Raghuram Rajan, former Governor of RBI and now an academic in the US, has been giving interviews regularly on how the Indian economy should be steered.

In his December 2021 interviews, he has suggested ways to help the Indian economy grow at 8-9 per cent in the coming years, to generate employment for youth.

His view was that India should not go for increasing the share of manufacturing in the overall GDP like the way China has been doing and should continue to concentrate on the services sector.

According to him, China achieved success in manufacturing due to its authoritatarian regime, and hence democratic India should not aim the same. It is true that China’s share of contribution to world manufacturing in 2018 was 28 per cent, the highest among all countries. But in the same year, the US, Japan, Germany, South Korea, Italy, France, UK, and Mexico contributed 16.6 per cent, 7.2 per cent, 5.8 per cent, 3.3 per cent, 2.3 per cent, 1.9 per cent, 1.8 per cent and 1.5 per cent, respectively to world manufacturing.

Each of these countries nearly contributed to the world manufacturing much more than their share in the world population.

China implemented economic reforms in the late seventies and became the number one contributor to world manufacturing only in 2010. In the preceding decades, the US, Japan, Germany, Italy, France, and UK were dominating the manufacturing world. Did these countries adopt authoritarian means? So seen from this perspective, Rajan’s analysis seems faulty.

In 1951, the primary sector of agriculture and allied activities like forestry, fishing contributed to 56.4 per cent of India’s GDP, the secondary sector of manufacturing, construction, mines, and quarry contributed 15.01 per cent and the tertiary sector of services contributed 28.59 per cent.

In 2021, the primary, secondary and tertiary sectors contributed 20.2 per cent, 24.3 per cent and 53.9 per cent, respectively, of the GDP of India. Fast growth is propelled first by the secondary sector, and thereafter by the tertiary sector.

Services sector surge

India was in the grip of the license and quota raj till 1991 and hence the secondary sector was artificially suppressed despite great demand for consumption of goods and allied activities. However, even after liberalising the economy partially from the clutches of license and quota raj, Indian entrepreneurs invested heavily in the service sector as it gives a quick return on investment vis-a-vis the manufacturing sector. An example is the proliferation of TV channels in India in the 1990s and 2000s.

As a result, the service sector replaced the agriculture sector as the dominant sector, as the latter was completely ignored.

Only in the last five years has there been concerted efforts by the government to push the share of manufacturing.

In 2018, India’s contribution to world manufacturing was miniscule 3 per cent, whereas our share in the world population is 17 per cent. India has a great scope and potential in manufacturing, given our demographic dividend, reasonably cheap labour, controlled inflation, and hence reduced interest rates on loans, scope for mobilisation of funds for expansion through equity, improving transport and energy infrastructure.

Change is required, where it has been long overdue, whether it is aggressively promoting manufacturing or farm laws that would bring crop rotation and diversification of crops.

When economists share their views on how to take the national economy forward, the government would listen.

But the views should be based on national interests and what the nation requires in the short, medium, and long term.

The writer is a macro economic analyst

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