Can we count on manufacturing as an economic growth engine?

The sector's contribution to India's economy has flagged despite supply-side support. It's demand that needs to be driven up

- MADAN SABNAVIS

The decade ending 2023-24 shows an interesting trend of a distinct decline in the contribution of manufacturing to India's overall story of economic growth. While it may not exactly be called 'de-industrialization,' given the high level of sophistication we have reached in terms of the spread and quality of products, a grand shift to services is discernible and may prove quite challenging to reverse.

The theory of economic transformation talks of how countries start off with rudimentary economies that are largely agrarian, and then transition through an industrial revolution before achieving a services orientation. This is the pattern witnessed in several developed countries.

However, in the case of India, we have more or less skipped the intermediate phase of rapid industrialization, with services having already come to the forefront as the economy's dominant sector. There is nothing amiss in such a model, but it also means that the amount of capital formation required to ensure sustainable future growth would tend to lag. This is so because services are typically less capital intensive than manufacturing.

While we have been talking of achieving a major manufacturing take-off that would see this sector making up 25% of gross domestic product (GDP), this goal seems even more distant today.

In a globalized set up, there is nothing wrong in having a more developed services sector, but the worry is that our dependence on imports will tend to increase if we do not create the domestic capabilities needed for a manufacturing upsurge.