Manufacturing vs Service led Growth

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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.

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).