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HindustanTimes Sun,28 Dec 2014

Manufacturing sector's role muted

Dr Rajiv Khosla, Hindustan Times   January 25, 2014
First Published: 11:31 IST(25/1/2014) | Last Updated: 11:33 IST(25/1/2014)

Economic growth or increase in GDP is associated with progress. Unarguably, during the process of economic development, share of non-agricultural sectors tends to grow faster than the performance of the agricultural sector. Contemporary developed economies have already stumbled across this structural transformation, while developing countries are treading the same path.

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Within the ambit of non-agricultural sectors, there have been wide differences in the context of developing the two major components - the manufacturing and the services.
For explanation, we can compare two giant, populous, fast-growing and neighboring economies - India and China.

During this structural transformation, there have been major differences between the two economies. In India, labour disposed from agricultural sector has found jobs in service activities; however, the similar category of labour and workers in China has been absorbed in the manufacturing sector.

This might be attributed to the fact that the share of manufacturing sector in India's GDP is only 28% (employing 22% workforce). In China, manufacturing contributes 47% to GDP and employs 30% of the workforce.

Contrast this with the figures for services sector, which contributes 57% to India's GDP (employing 26 % workforce). Services make up 43% of China's GDP, employing 27% of the workforce.

The figures point to an important change.

India skipped the industrial revolution and jumped directly from an agrarian to a services economy. Colossal reduction in share of agriculture sector in India's GDP from 52% in 1950-51 to 14% in 2010-11 appears to have boosted the share of services sector. Services have encompassed a voluminous change in its share in GDP from 30% in 1950-51 to 57% in 2010-11. However, the share of manufacturing sector in GDP (16% in 1950-51 to 28% 2010-11) has not even doubled over
the past six decades.

In general, the development of manufacturing sector has been either overlooked by the policy makers or only heavy investment is being considered, and that too, in the construction of roads, airports, ports, etc.

No doubt, heavy investment in logistics does propel GDP growth, but it is also true that widespread manufacturing growth can combat slowdown, if any, in a more comprehensive manner vis-à-vis lopsided growth using agriculture or services sector.

Lack of development of manufacturing sector has also robbed the economy of the chances of earning foreign exchange.

Since, the share of manufacturing sector in total merchandise exports in India has been around 60% since 2007-08, India has reduced its probabilities of accumulating foreign wealth and offsetting the negativities in balance of trade.

The advantage of the same has been taken by China, whose manufacturing exports in one decade (2000-10), have experienced a quantum jump from 3.2% to 10% against the increase to 1.4% from 0.6% for India, during the same period.

It cannot be denied that India has been successful in attracting a few large companies. A few indigenous companies have become globally competitive.
However, there has been no industrial revolution.

The decision-makers for the Indian economy need to understand that neither a borrowed investment-based model nor the services sector-driven growth is sustainable till it is supplemented with indigenously-supported sound industrial growth. We need to urgently identify the promising industries of India that can be developed on a war-footing to increase the prospects of genuine development.

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