Manufacturing vs Service led Growth

• Context (TH): Raghuram Rajan and Rohit Lamba suggest focusing on high-skill, services-driven growth instead of relying on manufacturing-led growth (Book – Breaking the Mould: Reimagining India’s Economic Future).
• They suggested this because, in 75 years, India has not been able to industrialise sufficiently. Its manufacturing share in output and employment has always been stagnant and below 20%
• This article discusses why such strategy will be wrong and need for india to focus on manufacturing-led growth.

Disadvantages of Services-led growth

• Firstly, it struggles to absorb the labor exiting agriculture, unlike manufacturing.
• Secondly, the service sector demands a large, highly skilled workforce, creating inequality as it favors workers with college degrees.
  • Inequality from services-driven growth is higher than the manufacturing-led growth. The Gini index of inequality for regular wages in the services sector was 44 compared to 35 for manufacturing (PLFS, 2021-22).
• Thirdly, the emphasis on high-skill services benefits the traditional elite more than many first-generation graduates from rural colleges and small towns.
• Finally, the service sector led growth benefits a small minority, whereas manufacturing led growth sector can promise all round economic development.

Why is Industrialisation stagnant in India?

• Neglect of mass school education due to early investments in higher education in India. Innovation and efficiency thrive on mass education.
  • For instance, Rural entrepreneurship was able to grow out of the traditional agricultural sector on a massive scale in China due to widespread mass education.
• Foreign direct investment in India, intended to spread technology, was limited to specific areas.
• India has traditionally devalued certain occupations hindering organic innovation in manufacturing. Artisanal knowledge lacks social respect.
• India doesn’t adequately appreciate the vocational skills essential for manufacturing, even if they command higher wages (Industrialists concern).