The ongoing debate over whether India’s preferred path for economic growth should prioritise manufacturing or services has revived in public debate. While India’s software exports have thrived, many are questioning why the services industry cannot lead the country forward. Given the dismal industrial growth after the 1991 economic reforms, it is clear that a structural barrier is impeding the sector’s expansion.
Manufacturing Reform Promises That Haven’t Been Fulfilled
- Increased Manufacturing Market Share: Despite the 1991 economic changes, which were primarily aimed at manufacturing, there was no major growth in manufacturing’s share of the economy. The sector’s expected growth and expansion did not occur as expected.
- Rising Income Inequality: Although the range and quality of products created in India have improved qualitatively since 1991, the restricted expansion of manufacturing in comparison to the entire economy has resulted in rising income inequality. The advantages of these advancements have not been distributed fairly throughout the population.
- Structural Challenges Persist: Despite manufacturing-focused governmental measures and reforms, the industry continues to suffer deep-seated structural challenges. These obstacles have hampered the sector’s growth and capacity to attain its full potential. To address these fundamental difficulties, a comprehensive approach is required.
- Manufacturing growth is restrained by demand factors, which are mainly independent of supply-side reforms. Household demand for manufactured items is inextricably tied to the fulfilment of basic needs such as food, shelter, health, and education. Food expenditure dominates a substantial share of Indian households, limiting the rise of demand for other manufactured goods.
- Educational Gap and Skill Development: In terms of educational outcomes, India falls behind successful manufacturing nations. Poor performance in international examinations, as well as low literacy and numeracy levels among Indian youngsters, indicate the need for considerable educational system improvements.
- Inadequate Focus on Ecosystem Development: The 1991 economic reforms concentrated primarily on policy improvements, ignoring the need for a full ecosystem to sustain manufacturing growth. This ecosystem should include things like education, training, infrastructure, and supportive legislation. A more comprehensive approach is required to provide a favourable climate for the manufacturing sector to thrive.
Recent Initiatives and Underwhelming Performance
- Make in India: This project, launched in 2014, sought to encourage manufacturing in India and attract foreign direct investment (FDI). Despite its lofty ambitions, the project has not produced the promised outcomes in terms of significant manufacturing expansion and economic output.
- Production-Linked Incentive (PLI) plan: This plan, which was recently implemented, gives production subsidies to encourage the manufacture of specified items. While these ideas were presented with excitement, the report points out that their track record has been underwhelming.
- Manufacturing Growth is Slow: According to the article’s preliminary forecasts for 2022-23, manufacturing growth will be 1.3% for the year. This pace of growth trails agriculture and other parts of the services sector, indicating a lack of significant improvement in manufacturing.
The Importance of Manufacturing in India’s Economy
- Job Creation: Manufacturing sectors have the potential to provide a large number of jobs, particularly for India’s increasing workforce. Manufacturing is important to the government and policymakers in tackling the unemployment problem and providing jobs for the population.
- Economic Growth: A thriving manufacturing sector can help to drive overall economic growth. India can boost its GDP and strengthen its position as a global economic player by growing manufacturing. A strong manufacturing base can boost productivity, attract investments, and propel economic growth.
- Private Sector Readiness: In an address to corporate executives, the finance minister emphasises the importance of the private sector contributing to the manufacturing push. The active participation of the private sector is regarded as critical for fostering manufacturing expansion.
- Public Investment: The government’s increased capital spending in the most recent Union Budget is projected to help the private sector by increasing aggregate demand. This investment in infrastructure and other areas can stimulate manufacturing and create a climate conducive to its expansion.
Food’s Role in Demand Constraints
- Household Expenditure: Household expenditure patterns influence demand for manufactured goods, which are mostly determined by the fulfilment of fundamental necessities such as food, housing, health, and education. These needs account for a sizable portion of household spending and are classified as non-discretionary expenses that cannot be postponed.
- Food Expenditure: Food accounts for a sizable portion of family expenditure in India. Because food consumes a large amount of disposable income, there is less availability for spending on other goods and services, which can limit the rise of demand for manufactured goods.
- Negative association with Per Capita Income: There is a substantial negative association between per capita income and the share of food spending in household expenditure around the world. Wealthier countries, such as the United States and Singapore, have lower food expenditure proportions. In contrast, India, which has a lower GDP per capita, has a higher share of food expenditure, which can constrain the increase of demand for manufactured goods.
- Implications for Manufacturing Demand: The dominance of food expenditure in household budgets shows that demand for manufactured items is inextricably related to the satisfying of basic requirements. As people prioritise spending on food, housing, health, and education, demand for other produced products may be constrained, limiting the manufacturing sector’s growth potential.
- Export Potential: Smaller East Asian countries have achieved significant manufacturing growth by relying on global markets rather than their domestic markets. Manufacturers can tap into bigger consumer markets and overcome the restraints caused by domestic demand limitations by diversifying into exports.
Exports as a potential manufacturing sector solution
- Overcoming a Limited Domestic Market: Exporting allows the manufacturing sector to overcome the constraints of a limited domestic market. Manufacturers can access a bigger consumer base and expand their sales potential beyond domestic demand by entering global marketplaces.
- Market Diversification: Exporting allows manufacturers to diversify their markets and lessen their reliance on a single market. This reduces the risks connected with changes in domestic demand or economic situations in the home nation.
- Global Competitiveness: In order to compete in the export market, firms must concentrate on improving their global competitiveness. Product quality, innovation, pricing, branding, and customer service are all examples of such criteria. Manufacturers must endeavour to provide products that satisfy international standards while remaining cost and quality competitive.
- Infrastructure and Logistics: To deliver their goods to foreign markets, manufacturers require dependable transportation networks such as roads, trains, and ports. Access to efficient seaports, airports, and customs facilities aids in the automation of export procedures and the reduction of turnaround times.
- Production Costs: Manufacturers must guarantee that their cost structure, which includes labour, raw materials, energy, and overheads, is competitive in comparison to other exporting countries. Cost-effective production processes and economies of scale can help boost export competitiveness.
- Trade Agreements and Market Access: Participating in trade agreements and obtaining preferential market access can give manufacturers a competitive advantage. Manufacturers can increase their competitiveness and extend their export potential by entering markets with lower tariffs or trade obstacles.
- Export Promotion and Support: Through export promotion activities, financial incentives, export credit facilities, and market information services, governments can play a critical role in boosting exports. These policies aid manufacturers in navigating export procedures, gaining market intelligence, and obtaining financial assistance to enhance their export potential.
@the end
The dispute between manufacturing vs services is critical to India’s economic success. While the services sector has played an important role, a comprehensive manufacturing environment is essential. Only through coordinated efforts and comprehensive reforms will India be able to fully realise its manufacturing potential and achieve long-term economic development.
Source: https://www.cgdev.org/publication/manufacturing-or-services-indian-illustration-development-dilemma-working-paper-409