of this, being recognition that the country is not capable of developing its manufacturing sector without trade protection and tariff walls. Once you head in this direction, business lobbies will influence policy towards ever more protection. This is already happening, with companies under the production-linked incentive programme asking for moving target goalposts, and with more sectors being added to the protection programme.

Perhaps the time has come to acknowledge that India is not going to replicate the export orientation of the East Asian manufacturing story, or even that of Bangladesh. If the country does build manufacturing into a bigger component of GDP, which has been the official objective from 2012, it will be oriented towards the domestic market, and probably high-cost. Domestic consumers will bear that cost, while the economy remains outside the main trading blocs, and therefore, at a disadvantage for exporting goods.

The story to compensate for this will come from services. Globally, trade in services is a third of merchandise trade. In India’s case, the ratio is nearly double that, at 60 per cent. Much more, if one counts at least some of the remittance inflow as the result of labour export, and therefore constituting service export earnings rather than incoming capital. Even conventionally defined services exports may, in five years, account for the lion’s share of India’s export basket — reducing the share of merchandise exports to less than half. That will be unique for an economy at India’s stage of development. It will also prop up the rupee to a level where labour-intensive manufactured exports become even more out-priced.

Whether one likes it or not, therefore, services constitute the value-addition sector that the country has to build on, using its comparative advantage in infotech and related skills. Enterprises based in India, whether owned domestically or internationally, will have to become not just the service backstop for the global economy, with their established expertise in offshoring tech and tech-related services, but also creative shops specialising in newer areas like artificial intelligence and big data. And chip design rather than chip manufacture (a Taiwan-US-South Korea monopoly), aircraft engine design rather than manufacture.


Also read: Let’s stop pretending. Indian banking sector needs to be mostly private to be healthy


India has already shown the world its paces through a rapid consumer digitisation process that the McKinsey Global Institute describes as one of the largest and fastest-growing in the world. Average data use per mobile subscriber is well ahead of China, and compares with South Korea. This has been facilitated by telecom platforms like Jio, which offer cheap data use, and the creation of an impressive infrastructure for instant payment services at low cost (retail digital payments have grown at over 50 per cent annually), the technology backbone for the goods and services tax system (10 million enterprises on one platform), a digital identity system with some 1.2 billion people registered, a software package to facilitate direct benefit programmes funded by the government, and so on.

Various businesses have been built using these platforms, accounting for India’s unusually large number of unicorns (the subject of this column last week). Explosive valuations have just begun, as more investor money flows in. Nasscom, the industry association, is looking ahead to the digital economy reaching a trillion dollars. Crucially, it says every fifth start-up now uses deep technology, and this constitutes the fastest-growing start-up segment. The first start-up forays into overseas markets have started even as data analytics is offered to large enterprises. Expect improvements in system-wide productivity. If proper marketing structures are built, it could even improve agricultural incomes by increasing the share of value captured by the grower, at the expense of intermediaries.

Nevertheless, an economy built on this model will see white-collar work even more at a premium, compared to blue- and black-collar. That automatically disadvantages the poorly educated, who will have to survive in the uncertain gig economy, while wealth gets more concentrated. The implication for the finance minister is that more fiscal transfers to the bottom tier will become unavoidable, and cannot be funded if concentrated wealth at the top is not taxed.

By Special Arrangement with Business Standard.


Also read: Indian unicorns are coming of age. This is what it means for big business & retail investors


 

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42 COMMENTS

  1. Painful to see this article is shit what do they mean by india cant be good for manufacturing
    Maan we dont even have the tech for building it so we didn’t build but u know what services requires infras so if the computer is not available or cheap how can the person do the service actually india is still not good in service because only of manufacturing as the equipment are of lesser quality and not enough good.look every developed used to be a developing one but all of them have one thing common i.e. manufacturing.

  2. Very poor research by theprint. I am moving from service to manufacturing, and I can see some progress. Labour reforms are the most important miles stone to be achieved. Also we need industry body to talk to Local/State/National governments, keep raw material prices in check.
    Also Industrial areas are very poor, graft in getting allotment and statergy missing.

