Why India should go for a manufacturing surge

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Raghuram Rajan, former RBI governor and now academic in the United States, has regularly given interviews on how the Indian economy should be run.

In his December 2021 talks, he suggested ways to help India’s economy grow 8-9% in the coming years, in order to create jobs for young people.

His view was that India should not increase the share of manufacturing in overall GDP like China has and should continue to focus on the service sector.

According to him, China has succeeded in manufacturing thanks to its authoritarian regime, and therefore democratic India should not be aiming for the same. It is true that China’s share in the contribution to global manufacturing industry in 2018 was 28%, the highest of any country. But in the same year, the United States, Japan, Germany, South Korea, Italy, France, United Kingdom and Mexico contributed 16.6%, 7.2%, 5, 8%, 3.3%, 2.3%, 1.9%, 1.8 percent and 1.5 percent, respectively, to the global manufacturing industry.

Each of these countries has almost contributed to world manufacturing far more than its share of the world population.

China implemented economic reforms in the late 1970s and only became the largest contributor to the global manufacturing industry in 2010. In previous decades, the United States, Japan, Germany, Italy, France and the UK dominated the manufacturing world. Have these countries adopted authoritarian means? Seen in this light, Rajan’s analysis seems flawed.

In 1951 the primary sector of agriculture and related activities like forestry, fishing contributed 56.4% of India’s GDP, the secondary sector of manufacturing, construction, mining and quarrying to 15.01% and the tertiary sector of services at 28.59%. .

In 2021, the primary, secondary and tertiary sectors contributed 20.2%, 24.3% and 53.9% of India’s GDP respectively. Rapid growth is propelled first by the secondary sector, then by the tertiary sector.

Growth in the service sector

India was in the grip of the licensing and quota raj until 1991, and as a result, the secondary sector was artificially suppressed despite strong demand for consumption of goods and related activities. However, even after partially liberalizing the economy from the clutches of the licensing and quota raj, Indian entrepreneurs have invested heavily in the service sector as it offers a quick return on investment compared to the manufacturing sector. One example is the proliferation of television channels in India in the 1990s and 2000s.

As a result, the service sector replaced the agricultural sector as the dominant sector, as the latter was completely ignored.

It is only in the past five years that the government has made a concerted effort to increase the share of the manufacturing sector.

In 2018, India’s contribution to the global manufacturing industry was 3%, while our share of the global population is 17%. India has great reach and potential in the manufacturing sector, given our demographic dividend, reasonably cheap labor force, controlled inflation, and hence reduced interest rates on loans, opportunities raising funds for expansion through equity capital, improving transport and energy infrastructure.

Change is needed, where it is long overdue, whether it be aggressively promoting manufacturing or agricultural laws that would bring crop rotation and diversification.

When economists share their views on how to move the national economy forward, the government listens to them.

But views should be based on national interests and what the nation needs in the short, medium and long term.

The writer is a macroeconomic analyst


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