Two Apples Of Our Eye – Manufacturing vs services is a false binary for India. We need both. But why we need them is not properly understood

Source: The post is based on the article “Two Apples Of Our Eye – Manufacturing vs services is a false binary for India. We need both. But why we need them is not properly understood” published in The Times of India on 19th April 2023.

Syllabus: GS – 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About the reasons to prefer manufacturing or services.

News: The India visit of Apple boss and two recent data points have re-ignited a simmering debate on manufacturing vs services. India has seen a dramatic 55% increase in the exports of electronics finished products.

On the other end, there has been a significant rise in the export of services not only from the IT sector alone but also from legal, medical, and MNC back-offices. So, experts have said India should focus more on services. This raises debate on what India should focus on, manufacturing or services?

Why India should prefer manufacturing or services?

Manufacturing is not a massive job-creator like Services: China, the largest factory in the world, with a manufacturing output of $5 trillion, employs around 83 million workers in manufacturing. In China, despite its monster manufacturing capacities, half of its workers are employed in services.

In contrast, India, with a manufacturing output of around $500 billion, employs between 27 million and 62 million workers.  A study has found that manufacturing employment declined from 51 million in 2016-17 to 27 million in 2020-21.

Another study found that hi-end jobs, especially in the hi-tech sectors, have a much bigger multiplier effect on jobs created than low-tech jobs. In short, services industries tend to create more hi-tech jobs than relatively low-tech, low-skilled manufacturing assemblies.

Manufacturing is crucial to keep the trade deficit low: High-performing services and limited manufacturing will lead to the trade deficit. This is because most services are non-tradable in nature and the country will depend on imports largely for manufactured items. So, countries that have limited manufacturing capacities also tend to have structural current account deficits (CAD).

For example, The UK and the US. Since they are developed they have enormous access to a reserve currency and more policy options to deal with structural CAD. But this is not feasible for emerging markets (EM) like India. CAD forces a trade-off between economic stability and income growth.

What India should prefer, manufacturing or services?

India needs both manufacturing and services. This is because,

To reduce CAD: India’s CAD has been a perpetual policy constraint for the country since its independence. Despite the record growth in service exports and the spectacular emergence of electronics exports, India ended 2022-23 with a CAD of around 2% of GDP.  So, India needs to have larger manufacturing capacities with market access to do away with CAD constraints.

To reduce risks of supply chains: India’s high dependence on China for API (a key ingredient in pharmaceutical manufacturing) or rare earth minerals (critical for a range of industries) or industrial intermediates for strategic electronic products presents large, un-diversifiable risks. Even during Covid, the developed countries ringfenced vaccine supplies. Hence, India should focus on manufacturing along with the focus on services.