Indian Development Model – India’s way forward: Services or manufacturing?

Source: The post on Indian development model has been created, based on the article “India’s way forward: Services or manufacturing?” published in Indian Express on 4th January 2024.

UPSC Syllabus Topic: GS Paper 3 – Indian Economy – Growth, Development and Employment

News: The article questions India’s economic direction, particularly the wisdom of prioritizing services over manufacturing given its unique developmental path. It highlights the challenges in job creation this approach brings, especially for the educated youth.

What is the Indian development model?

India’s service sector is, notably high-tech, is growing very fast compared to manufacturing. This shift differs from traditional models where countries transition from agriculture to manufacturing before services.

This model leverages global service demand, benefiting from outsourcing trends and advances in information technology, making it a part of the global supply chain for services.

What are the issues with the Indian development model?

Unbalanced Growth: India’s manufacturing growth has plateaued at or below 20% of the economy. India’s growth relies heavily on the service sector. Without a strong industrial base, growth might not be sustainable in the long term.

High Unemployment: Despite economic growth, India faces a high overall unemployment rate over 8%. Specifically, youth unemployment for ages 15-24 soars above 40%, indicating job creation is not keeping pace with labor force growth.

Quality of Employment: The service sector is creating jobs primarily in low value-added, low-skill areas, not in high-tech services, failing to meet the higher aspirations of a more educated workforce.

Educational Focus with Skill Mismatch: While producing 2.2 million STEM graduates yearly, the development model faces challenges with the employability and industry relevance of these graduates.

Emphasis on Aggregate GDP: The development model often focuses on increasing total GDP rather than GDP per capita, overlooking the individual prosperity aspect.

What should be done?

Combine Growth Models: India should integrate growth in both the service and manufacturing sectors. It needs to extend beyond the PLI schemes, which focus more on production than employment, by incentivizing private industry expansion.

Reform Policies: Implement land and labor regulatory reforms to attract more investment and incentivize private industry to scale up, creating more jobs.

Address Skill Deficit: Focus on closing the skill gap by aligning education with industry needs and by raising its investment in higher education. This will ensure the large young population is ready for the jobs being created.

Question for practice:

Discuss the challenges and issues associated with India’s current development model, particularly the emphasis on services over manufacturing.