India must balance services and manufacturing for growth

Source: The post India must balance services and manufacturing for growth has been created, based on the article “Manufacturing or services: Why place one sector over the other?” published in “Live Mint” on 27th June 2025

UPSC Syllabus Topic: GS Paper3-Indian Economy – Growth, Development and Employment

Context: India’s growth strategy traditionally emphasized manufacturing, influenced by classical economic theories. However, the services sector has grown faster and more consistently, raising questions about current policy priorities and the justification for a manufacturing-centric model.

For detailed information on Indian Development Model – India’s way forward: Services or manufacturing? read this article here

Historical Foundations of Development Theory

1. Agriculture to Industry to Services Transition:?Simon Kuznets observed that as per capita GDP rises, economies shift from agriculture to industry and then services. Arthur Lewis added that transferring surplus labour from agriculture to industry is the essence of development.
2. Debates on Resource Transfers: Earlier theories debated how much surplus should shift from agriculture to industry. Scholars like Shultz, Mellor, and Ishikawa offered varied models, from transforming agriculture to reinvesting in it.
3. Sectoral Transition in India’s Case: The author’s research focused on how inter-sectoral transfers affected India’s long-term growth, especially the evolving balance between agriculture and other sectors.

The Shift in Developmental Debate

1. From Agriculture to Industry vs. Services: Today, the central policy tension lies between industry—especially manufacturing—and the services sector. This reflects a new stage in India’s structural transformation.
2. Manufacturing’s Traditional Prestige: Many economists still favour manufacturing-led development, citing Europe and East Asia. However, Europe’s growth was shaped by colonial surplus and East Asia’s by U.S. alliances, making them less relevant for India.
3. Manufacturing in Advanced Economies: Among the 30 richest countries (excluding small island nations), manufacturing contributes 15% or less of GDP in two-thirds. Only Ireland exceeds 29%, making it an outlier.

The Case for Manufacturing Revisited

1. Strong Linkages and Theoretical Support: Professors Veeramani and Nagesh Kumar highlight manufacturing’s backward and forward linkages. Kaldor’s theory of increasing returns and cumulative causation supports its central role in development.
2. Demand Reinforcement and Scale: Kaldor, drawing from Allyn Young, showed that manufacturing lowers costs and raises demand through interlinked sectoral growth, aided by Keynesian policies.
3. Weak Long-Term Manufacturing Growth in India: Despite policy focus, India’s industry has grown only 5–6% annually over 70 years. Manufacturing’s GDP share is just 17%, with most growth from mining, utilities, and construction.

Services Sector Outperformance

1. Higher Growth and Employment Share: Services rose from 20.6% to 53% of GDP, with 7–8% average decadal growth. They also create increasing employment.
2. Better Trade Performance: India runs a trade surplus in services, in contrast to a deficit in goods.
3. Same Policy Climate, Different Outcomes: Services thrived despite the same regulatory environment blamed for manufacturing’s underperformance.

Policy Implications and the Need for Balance

1. Expanding Policy Support Beyond Manufacturing: ‘Make in India’ narrowly targets manufacturing. Services like education, health, and finance deserve equal support.
2. Learning from Past Success: Industry outpaced services only during 1950–60 and 2000–10. These periods should be critically studied.
3. Balanced Development Strategy Needed: To generate jobs and reduce trade deficits, India must pursue balanced growth between services and industry.

Question for practice:

Discuss why India needs a balanced policy approach between the manufacturing and services sectors for sustainable economic growth.