  3. I feel sad that it has come to this. But problem remains Agriculture amd Manufacturing sector are not open to reforms. It seems people will accept most crazy moves by the govt but won’t let the reforms pass. Reversal on Land aquisition act and current farm laws shows this.

    The moment govt touches labour laws you can bet there would be massive protests across the country. People in these sector are highly resistant to change and the demographics make them prime voting assets. Thats why even current govt with 330+ majority in Lok sabha cannot do any reforms.

    Agriculture and Manufacturing will keep on living on sibsidy provided by 3 million taxpayers and the income gap will keep on widening. One cannot behave illogically and yet expect to prosper. As ypu sow, so will u reap.

  4. Not sure if this is an industry level understanding that Print has. Also is it with regards to manufacturing for export, manufacturing for domestic consumption or manufacturing as a service… Indian manufacturing has already gaining and doing well in Pharma, FMCG, Automotive, Ayurveda Products (Which can be export Story), textiles etc. With technological advancement, & machinery, requirement of skilled manpower has reduced.

  5. sorry, Sir, you are not a good economist.
    We need efficient agriculture sector for food security and strong manufacturing for real growth.
    Service sector will rise but it is only the third tier.

  6. Yes, services sector by its nature will have to augment the Indian economic growth and its contribution may well be much above that of manufacturing. But the simple point is there can’t be services without products from the brick and mortar world. YIou can’t repair a computer if there is no computer; you can’t have a supply chain without supplies.
    India is at present the second biggest importer of Defence equipment. Even if part of this “imports” is shifted to local manufacturing, as has already started, it will create more jobs and boost the GDP. THAT is just one sector.
    India has several strengths that could help it become a leading manufacturing base: a large pool of engineers, a young labor force, wages that are relatively low, and significant domestic consumption of manufactured goods. I don’t find anything amiss in servicing the local consumption with local manufacturing if it can create more jobs. India does not have to increase exports manifold overnight. All in good time.
    Here is an extract from a Mcinsey report.
    “As our colleagues argue in the McKinsey Global Institute report India’s turning point: An economic agenda to spur growth and jobs, developing globally competitive manufacturing hubs represents one of the biggest opportunities for India to spur economic growth and job creation this decade. This article offers a closer look at how to do that. We identify 11 manufacturing value chains with strong potential to operate in international markets, power growth, and provide long-term employment and skill pathways for millions. Their potential comes from several factors. First, these value chains are well positioned to capitalize on India’s advantages in raw materials, manufacturing skill, and entrepreneurship. Second, they can tap into four market opportunities: export growth, import localization, domestic demand, and contract manufacturing.”
    If India puts in its efforts in the right direction with a positive attitude, it can reach there.
    Tail piece: Economic progress has to do more with doing than just forecasting.

  7. Due to some queer combination of lethargy and desire to become rich quickly, Indians have given a miss to quality issues. So manufacturing doesn’t suite Indian temperament. In services one becomes accountable immediately, so they cannot “deliver and scoot”. So, if there has to be a hope for any recurring earnings, it a priori has to be only through services.

  8. I have read few articles from the print and I can tell that this news agency is full of pessimism, it reeks sign of external interference in Indian news

  9. Sir, as a first step, should we call the bluff of the lobbies that you mention? Mfrs. who can not compete in today’s time and age, when access to technology and capital for large businesses is not an issue. It is the large Indian firms who have become used to crutches. We provided corp tax rebate in 2019, knowing fully well that it is not going accelerate investment. Then came PLI. A review of funding why electoral trust informs us about what is going to be our policy choices. Is it not?

  10. Title itself says- you like it or not.
    You are right.
    The way service sector flourished it did not happen with any other sectors. Be it agree culture, manufacturing , none could perform this par.
    There are certain reasons.
    Unions, vested interests of politicians, red tapes, opposition to automation, opposition to evolve etc.
    Service sector does not have these kind of hurdles.
    Therefore this sector shall keep flourishing others shall stay as they were.

