Structural transformation of an economy, where the share of agriculture decreases while the share of industry and manufacturing increases first followed by the share of services has been the dominant kind of economic growth experienced by most countries of the Global North.
It was generally expected that as countries made economic progress, this would be the trajectory they would follow. Agriculture would remain a crucial sector with its forward and backward linkages, requiring investment and support. Large-scale employment and formalisation would take place in the manufacturing sector.
The share of manufacturing would peak around 35-40% and then decline with services taking over as the major sector. However, this is not the norm anymore, with many developing countries including India facing ‘premature deindustrialisation’ i.e. the share of industry in the GDP declining at a much lower level than what has been previously observed. While some might argue that this indicates that the future lies in a ‘services-led’ growth models, most would still lay emphasis on the importance of manufacturing for creating employment as well as output growth.
India has not generally been very successful in expanding its manufacturing sector after the initial decades after Independence. The share of manufacturing in GDP increased from around 8-9% in the 1950s to around 14-16% in the 1980s. It was expected that the reforms introduced in 1991 would lead to a massive expansion in manufacturing, however, manufacturing share has been slow to rise. While there was some shift in the decade of 2000s when the share went up to almost 16-17%, it has more or less remained stagnant, with a dip during the Covid years. The share in employment is even lower at around 11-12%. Governments have tried various policies to address this challenge, but have mostly been unsuccessful and piecemeal.
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The Make in India initiative introduced in 2014 along with other recent initiatives like the Production Linked Incentive (PLI) scheme aimed to address this gap in the manufacturing sector. One of the main objectives of the Make in India initiative was to increase the share of manufacturing in GDP to 25% by 2025. However, as seen above, ten years later the share of manufacturing still remains the same. There are annual fluctuations like a decline during the Covid years followed by a recovery, but no indications of any major expansion.
While some high-profile investments like Foxconn are highlighted, at the macro level there is no significant change yet. It is clear that just making some supply-side interventions towards increasing access to credit and catering to the global financial markets by enhancing ‘ease of business’ is not enough. Many have been arguing for a comprehensive industrial policy for the country.
Any industrial policy must also focus on employment generation as a primary objective of industrialisation. A focus on MSMEs, given that they are relatively more labour intensive in nature would be appropriate. An MSME policy also would need to look beyond access to finance and towards addressing all issues such as access to inputs and markets, basic infrastructure as well as some support for enabling access to technology, accounting and management services and so on. A key issue that all of these policies would have to take into account is where the demand is expected to come from – while there are advantages to an export-oriented policy, a country the size of India cannot ignore the domestic market. Purchasing power in the domestic market would be the most significant source of demand for Indian manufactured goods. Therefore, while making Indian goods more competitive both in the domestic as well as global markets increasing the purchasing power of people who consume these labour-intensive domestic manufactured goods would also contribute to this process. Increasing incomes of those in the lower income quintiles is imperative.
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Along with this, the industrial policy must also respond to the context of the 21st century. In response to climate change and the threat that it poses necessitates that we have to rethink the ways in which production is organised. Huge factories and urban conglomerates cannot be the only model for economic progress as we look ahead.
Creating employment while also ensuring sustainable use of resources is not a matter of choice, rather a compulsion. How social protection will be achieved in this changed context also would require thought. Social protection (pensions, health insurance) through employment is a model that was suitable where there is large-scale formal employment in large enterprises. If what we have instead is more small-scale and flexible forms of employment, then the role of the state in providing social protection becomes even more important. Further, issues of regulation and implementation of labour laws are also activities that the state cannot withdraw from.
Rather than addressing these issues in silos, what we need to is a complete re-imagining of progress and development. Finding solutions to the challenges of increasing output and employment, while respecting the planetary boundaries, social diversity, and preventing wealth concentration, requires thinking outside the box.
Dipa Sinha is a development economist.