Manufacturing versus services: Why privilege one over the other?

India's Growth Engine: Manufacturing vs. Services – A Re-evaluation

India's economic journey is a fascinating case study in development economics. Traditional theories emphasized the shift from agriculture to industry, with manufacturing seen as the key driver of growth. But India's reality presents a more nuanced picture, prompting a critical examination of our policy priorities.

The classical development model, influenced by Kuznets and Lewis, highlighted the transfer of labor and resources from agriculture to industry. This framework, while insightful, may not fully capture the complexities of India's current economic landscape.

• The Manufacturing Myth: While manufacturing led growth in many historical examples (Europe post-Industrial Revolution, East Asia), the dependence on colonial surplus (Europe) and strategic alliances (East Asia) casts doubt on its universal applicability.
• Global Context: Among the world's top economies, manufacturing's contribution to GDP is surprisingly modest, often below 15%, challenging the notion of manufacturing as an absolute necessity for high growth.
• The Kaldor-Young Argument: Increasing returns to scale and cumulative causation in manufacturing offer compelling reasons for its importance. However, India's industrial growth hasn't lived up to this potential.

India's Industrial Reality: India's industrial growth has been moderate, averaging around 5-6% annually. A significant portion of this growth comes from mining, utilities, and construction, with manufacturing's contribution hovering around 17%.

The Services Surge: In stark contrast, the services sector has demonstrated remarkable dynamism, growing at 7-8% annually for the past 40 years and now accounting for 53% of GDP. It also boasts a growing trade surplus, unlike the goods sector.

Policy Implications: The "Make in India" initiative, while laudable, needs a broader perspective. Should policies solely focus on manufacturing when services – transport, finance, hospitality, education, and healthcare – are equally crucial?

A Balanced Approach: Instead of a singular focus on manufacturing, India needs a more balanced approach, recognizing the vital contributions of both sectors. Analyzing periods of exceptional industrial growth (1950-61 and 2000-11) can provide valuable insights. A more equitable policy, maximizing employment and addressing the trade deficit, should be a priority.

Conclusion: India's development journey requires a re-evaluation of traditional development models. A balanced and nuanced approach, recognizing the strength of both manufacturing and services, is crucial for achieving sustainable and inclusive growth.

Disclaimer: These are the author's personal views. The author is chairman, Centre for Development Studies.