Building an India for manufacturers

Source: This post has been created based on the article “Building an India for manufacturers” published in The Indian Express on 9^th October 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy — Indian Economy and issues relating to growth, development and employment

News: This article discusses the changing scenario of India’s services sector, its bright prospects and its utility in countering the issues of the manufacturing sector.

India’s services sector is undergoing two major changes which could define the trajectory of the country’s growth. One is fast-evolving services exports to the rest of the world. The second is the rapid transformation of domestic services.

Another exciting development is a sign of these new services rising up the value chain and moving into manufacturing.

What is the changing landscape of India’s services exports?

There has been a rise in India’s services exports due to various reasons:

1) The pandemic-induced “Work From Home” increased the demand for tech capability across firms and led to growth in the IT Services sector.

2) Broadening of both the services provided and the service providers. India is no longer restricted to just call centers or software solution provider. It has moved up the value chain to include services ranging from accounting, legal, HR, business development, design, and R&D.

3) Not just large IT firms, even mid-sized IT firms have been gaining market share and consulting firms are growing their services export.

4) Global Capability Centers (GCCs) of India: India now has the world’s largest share in GCCs.

What are Global Capability Centers (GCCs)?

GCCs have traditionally provided tech and IT support to their parent MNC companies, but have gradually moved up the ladder to higher-value-added services like legal, audit, design and R&D.

Will the boom in the services exports last?

It is possible that the growth in India’s IT services exports slows down over the next few year due to slowing global growth. However, once global growth bottoms out, India’s services exports can begin to grow fast again.

There are several reasons for this:

One, there is a change in attitude about getting work done from “home”.

Two, India has the skilled workforce for a variety of services, ranging from engineering to design. This has become possible due to internet penetration, young and digitally savvy demographics, and improvements in education.

Three, India offers cost-competitiveness.

Finally, India is at a tipping point from which growth in services exports will tend to be even stronger. This is demonstrated by examples of economies whose share in global services exports is much higher than India’s, like USA, UK, Germany, and Ireland.

Reasons behind this include reaching scale which leads to both pull and push factors that lead to even higher growth. Also, many multinationals are increasing their footprint in India.

Additionally, companies have begun increasing the range of services. And some, especially in sectors such as medical equipment, electronics, and precision manufacturing, are even moving into manufacturing.

What is the changing landscape of India’s domestic services?

India has an impressive “Digital Public Infrastructure”.

Tech start-ups are utilizing it using a variety of business models. Over time these startups could move from services into manufacturing and agriculture.

How can service sector companies solve the issues of the manufacturing sector?

The reason behind India’s jobs problem is a slow-moving low- and medium-tech manufacturing sector.

Digital infrastructure can be used to solve problems that small manufacturers face.

Start-ups could help small firms gain access to formal credit, cheaper raw materials, bigger final markets, better warehousing and logistics, and enhanced quality checks. In this way, they are incentivized to expand.

There is also evidence of the “new” domestic services companies moving into manufacturing. For e.g., those in the transport, procurement, and e-commerce sector.