Today's Editorial

Today's Editorial - 05 January 2024

India’s way forward: Services or manufacturing?

GS Paper III

News Excerpt:

India is inundated with discussions regarding its economic direction and the methods to achieve its developmental objectives.

  • The ambitious predictions of India reaching a $5 trillion economy by 2025, itself act as a distraction as it centres on the overall GDP. The actual challenge lies in improving the well-being of the average citizen. Therefore, the pertinent focus should be on GDP per capita rather than the total GDP.

About the News: 

  • The former RBI governor has raised the question of whether India can achieve growth and development by prioritizing the expansion of the service sector over industrial growth. 
    • The context for this inquiry lies in the historical trajectory of developed economies, which gradually transitioned their economic resources from agriculture to manufacturing and eventually to services during their development.
    • Eg- recently industrializing Asian economies like China, Korea, and Taiwan.

Key discussions:

  • Challenges in increasing the share of its manufacturing sector within the economy:
    • India has experienced a different developmental path, wherein most of the growth has occurred in the service sector. 
    • The contribution of manufacturing to both output and employment in India has remained stagnant at or below 20 percent. 
    • India seems to be bypassing a stage in the developmental process by transitioning directly from a primarily agrarian society to one dominated by the service industry. 
    • The question remains whether this is sustainable in the long term or not.
  • Expansion of the service sector:
    • It typically hinges on increasing demands for various personal services such as medical, legal, entertainment, and accounting. 
    • This growth is driven by rising personal incomes and the trend of firms outsourcing business processes as they expand. 
    • However, in India, industrial growth has been sluggish, posing a question regarding the origin of demand for the service sector.
  • Opportunity for India within the global growth of business services, facilitated by the advancement of information technology:
    • Companies worldwide are subcontracting parts of their business service needs, an integral aspect of the global supply chain. 
    • India is also actively engaging in service business back offices. Yet, the challenge lies in achieving this on a larger scale.
  • The challenge of solely relying on a service-oriented approach:
    • The country is consistently adding 8-10 million new workers to its workforce annually, a trend expected to persist for a decade. 
    • Most of these entrants possess a high school education or higher, leading to high aspirations buoyed by India's narrative of international achievement. This poses a potential obstacle in addressing India's economic hurdles using a service-led model alone.
  • Struggle to fulfill the ambitions of its young workforce:
    • Data from CMIE (Centre for Monitoring Indian Economy) indicates a notably high overall unemployment rate exceeding 8 percent, with youth aged 15-24 facing an unemployment rate exceeding 40 percent. 
    • Addressing this imminent employment crisis necessitates prompt actions to stimulate widespread job creation by private employers.
  • Evaluation
    • The effectiveness of the service sector-led development model must be compared to the more traditional manufacturing-led approach.
    • India's current service sector is highly segmented, with growth primarily concentrated in high-tech services. 
    • However, job creation in this sector mainly consists of low-value, low-skill services, failing to generate income streams that align with the aspirations of the youth.
  • Vision for a back-office-led service sector:
    • It could potentially generate a significant number of jobs over time. 
    • Nonetheless, it may take 10-15 years for this vision to become a viable alternative. 
  • India's skill deficit:
    • Despite producing approximately 2.2 million STEM graduates, post-graduates, and PhDs, a majority of them lack employability due to inadequate training. 
    • Addressing this issue demands sustained investment in enhancing the quality of higher education to develop a skilled workforce capable of thriving in sectors requiring higher human capital.
  • Potential employment opportunities:
    • They could arise from the expansion of innovative health and education outreach programs such as deploying Anganwadi workers. 
      • However, these initiatives have limitations, and their alignment with the aspirations of the majority of young people remains uncertain. 
    • The government's PLI (Production Linked Incentive) scheme aims to address the political-economic challenge of generating immediate jobs. 
    • If domestic and international businesses establish production centres in India that create employment opportunities, it could help alleviate some of the job deficits. 
    • Yet, concerns persist regarding the nature of these incentives being more production-oriented rather than employment-driven. 
  • The current assembly-based production models within decentralized global supply chains might not necessarily result in substantial job creation. 
    • Additionally, doubts exist about whether these businesses will continue operations or relocate once the incentive schemes expire.

Way Forward:

India's employment predicament is a pressing reality. With a median population age of 28, this issue will exacerbate over time unless swift action is taken. 

  • India needs a merger of manufacturing and service sector models beyond the scope of PLI schemes by incentivizing private industry to expand.
  •  Crucial to this expansion are land and labour regulatory reforms, which, while fiscally costless, do involve political challenges. 
  • Simultaneously, India must address its skill deficit by increasing investment in higher education.
  • Urgent and comprehensive action is imperative for India to overcome the failure to create high-value-added jobs at scale, which could otherwise transform India's demographic dividend into a demographic curse.


Mains PYQ

Q. Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis the industry in the country? Can India become a developed country without a strong industrial base? (UPSC 2014)

Q. Can the strategy of regional-resource based manufacturing help in promoting employment in India? (UPSC 2019)

Q. Account for the failure of manufacturing sector in achieving the goal of labour-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports. (UPSC 2017)

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