A critical examination of a persistent Indian view on manufacturing

News Excerpt:

Ever since India's independence, a part of India’s political, economic, and business elite have held on sternly to many different views. However, most agree that manufacturing should be India’s biggest priority. 

Why is manufacturing preferred:

  • The reasons cited for giving preference to the manufacturing sector range from greater productivity, more jobs, higher incomes, technological advancements, rapid growth of the gross domestic product (GDP) etc
  • Economic models such as the Lewis two-sector model stipulate that unproductive workers from the agricultural sector (surplus labour) move towards the modern or manufacturing sector, with greater scope for productive work. 
  • Those who call for the push for manufacturing in India predicate their argument on a few essential claims:
    • The agricultural sector in India remains underproductive.
    • There is an ease of labour mobility between the two sectors.
    • India possesses a comparative advantage in the manufacturing sector.
  • Moreover, certain voices who are proponents of manufacturing in India call for easing regulations relating to worker rights and land acquisition processes.

Lewis two-sector model:

  • Arthur Lewis was a British economist who developed the dual-sector model, for which he won the Nobel Prize in Economics in 1979.
  • Lewis devised the idea of an economy with two sectors: 
    1. one that is modern and capital intensive
    2. another that is traditional and has subsistence wage levels.
  • Lewis' model seeks to provide a framework for understanding how relatively poor countries can develop economically. 
  • Lewis argued that in many developing countries, there is a large pool of surplus labour in the agricultural sector that is available to be absorbed by the industrial sector; it can be treated as an “unlimited supply of labour.” This labour, earning low wages, can keep the cost of industrial production low.
  • Many economists have used the Lewis model as a framework for explaining the extraordinary economic development that China has achieved in recent decades.

A critical examination of the claims is necessary to validate the veracity of this argument. 

Is the agricultural sector in India underproductive?

  • The first claim relating to the agricultural sector’s productivity is a vastly complex topic to unravel, requiring its specialised examination. 
  • A cursory glance throughout 2012-2022 at the cereal yields per hectare has shown an increase of over 20%. 
  • Interestingly, the total number of individuals employed in the agricultural sector increased by over 10 million during the same period despite their lower share of the labour force.
  • The value added per worker in India’s agriculture, forestry, and fishing segment shows a steep rise between 2012 and 2022 from $1,557 to $2,400. 
  • The data shows the agricultural sector has absorbed more labour while increasing the output per worker during this period, indicating increased productivity. 
  • Therefore, claiming that the agricultural sector is completely underproductive may be inaccurate. Nevertheless, constraints on agricultural productivity also come from capital and technological limitations. To claim that the sector’s productivity suffers from merely a surplus of workers threatens to miss the point. 

Is there an ease of labour mobility between Manufacturing and Agriculture?

  • The second claim relating to the ease of labour mobility between the two sectors has been admittedly contested by reputed economists and the government. 
  • Dr. Raghuram Rajan, the ex-RBI governor, pointed out that Indian manufacturing workers are not as qualified as their counterparts elsewhere across the globe, including Vietnam and China.

Does India possess a comparative advantage in the manufacturing sector?

  • The Ricardian theory of comparative advantage tells us that for a country to specialise in a specific export successfully, it would have to have a lower opportunity cost to produce that good than its counterparts. 
  • Under the “Make in India” push, the government has made multiple efforts to attract foreign enterprises onto domestic shores. 
    • They have worked on improving our rankings on the Ease of Doing Business index. 
    • They have offered generous schemes and subsidies such as the Production Linked Incentive scheme and roughly ₹16,500 crore to Micron Technology to open a semiconductor assembly plant in Gujarat. 
    • Assuming a generous figure of 5,000 jobs being created, the cost of creating each job amounts to ₹3.3 crore. 
  • From the data, it is evident that from the 1960s, when manufacturing value added as a percentage of GDP ranged between 13-16%, peaking at 18% in 1979, we as a nation have not made much progress with the figure standing at 13% as of 2022. 
  • India’s manufacturing sector, which faces disabilities relating to poor infrastructure, lack of skilled workers, and minimal research and development, may not be where our comparative advantage lies. 

Services Sector:

  • Services value added as a percentage of GDP has grown from 38% in the 1960s to over 48% as of 2022. 
  • The past few decades have shown us that India remains highly competitive in services, mainly from our educated population. 

Why India should not focus on manufacturing?

  • Providing almost 35% of the entire Union Budget for higher education (₹47,000 crore) to open a single factory to manufacture chips in a sphere where we are scarcely competitive may not be the best use of our resources. 
  • Instead, a focused push on promoting human capital through raising the literacy rate, which stood at 76% as of 2022 (whereas China stood at 78% during the 90s) and providing better healthcare may present a better alternative. 
  • Moreover, when one examines the percentage of value addition in manufacturing for producing goods such as a mobile phone, we find that most of it comes from proprietary design technology, which is the intellectual property of companies situated abroad. 
  • It may be more lucrative to capture a higher share of value addition by concentrating on design rather than assemblage within domestic borders. 
  • With no incentives, India’s share of design in products such as integrated circuits and chips is rapidly climbing, indicating a classic Ricardian comparative advantage.


After examining the shift towards manufacturing as an economic goal within the economic discourse, one can ascertain its effectiveness is constrained by productivity issues, labour mobility, and comparative advantage challenges. Pragmatically, redirecting investments from manufacturing to enhancing human capital in services and education could leverage existing strengths and offer more significant economic benefits that were initially envisioned with the push for the manufacturing sector.

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