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Mint
26-06-2025
- Business
- Mint
Manufacturing versus services: Why privilege one over the other?
This column looks at the relative importance of the manufacturing industry and services in India's growth story and discusses our required policy priorities in that context. The origin of modern development theory can be traced to the regularities that Simon Kuznets and others observed in the 1950s and 1960s on how the structure of an economy evolves with growth. A key feature he observed is that as per capita GDP (a concept he invented) rises, the dominant sector of the economy shifts from agriculture to industry and then services. This regularity, combined with Arthur Lewis's foundational theory about how the transfer of labour and surplus from a traditional agricultural sector to a modern industrial sector constitutes the fundamental process of development, became the core of development economics. Also Read: Rahul Jacob: Manufacturing is crying out for a reality check These pillars were supplemented with seminal contributions by many others, but the main focus of enquiry was on the transfer of labour and savings from a traditional agricultural sector to a modern industrial sector, especially manufacturing, which was seen as representative of the entire capitalist non-agricultural sector. The key policy debate at this sectoral boundary between agriculture and the rest of the economy was about the desirability and appropriate scale of the surplus transfer out of agriculture. Theodore Shultz wrote about the importance of transforming traditional agriculture. Mellor and his school of economists at IFPRI developed models of agriculture-led growth. Ishikawa argued that growth in developing economies required a reverse transfer of resources into agriculture. My own doctoral thesis investigated the interaction between inter-sectoral resource transfers and patterns of long-term growth in India. Also Read: Manoj Pant: Let's prepare well for negotiations on trade in services Since then, the sectoral boundary of interest in India and policy debate have shifted. The boundary in focus now is between industry, especially manufacturing industry, and services. There is a broadly held view among economists that manufacturing has to lead development. However, on close questioning of why they think so, the response is usually a cursory reference to historical experience. Manufacturing industry indeed led the high growth phase of many countries in Europe after the Industrial Revolution. This is also true of East Asian countries in their high-growth phase. But how much of that growth in Europe is attributable to surplus transfers from colonies—and in East Asia to their strategic and economic alliance with America—remains an open question. Of the 30 most advanced countries in the world today (in per capita GDP terms, excluding some small island economies), manufacturing accounts for 10% or less of GDP in a third of these and 15% or less in another third. Ireland is the only outlier where manufacturing accounts for over 29% of GDP. Also Read: Services led exports are a mixed blessing for the Indian economy So, what is the evidence pointing to the special importance of manufacturing? The only evidence-based answers I have seen are those by Professors Veeramani and Nagesh Kumar. Both of them argue that strong backward and forward linkages unique to manufacturing industry make it an ideal sector to lead developing economies. Surprisingly, few remember the robust theory of manufacturing-led growth developed by Nicholas Kaldor 50 years ago. Building on the even earlier work of Allyn Young, Kaldor argued that manufacturing typically has the characteristic of increasing returns to scale, driving down costs but correspondingly increasing demand as multiple industries reinforce one another in an expanding process of cumulative causation. Keynesian demand management can greatly strengthen this process. Thus, there are compelling reasons for expecting manufacturing to play a leading role in an economy like India's. If so, why has the long-term record of industrial growth been relatively unimpressive? Industry has typically grown at around 5-6% annually during the past 70 years and its GDP share has risen from around 15% to 29% over this period (see data chart). Actually, much of our high industrial growth in recent decades is attributable to mining, utilities and especially construction. The share of manufacturing industry is only around 17%. In contrast, the share of services in GDP has grown from 20.6% at the outset to 53% today, its average decadal growth during the last 40 years being in the range of 7-8% annually. The more dynamic performance of services is also reflected in its rising share of employment and, significantly, in our growing trade surplus in services. This is in sharp contrast with our trade deficit in goods. It is sometimes argued that manufacturing has been hamstrung by dysfunctional regulations and undue interference by an overbearing state. But it is the same regulatory ecosystem in which the services sector has performed so much better. Also Read: Services offer a fast and reliable path to economic development Thus, from a policy perspective, we must ask: Why is the slogan of 'Make in India' and related policy incentives limited only to manufacturing industry, when, say, transport and trade services, financial services, hospitality, education, health and other services are just as important as tangible goods like textiles, steel, cars or pharmaceuticals? We should carefully study the only two decades when industry grew significantly faster than services, 1950-51 to 1960-61 and 2000-01 to 2010-11. What made the difference? Meanwhile, the government would do well to pursue at least an even-handed policy between industry and services, especially if it wishes to maximize employment growth and minimize or eliminate India's trade deficit. These are the author's personal views The author is chairman, Centre for Development Studies.
Indian Express
27-05-2025
- Business
- Indian Express
What is the benefit of rapid GDP growth if it doesn't translate to a dignified life?
