Since the launch of Prime Minister Narendra Modi’s much-vaunted Make in India campaign last year, manufacturing in India has become a favorite talking point for pundits and the public alike. While there is no denying that rapid expansion of manufacturing remains the time-tested method for economic growth and job creation, there is evidence that manufacturing volume may not be the best proxy for long-run economic prosperity of a country.
In India, the services sector is the second largest employer after agriculture (28 percent of total employment in 2012). Services also contribute more to GDP than agriculture and manufacturing put together, at 57 percent in 2013 (see Table 1 for decadal trends since India’s independence). That is not all – services sector labor productivity (output per worker) has matched that of industry’s in the 1983 – 2007 run.
Given the importance of the services sector in the Indian economy, it is a bit surprising that it has not, relative to manufacturing, received as much attention as it should. This has both theory and policy roots.
The theoretical argument goes as follows: high-productivity services cannot be a source of long-run growth since that would demand a level of skills growth that is unrealistic. Take the highly visible IT and back-end business services sector and imagine it to be the sole driver of growth in the Indian economy. For this growth to be sustainable in the long run, the sector would have to employ more and more highly skilled people; eventually there would be a mismatch between the number of skilled workers the number demanded by high skills services.
The policy roots in India lie in the fact that a large number of services are small-scale or in the informal sector. For example, in 2009 – 2010, almost 16 percent of the GDP came from trades, hotels and restaurants, the largest sub-sector within services. Without proper reporting mechanisms (and the lack of a single nodal ministry in charge of services) it isn’t easy to place the services sector in the complex Indian calculus of growth engineering.
Given the often forgotten fact that services account for majority of employment in the Indian organized sector, at 62 percent in 2009 – 10, the Indian government must place greater emphasis on maximizing the growth and job creation potential of the sector. This means more systematic data-gathering and analysis and new policy measures to encourage the growth of micro, small and medium services enterprises.
What’s more, given that trade services in India are often industry services, an emphasis on manufacturing can also include the possibility of efficiency and productivity boosts to the services sector. In other words, Prime Minister Modi’s “Make in India” policy might also need a “Served by India” component.