Manufacturing's the key

Development Economics’ wisdom says that as the economy progresses the sectoral shares of output change too. Historically, most of the developed countries became service sector dominant economies only after going through an elaborate phase of industrial development, where the secondary sector typically contributed around 50 percent to Gross Domestic Product (GDP). However, Indian economic growth has come about mostly by bypassing growth of the secondary (industrial) sector.

Despite the decline in the agricultural sector’s share in GDP, the secondary (Industrial) sector’s share in GDP did not take off as expected. Since the 1970s, the share of the secondary sector as a percentage of GDP has hovered around 25 percent. Recently, in 2013 too the share of industry in the GDP was 25 percent. The average share of the secondary sector in GDP for lower income countries to which India belongs is around 40 percent or more.

 The industrial sector showed a meagre annual growth rate of 0.35 percent. In fact the manufacturing sector registered a decline in output by 0.71 percent.

  If we compare the sectoral output shares in GDP of China in 2013 with India, we see a stark difference in the shares of industry and service sector. As against India’s 25 percent industrial sector contribution to GDP, its GDP, China’s secondary sector contributed close to 45 percent to total output in 2013. The same is the case with countries like Indonesia, Bhutan, Thailand and Philippines.

In India, the secondary sector’s growth since the 1970s was dampened by various policies that hindered the growth of the manufacturing sector in India. The emergence of the ‘License Raj’ was one of these.  In addition to these licensing processes, the imports of raw materials and capital goods were restricted. There were multiple excise duties on goods. Third, the public sector had monopolies in services like banking, airlines, and electric power. The sectors that were open for private investment were limited. Fourth, the Monopoly Restrictive Trade Practices act limited the size of existing firms. Even after the 1991 reforms, a lot of industries were reserved for the small-scale industries (SSI) by the SSI Reservation Act which limited the scope of large-scale manufacturing Fifth, stringent labor laws also posed an impediment in the path of efficiency and growth of industrial sector. These factors may have led to the bypassing of industrial development stage in India development experience since the 1970s.

A few points need to be mentioned while analyzing the Indian case. India has abundant unskilled labor. However, the Indian industry is mostly remained capital or skilled-labor intensive. The encouragement of engineering and chemical industries called for extensive use of skilled labor. Some of the fastest growing sectors in India namely, Telecommunications, Automobile, Pharmaceuticals and Software industry have remained mostly skilled labor intensive. Therefore, the lack of development of unskilled-labor intensive sector in India may be one of the many causes that is holding back industrial development in India. The fact that in spite of various liberalization measures, the of growth in the industrial sector has not been impressive indicates that some domestic policy restraints such as  strict labor laws that discourage the entry of large scale unskilled labor intensive firms in the industrial sector, may be responsible for such stagnancy. 

In a country like India that has a large population of unskilled labor, industrial development and availability of livelihood to the people through secondary sector jobs can play a vital role in reducing poverty. As pointed out by the United Nations Industrial Development Organization (UNIDO), “a competitive and environmentally sustainable industry plays a crucial role in accelerating economic growth, thereby reducing poverty” (UNIDO 2010). Thus if India is to achieve a pro-poor and balanced growth, the development of industry cannot be ignored.