India’s economy and the ‘elegant excuse for being incompetent’

The government’s all-out push to turn India into a manufacturing powerhouse started sounding credible after the world began turning away from China for geopolitical reasons and looking at options to shift supply chains. Just when it seemed it’s India’s moment to replace China as the world’s factory, a major debate has erupted whether India would fare better with a services-led growth or by becoming a manufacturing power.

External Affairs Minister S Jaishankar, known for his sharp comebacks, waded into this debate yesterday. “I have always believed that this focus on services was actually an elegant excuse for being incompetent in manufacturing,” he said in his inimitable style. “There is no major country in the world which has sustained or enhanced its global position without some commensurate build up of manufacturing,” he added while speaking at the launch of the book ‘Made in India: 75 Years of Business & Enterprise’ authored by India’s G20 Sherpa Amitabh Kant.

Jaishankar’s comment underlines how the Indian government looks at manufacturing growth as a strategic edge too.

“In the name of opening the economy and globalising we should not end up de-industrialising this country. We should not allow level playing field in this country for others to subside their rich. That’s economic suicide. We need to be clear that every country must support its manufacturers, must support its businesses. We mustn’t allow other businesses to enjoy advantages in our country at the expense of others,” said Jaishankar.

The big debate
India has traditionally been a services-led economy but the Modi government is trying to change that by boosting the manufacturing sector. However, this has ignited a debate, with many arguing that a services-led economy is a better bet for India.

In recent times, India’s former RBI chief Raghuram Rajan had batted for a services economy, He favours a services-led export model for India instead of following China’s manufacturing-led one in order to grow faster. Rajan says the positive impact of liberalising services offers massive potential in reducing inequality in industrial economies and also contributing towards climate action.

“Weightless services also consume little energy on the way to the final consumer, unlike manufactured goods. Export-led services growth will be much less environmentally harmful – the world cannot afford India to follow China’s path, even if it were open to it,” Rajan has said. He says services, unlike manufacturing, can be distributed across a country and reduce pressure on megacities that are turning into heat sinks and becoming increasingly unlivable.

Such a distribution of services away from large cities will boost rural incomes and provide an alternative in case of loss of agricultural incomes.

Commentator Swaminathan Aiyar too has argued for a services-led growth model. He says the focus on providing subsidies for manufacturing will undercut the limited resources for human development. According to him, India needs to focus not just on services like IT but education and health that have been grossly underfunded for years.

“Politicians and economists emphasise merchandise over services exports. Vast subsidies and tariff protection are offered to attract manufacturing companies to shift from China to India. But services exports are soaring without subsidies or tariff protection. Despite aatmanirbhar and the production-linked incentive (PLI) scheme, India accounts for just 1.5% of world merchandise exports, but over 4% of world service exports,” Aiyer has written.

The hopes from India
Though services-versus-manufacturing is an ongoing debate and most agree that an outsized focus on either of these is not favourable, the advanced world is looking at India and many other Asian countries to shift their supply chains or create additional manufacturing capacities.

China still towers over every other country in global manufacturing, a position it cemented when multinationals flooded in after it joined the World Trade Organization in 2001. But a growing list of factors has prompted companies to search for a backup. First, there were rising labour costs in China and pressure from the Chinese government to transfer technology to Chinese competitors.

Then there were President Donald Trump’s tariffs on Chinese imports in 2018, Covid lockdowns from 2020 through last year, and now a push by Western governments to decouple their economies from China. Many countries are competing to be the “plus one,” with Vietnam, Mexico, Thailand and Malaysia in particular contention. India must still overcome entrenched problems that have kept it a bit player in global supply chains. Its labour force remains mostly poor and unskilled, infrastructure is underdeveloped and the business climate, including regulations, can be burdensome.

Manufacturing remains small relative to the size of India’s economy. Nonetheless, after decades of disappointment, it is making progress. Its manufactured exports were barely a tenth of China’s in 2021, but they exceeded all other emerging markets except Mexico’s and Vietnam’s, according to World Bank data.

The biggest gains have been in electronics, where exports have tripled since 2018 to USD 23 billion in the year through March. India has gone from making 9 per cent of the world’s smartphone handsets in 2016 to a projected 19 per cent this year, according to Counterpoint Technology Market Research.

It scored a coup with the decision by Apple to significantly expand iPhone production in India, including expediting the manufacturing of its most advanced model.

(With inputs from ANI)