  11. You are right.
    The way service sector flourished it did not happen with any other sectors. Be it agree culture, manufacturing , none could perform this par.
    There are certain reasons.
    Unions, vested interests of politicians, red tapes, opposition to automation, opposition to evolve etc.
    Service sector does not have these kind of hurdles.
    Therefore this sector shall keep flourishing others shall stay as they were.

  12. Is our IT sector model based on Manufacturing Or Service ? Looks like Google, Microsoft and the likes are the manufacturers making the real money, while the Indian tech giants although big are still on the periphery of earning being the in the service sector.
    Suppose same applies to all industries.

  13. As has been admitted by the writer in passing, such a model would only make the divide between the educated haves and the have-nots more entrenched. The solution suggested – of making them live on fiscal transfers – is worse. Instead, why not promote manufacturing and give them jobs and skills?

  14. Putting all eggs in one basket of services is as unwanted as doing so in manufacturing. Given that we carry 1.38 billion people with the need to cater to their needs and aspirations, emphazising growth in all 3 sectors is apparent: not because we aspire to be the world’s top exporter but we have to develop the local markets both on demand and supply sides. This article is one sided.

  15. India has a 1.3 billion population and growing. People are brilliant, intelligent and creative but what percentage of the population are just average and below average?….what jobs can India provide the average person which will at least give them a std of living better than their parents.

  16. Nonsense. A large country like India must have a super strong manufacturing backbone – for sustainable economy, job creation and national security. We may not become a China, but we need to be a strong manufacturing country.

  17. If it is going to be service led growth then brace of big income inequality in society and a jobless growth.

  18. Like it or not, no developing country in the history of the world, has become a developed country with service sector only. Manufacturing is and was the key to all of them without exception. It may be convenient to you to peddle service sector but in an increasingly educated and bitterly learned India with 72 lousy years of sad experience, you need to try again Misinformation is as bad as fake news in new India.

  19. India has the ability to focus on manufacturing and service sector. Problem with service sector is its easily replaceable… Many IT firms switched to Philippines and Singapore. Manufacturing sectors is more stable.

    Lack of research by the author

  20. You ignore the central issue: employment. With the gargantuan population that we have, unemployment looms large. To tackle that, we must get manufacturing going ….. services are no good for a populace that cannot afford them, and high-cost domestic manufacturers with poor quality protected by tariff barriers will get us back to where we were in the days of the license raj. Keeping our borders open for imports and foreign investment in manufacturing is necessary, not least to bring in competition, technology and good management. Never mind if we can’t have export-led growth based on manufacturing, the domestic market is large and will support investment in low-cost, good quality manufacturing. Services of the sort you mention – aircraft design, software and so on will only employ a small number. Moreover, unless we get manufacturing going, government’s tax collections will stagnate and the level of investment in public services such as healthcare and education, above all, will suffer – compounding their already abysmal quality.

  21. I agree with the assessment made in the article. The dominance of service sector in export trade is slated to rise.But the worrying fact is exports are almost stagnant, which means that manufactured goods exports are showing a declining trend. Yes, one can argue that we have a big domestic market and the GDP would still rise. Nevertheless with this trend, the target of 5 trillion dollars economy seems to be very distant and far away.

  22. Not enough focus on manufacturing and lopsided focus will result into vulnerable situation .

    America and Australia are example of it . All manufacturing is leased and now they totally depend on South East Asian counties for everything .

    We need an balanced approach. Rigorous focus on manufacturing for this decade could bring that balance .

  23. Very bad article. While it is true that services sector will still remain very big for sometime, it will have to be replaced. Just like Saudi Arab’s oil will have to be replaced. Manufacturing is the only viable option. But we need to specialize in making things which will be necessary but no one will be able to produce them like us. That’s a very big challenge.

