Manufacturing or services: Why place one sector over the other?

Let's pursue an even-handed policy between the two to maximize employment growth and minimize India's trade deficit

- Sudipto Mundle is chairman, Centre for Development Studies.

This column looks at the relative importance of the manufacturing industry and services in India's growth story and discusses our required policy priorities in that context. The origin of modern development theory can be traced to the regularities that Simon Kuznets and others observed in the 1950s and 1960s on how the structure of an economy evolves with growth. A key feature he observed is that as per capita GDP (a concept he invented) rises, the dominant sector of the economy shifts from agriculture to industry and then services. This regularity, combined with Arthur Lewis's foundational theory about how the transfer of labour and surplus from a traditional agricultural sector to a modern industrial sector constitutes the fundamental process of development, became the core of development economics. These pillars were supplemented with seminal contributions by many others, but the main focus of enquiry was on the transfer of labour and savings from a traditional agricultural sector to a modern industrial sector, especially manufacturing, which was seen as representative of the entire capitalist non-agricultural sector. The key policy debate at this sectoral boundary between agriculture and the rest of the economy was about the desirability and appropriate scale of the surplus transfer out of agriculture. Theodore Shultz wrote about the importance of transforming traditional agriculture. Mellor and his school of economists at IFPRI developed models of agriculture-led growth. Ishikawa argued that growth in developing economies required a reverse transfer of resources into agriculture. My own doctoral thesis investigated the interaction between inter-sec