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.
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.
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