  24. Who will the finance ministry tax when the educated class (the back bone of service industry) exit this country due to high taxation?
    No amount of redistribution is going to help as the people who are incredibly rich are extremely low in numbers. And have more opportunities to flee to better destinations.

  25. What you can not make you can not understand and what you can not understand you can not design.

    A lot of Indian economists are bookworms, they are not engineers, they have not worked in manufacturing or service in India and abroad. They do not understand anything about the modern economy.

    And like social sciences they invent words and dogma to explain what has been going on for the last two decades.

  26. What rubbish this article is. The reason manufacturing hasn’t grown in India is due to a lack of economic reform but with the current labour reform and statewide land reform this is going to change. Services will continue to play a big part and we won’t be able to replicate the East Asian export growth but regardless both exports and manufacturing are our exports. India as a whole has missed the low skilled manufacturing path except gujurat but manufacturing will still need to grow

  27. In 2021 , which educated indian will work in manufacturing sector. What learning it provides? No career progression. No flexibility of location. Poor hikes. Manufacturing and UPSC are only for the bottom strata of the society who require steady income and also some respect. Upper middle class pls stay away from these jobs , manufacturing and infrastructure. All the technology we have is imported. No innovation in india in manufacturing. Hence it is a dead end

  28. This is a flawed opinion at best.

    We will be good at services until a a cheaper and reliable one is available. You will be surprised south East Asian countries especially Philippines and Singapore are good at it.

    Service sector had it good specifically the IT as there were lesser options. Once Africa also catches up then its goodbye.

    Then we will left with nothing.

    Author would do well to research the Japanese automakers how the playing field was stacked against them in US yet they beat all the odds and obstacles. Rest they say is history.

    Overall the article reeks of defeatist mindset plaguing the Indian psyche. A start is never too late.

    • Absolutely we have 2nd largest smartphone asse.bler in world now and start is not late . As government focus is on infrastructure roads,dfc, and logistics our logistics cost will decrease and service sector have many competitors which will emerge in future like Africa,bangladesh,Pakistan and East Asian countries as well only English cannot be a usp for our service sector we have to further diversify in manufacturing, defense ,electronic manufacturing and textile as well and got should support high tech startups emerging in our country especially in cities like Bangalore and other tech cities and yes one thing I agree in this article is don’t become protectionist and i don’t think this article will change the unachievable potential of india manufacturing power and India s economy will have a good share of manufacturing in future as well as service sector. And pli scheme is successful till now.

    • Absolutely we have 2nd largest smartphone assembler in world now and start is not late . As government focus is on infrastructure roads,dfc, and logistics our logistics cost will decrease and service sector have many competitors which will emerge in future like Africa,bangladesh,Pakistan and East Asian countries as well only English cannot be a usp for our service sector we have to further diversify in manufacturing, defense ,electronic manufacturing and textile as well and got should support high tech startups emerging in our country especially in cities like Bangalore and other tech cities and yes one thing I agree in this article is don’t become protectionist and i don’t think this article will change the unachievable potential of india manufacturing power and India s economy will have a good share of manufacturing in future as well as service sector. And pli scheme is successful till now.

  29. Taxing the top 0.1% wealthy individuals is fraught with risk for Modi since they are his closest pals and supporters. The bottom have nots are dupes in any case – they don’t need any economic growth – caste and religious issues suffice to capture their votes. Modi knows this full well considering he is a master at this. Therefore Mr Hot Shot economic writer – forget economic growth for all. The only guys who will be growing economically in India are Modi’s rich friends.

    • Left-(ill)liberal spotted! Rich are all crooks and everyone is corrupt and all. Surprised to see that Ambani-Adani were not named and called as crooks. Only the JNU educated are the most sincere, they know what is best for india, etc. Keep it up! Socialism and Marxism zindabad!

  30. Well, some one has to still manufacture cars, computers, soaps, shampoos, crush oil seeds etc, right? Don’t banish manufacturing sector so soon.

    • Yes, you are quite right. The rest of the world would “still manufacture cars, computers, soaps, shampoos, crush oil seeds etc,”

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