'Make In India' Goes Off-track, Country Gets Focused On IT Sector

India is unable to create millions of low-skilled jobs in manufacturing and industry, while employment is getting concentrated in the highly skilled IT and financial services and in low-productivity agriculture.

Speaking at the Rising India event organised by a media group last week in Delhi, well known American economist Paul Krugman, who won the Nobel Prize in 2008 for his work on international trade theory, said India has achieved rapid pace of (economic) transformation in the last 30 years, but it still suffers from high degree of economic inequality, visible poverty and poor infrastructure. Talking about challenges facing India, Krugman observed that India needs to move more into manufacturing than services to tackle mass unemployment. The key to India’s growth, in Krugman’s view, is manufacturing.

“There are clearly a lot of things that India could be manufacturing. That is why India probably needs to move more into manufacturing. Service export, not necessarily the service sector as a whole, disproportionately employs highly educated, high skilled people. You need to create jobs for hundreds of millions of people who are going to need jobs that do not require those skills. Manufacturing is a natural place to employ people. India has got to move millions of people off the land into some kind of regular job, and manufacturing probably fits the bill,” Krugman said. Elaborating further, he added, “The answer to the employment requirement of developing nations (like India) with a large rural population lies in investing in rural areas and partly, in migration.”

Since the industrial revolution, almost all countries that have successfully managed the transition from low income agricultural economies to high income and high growth economies have gone through a period of sustained industrialisation and up-gradation of production structure, by relinquishing dependence on agriculture and natural resources. The four Asian Dragons or the East Asian Tigers – Hong Kong, Singapore, South Korea and Taiwan – which are the most successful examples of late developers underwent rapid industrialisation between the 1960 and 1990s. These previously backward nations have consistently maintained exceptionally high levels of economic growth since the 1960s, fuelled by exports and industrialisation, which enabled them to join the ranks of the world’s richest nations. Today, Singapore and Hong Kong are among the biggest financial centres worldwide, while South Korea and Taiwan are important hubs of global manufacturing in automobiles and electronic components.

China has been following in the footsteps of the Asian tigers – particularly South Korea and Taiwan – since the 1990s. In 1990, for instance, China produced only 3 per cent of global manufacturing output by value; its share now is nearly a quarter. By expanding its manufacturing base, China has become the ‘world’s factory’. Rising wages made people assume that China would lose its grip on manufacturing in due course and manufacturing would move to other parts of the world, including India, which would enable them to manufacture their way to prosperity. But nothing of the sorts has happened. Low cost work that leaves China goes mainly to South-East Asia, including Bangladesh, which strengthens the dominance of the ‘South-East Asia factory’ in manufacturing. This makes the task of getting rich through manufacturing for countries in Africa and South America as well as for India harder.

Conventional wisdom and economic theory suggest that when an economy progresses, it moves from a predominantly agrarian to manufacturing-driven economy. As it attains maturity, the economy is driven by services-led growth. This is the conventional route that almost all developed countries have had to take on their way to prosperity. Only a few countries with valuable natural resources and with small population – like a few of the oil-rich middle-east countries – have gone through a period of sustained economic growth without advancing mechanised production. The countries that have low mechanised production base have remained poor and backward.

Manufacturing production, productivity growth and technological advancement lie at the root of economic growth. The case with India is however different: the progression from agrarian to manufacturing to services-led growth has been given a go-by. As a result, India has leapfrogged from agriculture to services-driven economy without creating a solid manufacturing base for sustained growth and large scale jobs creation. The result: India is unable to create millions of low-skilled jobs in manufacturing and industry, while employment is getting concentrated in the highly skilled IT and financial services and in low-productivity agriculture. This is called the ‘missing middle’, as Krugman pointed out, in India’s growth journey. Focusing on this missing link will help address mass unemployment.

Direct agriculture employs 41 per cent of the employed population (total dependence on agriculture for livelihood is 60 per cent) in India, while its share in GDP is only 15 per cent. This makes agriculture a low income economic activity, and hence, a major cause of income disparity and inequality. Industry employs 28 per cent of employed workforce, while its share in GDP is 31 per cent. However, while the share of services sector in GDP is 54 per cent, it employs only 31 per cent of the workforce. Currently, the IT sector is a mass employer of highly skilled workforce. But the shift to digital technology in IT will limit the ability of this sector to generate more employment in future, though its contribution in value creation will rise. As the services sector will continue to add more value to GDP while employing lesser workforce, mass unemployment could be a major worry for India if it does not get its manufacturing engine to fire.

This has already started happening: jobs are dwindling in the IT sector because of digital technology and automation, while industry is creating fewer jobs. This is why ‘Make in India’ initiative comes into picture as a potential game-changer. Prime Minister Narendra Modi was right when he stated that his government’s goal was to give the highest priority to ‘Make in India’. The share of manufacturing in India’s GDP is about 16 per cent. If India is to seriously chase the manufacturing dream by increasing its share to 25 per cent by 2022, a lot needs to be done simultaneously to make Modi’s ‘Skill India’ initiative a success.

Since the announcement of ‘Make in India’ on August 15, 2015, there has been no visible evidence to suggest that manufacturing has gathered momentum. On the contrary, it has had a patchy and subdued impact on economy. There is still long way for India to experience the kind of economic transformation that has swept China in the past 30 years. China’s growth story, like the all other economic success stories before it, is a highly significant example to emulate for India: that is, if you want to prosper, you better start manufacturing in a big way.