Calcutta Notebook


Indian manufacturing just does not seem to rev up. The growth rate of the economy is slowly picking up. It has reached a respectable 5.7 percent in first quarter of the current financial year. The growth rate of industrial production, however, was less than one percent. The growth has come mainly from the services sector.

The economy is conventionally divided into three sectors—agriculture, manufacturing and services. The crops grown for making drugs are considered part of agriculture sectors. The drugs that are manufactured are considered part of manufacturing sector. The services provided by the doctor are considered part of services sector. Of these, the share of agriculture shows a long term downward trend. The share has declined to less than one percent in major developed economies. The share of agriculture in Indian economy was about 55 percent at the time of Independence. It has now declined to about 20 percent in keeping with the global trend. That means that the engine of growth will lie either in manufacturing or the services sector.

The services sector appears promising. The share of manufacturing in Indian economy has remained stagnant at 24 percent since beginning of reforms in 1991 to present. The share of services sector, excluding government services, on the other hand, has increased dramatically from 27 percent to 47 percent in the same period.

It is clear that services is the sunrise sector, not manufacturing. This is the trend observed world over. The share of services is up to 90 percent in some high income countries.

The stagnation in share of manufacturing happens because people can consume only so much of physical goods whereas the consumption of services is almost limitless. One can eat only so much bread, put so many air-conditioners in his house; or ride on so many cars. But the possibilities in tourism and video games are much greater. Hence it is seen that the consumption of services, not manufacturing, increases with economic development.

The second problem is of the global race to the bottom. China is merrily destroying its environment in order to produce cheap goods for the world market. The Chinese Government does not require industries to set up pollution treatment plants and has allowed its air and water to be polluted. The cost of production in China is less because the industries do not have to set up these plants. The cost of production in India is more because here industries have to set up these plants. Indian businesses will be able to compete with China only if they too are allowed to produce without installation of treatment plants and allowed to pollute the air and water. A single country destroying environment will force rest of the world to follow it in a race to the bottom in a global market. Expansion of manufacturing in India will, therefore, necessarily have to follow the anti-environment policies of the rouge countries. This problem does arises much less in services sector. The consumption of raw material is less in the services sector. A software company can produce billions of rupees worth of software from a single building.

China is not able to compete with India in the services sector because this requires a supple mind. China is able to produce cheap goods mainly because it has encouraged large companies, including multinational corporations, to produce on a large scale. Such production requires less suppleness of the mind and more exploitation of the environment.

The quality of jobs in this sector is also generally better than in manufacturing. The number of skilled persons required is more in services sector. Therefore services sector will provide more numbers of high paid jobs. For these reasons India should focus more on the services sector.

That is not to discredit manufacturing. That will continue along side. The Prime Minister welcomed foreign investors to set up manufacturing units in India. Question is why can the job not be accomplished by Indian businessmen? There is no consensus among economists regarding the long run impacts of FDI on host country. Some studies find that FDI is beneficial in the short run but harmful in the long run. Therefore, in the first instance, effort should be to get Indians to "Make in India" and export. FDI should be welcomed only where specific proprietary technologies are involved.

It's difficult to fathom why the bureaucrats are goading Modi to promote manufacturing instead of services. One possibility is that they are driven by their personal interests. Establishing a manufacturing facility requires many a interface with the bureaucrats—land has to be acquired, coal linkage may be needed, compliance with the factory act is to be made, no objection certificate from the Pollution Control Board is to be obtained, etc. Each of these steps provide opportunity for the bureaucrats to take bribes.

It is necessary for the Government to take a proactive approach to the development of the services sector. There is a huge demand for translation services across the world. India must develop the capability to translate, for example, a text book from German to Chinese. It is necessary to spread the knowledge of foreign languages for this potential to materialize. The Government can establish Institutes of Foreign Languages along the lines of IITs, IIMs and AIIMS in various states.

India already has emerged as an important destination in health tourism. A medical procedure that costs, say, Rs 50 lacs in the United States can be undertaken here in mere Rs 5 lacs or less. The health tourist does not have an efficacious and effective remedy in case the doctor does not provide the promised services. The visitor cannot be expected to file a case in the Consumer Court and fight for decades. A Health Tourism Act should be enacted with provision of establishment of a Health Tourist regulatory and enforcement establishment. Similar steps can be taken in relation to other services. Mr Modi should take a relook at his focus on the manufacturing sector.

Vol. 47, No. 22, Dec 7 - 13, 2014