‘In terms of education, India has lagged behind those countries which are successful in building the world’. Photo credit: Getty Images/iStockphoto
The issue of manufacturing or services as the desired path for India’s economy continues to circulate in public forums from time to time. In the early part of this century, when India’s software exports were booming, it was asked why India’s services sector should not overtake manufacturing to propel the economy. This proposal challenged the standard model of economic development, as industrial expansion came first in most successful economies. The frustration of Indian economic policy makers is well understood.
The economic reforms of 1991 focused almost exclusively on manufacturing, but significant reductions in tariffs and the abolition of the ‘licence-permit raj’ did not increase the share of manufacturing in the economy. Of course, India’s manufacturing sector should not be viewed in terms of its size alone. There has been a qualitative change after 1991. There has been an impressive increase in the range and quality of products manufactured in India. The increasing quality and variety of goods produced without the expansion of manufacturing in relation to the economy indicates a growing inequality of income.
unaffected record
After the economic reforms of 1991, manufacturing next came into the government’s mind after 2014, when ‘Make in India’, with an emphasis on foreign direct investment, was launched. More recently, there has been a production-linked incentive scheme, which essentially subsidizes the production of certain products. First announced with much fanfare within months of the Narendra Modi government taking office, the track record of these schemes has not been impressive.
The first advance estimates of national income for 2022-23 show manufacturing growth for the year at 1.3%, lower than all core sectors including agriculture and services. While the data clearly points to the role of 2016 demonetisation in the manufacturing sector slowdown, the continuation of low rates of growth in the presence of policy initiatives that focused on manufacturing point some back to the ‘structural’ sector . India.
The issue reportedly came up for discussion at a private event, where it was agreed that the economy needed a manufacturing push to generate jobs and boost growth. We are told that during the ceremony, the finance minister addressed the assembled corporate leaders with the remark, “I am sure the Indian private sector is ready. Are you?” Earlier too, the minister has publicly mentioned several policy initiatives in favor of the corporate sector. Among them, the tax rate was reduced significantly in 2019 and the government also claims that there has been ease of doing business. There is also another factor, namely public investment. In the last Union Budget, capital expenditure was increased by 18.5%. This unusually high growth should come to the aid of the private sector by boosting aggregate demand.
cost of food
Despite the favorable measures taken by the government, it would be simplistic to expect industry leaders to push manufacturing on their own. Demand has to be considered, and it is largely independent of the supply side, which the government has acted upon. Domestic demand for manufactures inevitably follows the satisfaction of their own demand for the necessities of life – food, housing, health and education, none of which can be postponed. For a large part of India’s households, food plays a big part. This inhibits the growth of demand for manufacturers.
The relationship between the share of food in per capita income and household expenditure is very negative globally, with the richest countries such as the United States and Singapore having lower such shares. Among the world’s major economies, India has the largest share of food, and its per capita GDP is the lowest. Industry leaders have no control over the demand side of the equation. However, the potential for exports means that an economy’s manufacturing sector can bypass a narrow domestic market. After all, the small countries of East Asia would never have been able to develop their manufacturing base to such an impressive level if they had relied on their domestic markets alone. However, taking this route requires building an economy that is globally competitive.
Comparing the economies of East Asia, we can see what it takes for an economy to be a successful exporter. One is the infrastructure and the other is the skill level of the workforce. These respectively determine the cost of production and the type of products produced by a country. Manufactures export to a large extent by sea. One can imagine the challenge faced by companies based in North India in accessing ports. Goods first have to reach the coast by road, and then exporters have to deal with the relatively poor infrastructure and practices at India’s ports. The competitive disadvantage faced by India’s exporters can be seen in the much longer turnaround times for ships in India’s ports with Singapore. The importance of ports for exports can be seen in a recent public statement issued by a section of Kerala traders: that they are forced to use ports outside the state because of the very low cost of using them comes While transportation is a big factor, it’s still not everything. Affordable electricity, space and industrial waste disposal services all matter.
educational results in india
But it is in the matter of education itself that India has lagged far behind those countries which have been successful in building the world. This is directly reflected in the ranking of countries by the Program for International Student Assessment. In a group of about 75 countries, countries from East Asia are at the very top, while India is barely at the bottom. Now, if we don’t want to rely on tests administered by international bodies, we can turn to our own NGO Pratham, which assesses learning outcomes in India’s schools. Its widely publicized findings point to a very low level of reading ability and numbers of Indian children in the early years. These tests are for school children.
While there is no standardized test for university graduates, we do have major Indian employers issuing statements on the lack of employability of these graduates. This dismal assessment has extended to an Indian Institute of Technology as well. India’s universities expanded to meet the aspirations of its middle class, who wanted to avoid manual labor. However, for those making a living as a skilled worker, from carpenters to plumbers and mechanics, university is not an aspiration. This group has been neglected in economic policy-making in India. There is no formal assessment available of the status of vocational training institutions in India, but we do know for sure that they are few and far between. When it was in existence, the Planning Commission released data showing that only 5% of Indian youth have any kind of technical training. For South Korea, the figure was over 85%. With such a workforce, it would be naïve to expect India to make a mark on the global stage for manufacturing.
The economic reforms of 1991 were undertaken with a view to increase the presence of manufacturing. To this effect, the trade and industrial policy regime was overhauled. However, it ignored the need for the entire ecosystem including schooling, training and infrastructure for manufacturing to flourish. It has to be made. This cannot be achieved through legislation alone. Liberalization reforms have run their course in India.
Pulapre Balakrishnan is an economist