India is awash with discussions about where it is headed economically and how it might achieve its desired development goals. Some of this discussion is unfortunately a distraction. One example of this is the spectacle of myriad commentators tying themselves in Gordian knots while projecting India’s march towards a $5 trillion economy by 2025. Leaving aside the incredulousness of some of the assumptions underlying the projections, this exercise itself is a distraction because it focuses on aggregate GDP. The development challenge is to make the average citizen better off. Hence, the relevant target should be GDP per person, not total GDP.
A recent book by Raghuram Rajan and Rohit Lamba, Breaking the Mould: Reimagining India’s Economic Future, has tried to frame the debate in more relevant terms. The book asks whether India can grow and develop by prioritising service sector growth rather than industrial growth. The backdrop to the question is that the currently developed economies had gradually switched their economic resources from agriculture to manufacturing to services as they developed. This pattern of structural transformation has also characterised the more recently industrialising Asian economies like China, Korea and Taiwan.
India has had difficulties in expanding the share of the manufacturing sector in its economy. Instead, it has witnessed a somewhat different development path wherein most of the growth has happened in the service sector. Manufacturing’s share of both output and employment in India has plateaued at or below 20 per cent. In other words, India appears to be jumping a stage in the development process by going from a primarily agrarian to a mainly service economy. Is this sustainable in the long run?
Growth of the service sector typically occurs through rising demands for medical, legal, entertainment, accounting and other personal services. Growth in these demands is the result of rising personal incomes of residents as well increasing outsourcing of business processes by firms as they grow. Rapid industrial growth creates ideal conditions for growth in domestic demand for both of these components. Since industrial growth in India has been tepid at best, where will the demand for the service sector come from?
Messrs Rajan and Lamba spy an opening for India in the world business service growth that has been facilitated by the increasing sophistication of information technology. Firms globally are outsourcing parts of their business service requirements. This is becoming an increasingly important part of the global supply chain. The book provides examples of service business back offices that India is becoming a part of. The challenge of course is to do this at scale.
The problem facing India though may be difficult to solve using a service-led model alone. India is adding around 8-10 million new workers to its labour force every year. This pace will continue for at least a decade. Moreover, a majority of these new workers are arriving in the labour market armed with high school or better educational attainment levels. Hence, their aspirations are commensurately high and further buoyed by the general national narrative of India finally arriving at the international stage of accomplishment.
India is currently failing to meet the aspirations of young Indian workers. Monthly statistics from CMIE show that while the overall unemployment rate itself is very high at over 8 per cent, the unemployment rate for youth in the age-group 15-24 is above 40 per cent! Dealing with this looming employment crisis requires expedited measures to incentivise job creation at scale by private employers.
It is in this context that one needs to evaluate both the service sector-led development model versus the more conventional manufacturing-led model. The current service sector in India is very segmented. Its output growth is primarily in high-tech services, while its job creation is mostly in low value-added, low skill services. Thus, the current service sector job creation does not generate income streams that the young aspire to.
The back-office led service sector vision stressed by Rajan and Lamba, may be able to generate a substantial number of jobs in due course. However, it will still take 10-15 years for it to become a viable alternative. The problem is India’s skill deficit. India currently produces about 2.2 million STEM graduates, post-graduates and PhDs. Unfortunately, a majority of them are unemployable with the training that they receive. It will require sustained investment in the quality of higher education to create a cohort of adequately skilled workers who can be profitably employed in these higher human capital sectors.
What happens in the interim though? One might be able to find some employment opportunities by expanding innovative health and education outreach programmes like Anganwadi workers. But there are limits to these. Plus, it is also unclear whether these programmes meet the aspirations of a majority of the young. One interpretation of the government’s PLI scheme is that it is an attempt to meet the political economy challenge of generating jobs now. If domestic and international businesses do indeed set up production centres in India that create jobs, then some of the jobs deficit may be corrected. The concern with the scheme is that it is production linked, not employment linked. Current component assembly-based production models in decentralised global supply chains do not necessarily create many jobs. Additionally, there are concerns about whether these businesses will stay or leave after the incentive schemes end.
India’s jobs problem is real. With a median population age of 28, the problem will only get worse over time unless things change quickly. The country needs to combine the manufacturing and service sector models. It needs to go beyond the PLI schemes by incentivising private industry to scale up. Key for this are land and labour regulatory reforms. The good news is that these are fiscally costless though they do entail political costs. At the same time, India needs to address its skill deficit by raising its investment in higher education. India’s demographic dividend will become a demographic curse if the country fails to create relatively high value-added jobs at scale. It needs to act quickly and comprehensively.
The writer is Royal Bank Research Professor of Economics, University of British Columbia
India’s way forward: Services or manufacturing?
12
1
04.01.2024
India is awash with discussions about where it is headed economically and how it might achieve its desired development goals. Some of this discussion is unfortunately a distraction. One example of this is the spectacle of myriad commentators tying themselves in Gordian knots while projecting India’s march towards a $5 trillion economy by 2025. Leaving aside the incredulousness of some of the assumptions underlying the projections, this exercise itself is a distraction because it focuses on aggregate GDP. The development challenge is to make the average citizen better off. Hence, the relevant target should be GDP per person, not total GDP.
A recent book by Raghuram Rajan and Rohit Lamba, Breaking the Mould: Reimagining India’s Economic Future, has tried to frame the debate in more relevant terms. The book asks whether India can grow and develop by prioritising service sector growth rather than industrial growth. The backdrop to the question is that the currently developed economies had gradually switched their economic resources from agriculture to manufacturing to services as they developed. This pattern of structural transformation has also characterised the more recently industrialising Asian economies like China, Korea and Taiwan.
India has had difficulties in expanding the share of the manufacturing sector in its economy. Instead, it has witnessed a somewhat different development path wherein most of the growth has happened in the service sector. Manufacturing’s share of both output and employment in India has plateaued at or below 20 per cent. In........
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