Written by Ejaz Ayoub 'The welfare of a nation can scarcely be inferred from a measure of national income.' — Simon Kuznets, chief architect of the GDP metric India, according to the International Monetary Fund, is expected to be the fourth-largest economy in the world with a GDP of USD 4.19 trillion in 2025, ahead of Japan. This achievement, while seemingly a moment of national pride, warrants a closer examination. Beneath the impressive headline lies a complex reality of structural challenges that, if unaddressed, could impede India's path to sustainable and inclusive growth. There is no denying the fact that India's economic ascent from the 10th position a decade ago to fifth today and fourth eventually deserves to be applauded. However, GDP in absolute terms can be a deceptive metric when isolated from its context. A nation's economic strength is not solely determined by its size but by the tangible benefits it delivers to its populace. Consider the stark contrast with Japan. Despite being 10 times smaller in population (124 million compared to India's 1.4 billion) and geography (377,000 sq km versus 3.29 million sq km), Japan generates nearly the same economic output as India. More tellingly, Japan ranks 23rd on the Human Development Index, while India lags far behind at 130th. This disparity highlights that economic efficiency and human development, not just scale, are what truly define progress. That a country with a fraction of India's human and natural resources achieves comparable GDP should prompt introspection rather than mere celebration. The question isn't just about scale, but policy and efficiency: Why isn't our immense demographic and territorial advantage translating into proportionate economic value? The root of the problem lies in the persistent inefficiencies of India's economic and institutional structures, an overreliance on low-value services, and a failure to industrialise and innovate at scale. Per Capita Income: The real picture India's per capita income reveals a more sobering truth. According to the IMF, at $2800, India ranks 140th globally in per capita income, the lowest even among the peer BRICS nations with Brazil at $10,296, Russia at $14,953, China at $12,969, and South Africa at $6,377. While overall GDP has surged, the wealth generated remains thinly distributed. The benefits of growth are disproportionately captured by the top 1 per cent of the population, who now own over 40 per cent of the total wealth (2023 Oxfam inequality report). If we exclude the top 5 per cent, the per capita income drops to a meagre $1,130, which is even below the lowest-income African countries. This economic pyramid is not only top-heavy but also widening. A growing concentration of income and wealth is leaving the bottom 50 per cent and even the middle 40 per cent struggling to keep pace. This is not merely a statistical concern; it carries profound implications for social cohesion, political stability, and long-term economic sustainability. Recent reports by Oxfam indicate that the concentration of economic power in India is at an all-time high. A few conglomerates dominate critical sectors — telecom, infrastructure, digital payments, retail — raising concerns about monopolistic behaviour, regulatory capture, and democratic erosion. The widening gulf between the luxurious elite and the struggling masses endangers both economic stability and democratic integrity. While some argue that inequality is a global phenomenon, with even China and Brazil facing similar disparities, the context differs. Unlike China, where state control allows for redistribution through public investments, or Brazil, where redistributive politics are fiercely contested, India's current political economy shows a limited appetite for directly addressing inequality. The work of Daron Acemoglu and James Robinson in Why Nations Fail is particularly insightful here. Their central argument posits that inclusive economic institutions — not just market-friendly ones — are crucial for long-term prosperity. India must reflect on whether its institutions and policies are evolving to be more inclusive or if they risk becoming concentrated in ways that primarily benefit a narrow segment of society. Human development lags behind India's latest Human Development Index (HDI) ranking of 0.685 in 2023, placing it 130th globally, underscores significant developmental gaps. In contrast, fellow BRICS members like China (0.797), Brazil (0.786), Russia (0.832), and even South Africa (0.741) fare better across key human development indicators. These nations have not only achieved economic growth but have also made substantial investments in education, healthcare, and social protection. This comparison is instructive: India is now the second-largest economy among BRICS in absolute terms, yet it lags in converting economic size into human development gains. This raises a fundamental question: What is the benefit of rapid GDP growth if it doesn't translate into dignified livelihood, improved health, increased life expectancy, higher literacy, or more equitable access to basic services? Moreover, within India, inter-state disparities are stark. Southern and western states usually report better HDI scores and per capita incomes, while large populations in central and eastern regions continue to experience developmental backlogs. This unevenness within the country mirrors the broader challenge of making growth inclusive, not just across classes but also across all regions. India is the world's most populous country, with a median age of under 30. This demographic bulge presents an enormous asset, but only if matched by commensurate investments in education, skilling, and employment generation. Unfortunately, the gap between aspiration and opportunity is widening. According to the Periodic Labour Force Survey (May 15, 2025), labour force participation, especially among women, remains dismally low. Millions of young people enter the workforce each year, but the formal sector is failing to generate adequate employment. Real wages for the poor have stagnated since 2014–15 despite consistent GDP growth. This disconnect between economic expansion and labour market outcomes is alarming. Without structural reforms in education, labour laws, and job creation, the demographic dividend risks becoming a demographic disaster. India's economy rests on an increasingly fragile foundation. Growth is lopsided — geographically, socially, and sectorally. While urban India prospers, rural distress persists. While high-tech services shine, manufacturing stagnates. While stock markets soar, informal workers remain in precarity. Growth without inclusiveness can deepen divides. Growth without productivity can exhaust resources, and growth without sustainability can be short-lived. India must shift its focus from mere GDP milestones to what that GDP delivers for its citizens. This necessitates investing in job creation, public health, quality education, and a robust social safety net. It means ensuring that credit flows not just to unicorns but also to MSMEs. All of this requires courage: Courage to reform institutions, rethink priorities, and resist the temptation of headline economics. The writer is a research scholar in the field of Economics at the Department of Humanities, Social Sciences and Management, National Institute of Technology-Srinagar
Bloomberg
07-03-2025
- Business
- Bloomberg
Without Federal Spending, What's Left of US GDP Growth?
Should a country's gross domestic product include government spending? No, argued Simon Kuznets, the Nobel economics laureate who helped create the measure now known as GDP. When the US Department of Commerce started publishing estimates of national output in the 1940s with government spending included, Kuznets complained that this ensured 'that fiscal spending would increase measured economic growth regardless of whether it actually benefited individuals' economic welfare,' according to economist Richard Kane. Part-time government worker Elon Musk echoed Kuznets last week, asserting that 'a more accurate measure of GDP would exclude government spending. Otherwise, you can scale GDP artificially high by spending money on things that don't make people's lives better.' Soon after, Commerce Secretary Howard Lutnick — whose department is still responsible for producing US GDP data — declared that 'governments historically have messed with GDP. They count government spending as part of GDP. So I'm going to separate those two and make it transparent.'
