The Hindu Business Line : Manufacturing strong growth

Though the service sector has made a significant contribution to GDP growth, its sustainability depends on a variety of extraneous conditions. So for sustained economic growth, exports and generating jobs, a strong manufacturing base is needed. For this, manufacturing companies need to develop a global mindset rather than continue with the inward-looking attitude, says Bhanoji Rao.

IT SEEMS like great news: We have a vibrant service sector, contributing half the country's GDP, and helping the overall economy register growth rates of 6-7 per cent in the recent past. Yet, experts are quite concerned that agriculture and industry are not keeping "commensurate pace" with overall growth.

None other than the country's chief planner, the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, in mid-November, called for strengthening the manufacturing base saying that a development strategy which relies on a services revolution for growth was not sustainable. "A model which bypasses the manufacturing sector and pins all resources on the growth of the services sector would not be in the long term interests of the country," observed Dr Ahluwalia, in his address to the Economic Editors' Conference.

Most policy-makers, who routinely look at China and India, the only two most populous countries, bring out the contrast between the services-driven India and manufacturing-driven China. One major difference is that while manufactured goods exports face only tariff barriers most of the time, export of many low-end services (those of maids, chauffeurs, security guards, nurses, attendants) as well as specialist services (teachers, lawyers, doctors) require a sea change in international immigration laws — a far cry from the present situation of growing restraints on the immigration of manpower. While we are capable of `serving' the whole world, the world is not quite ready. Some services can be delivered without the necessity of physical travel, but not many are amenable to the BPO model. There is thus a more mundane reason for canvassing for a relatively high rate of growth of manufacturing in India. As Dr Ahluwalia noted, a stronger industrial base is called for, as services alone cannot tackle the growing unemployment problem.

In this context, the growth targets for the Tenth Plan are worth reviewing. The Plan's growth target for GDP is 8 per cent per annum and for the industrial sector 10 per cent.

While the target of 10 per cent can be taken as a major step forward against the less than seven per cent growth the last decade, it still falls short of the rate suggested by the historical relationship between GDP growth and industry (mostly manufacturing) growth.

If one were to consider the growth experience of India from 1950 to 1997 on the basis of National Accounts compiled at 1980-81 prices, the `statistical' relation between the growth rates of manufacturing and the overall GDP implies the manufacturing sector growth elasticity of 1.33. Our own experience of close to five decades of growth tells us that for obtaining a one per cent rate of growth of GDP, manufacturing might have to grow at around 1.33 per cent. An average annual 8 per cent growth in GDP goes along with a manufacturing growth rate of 10.6 per cent. On the other hand, data for 1970-2002 (at 1993-94 prices) give an estimate of 1.2 for the manufacturing sector growth elasticity, which implies that the GDP growth of 8 per cent is commensurate with a relatively low 9.6 per cent growth of manufacturing.

Clearly the Tenth Plan target of 10 per cent growth for industry falls between the two aforementioned projections (10.6 per cent and 9.6 per cent) almost exactly. Such a modest growth rate, however, will not raise the share of manufacturing in GDP to any significant extent. During the last four decades (1960-2002), the share of manufacturing remained mostly around 13-15 per cent. This is just about half the share found in China, which has hovered around 30-35 per cent.

When we start with a manufacturing sector share of 15 per cent and assume the sector grows at 10 per cent, while GDP grows at 8 per cent, after a decade from now, we end up with a sector share of just less than 18 per cent. If the growth rate of manufacturing is raised to 12 per cent, the share would go up to 20 per cent after a decade. We are thus a long way off the Chinese manufacturing share of a third of GDP unless the growth rate of manufacturing takes a completely upward trajectory and delivers growth rates of 15-20 per cent or more. Such high rates will also help lift the overall GDP growth rate, while raising the share of manufacturing to levels above 20 per cent.

It is, of course, reassuring that Dr Ahluwalia has said that the Mid-Term Appraisal of the Tenth Plan, currently underway, is to make an assessment about the potential of the manufacturing sector and how the sector can be propelled into higher growth and a more diversified base.

Such an endeavour is the key to promoting employment, growth of which has lagged behind growth of labour force during the 1990s, despite the relatively good performance of the economy in terms of GDP growth.

Granted that we must raise the growth rate of manufacturing, the key issue is how to go about it. One might take it easy in regard to constraints from the supply side, since domestic and foreign investors could be counted upon, plus we seem to have some excess capacity in several of the manufacturing sub-sectors.

The problem is one of creating sufficient demand and this has to be addressed both from the twin dimensions of domestic and export demands. An export-oriented manufacturing growth strategy will be a healthy wholesome menu for achieving high growth and employment generation.

We need to learn much in this regard from China, which has used foreign investment in manufacturing to promote employment and manufacturing exports. In the country's merchandise exports of $325 billion in 2002, close to 90 per cent are manufactured goods. Clearly those engaged as employees in the export oriented manufacturing will obtain their purchasing power from exports and then raise the domestic demand for manufactures as well.

A recent CII-McKinsey study is pretty optimistic about Indian manufacturing exports. The study projects the potential for manufacturing export and puts it at $300 billion by 2015, up from $40 billion in 2002. The jump implies an estimated annual growth rate of 17 per cent, much higher than the historical growth rate of 11 per cent.

The optimism in the forecast is based on the premise that producers from the rest of the world hunting for low-cost destinations would naturally select India with its skilled manpower. If BPO could do it, why not manufacturing? The study's forecast of jobs in manufacturing is even more interesting. There will be 25-30 million additional jobs in manufacturing directly linked to export growth, while linkages with the rest of the economy would provide several million more jobs. To realise the projected potentials, the study advises manufacturing companies in India to develop a global mindset rather than continue with the inward-looking attitude.

From the US, the Japanese learnt; from Japan, developing East Asia learnt; and it is now for India to learn and as a late-starter, combine the best of all the accumulated wisdom, available out there. The one major strategy for Indian manufacturing ought to be not just foreign investment in industry, but in export oriented industry. If such a strategy and commensurate policies are not put in place, we will end up with less than spectacular manufacturing growth as well not quite high overall growth.

(The author, formerly with the World Bank and the National University of Singapore, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. Website: www.bhanoji.com and E-mail: bhanoji@vsnl.net)