Return of manufacturing?

Historically, growth in developing economies has been led by industry, minerals or agriculture.

The only exceptions have been small island economies that are tourism-led. India is the first major developing economy to become services-led, with services outpacing industry and agriculture.

In earlier decades, services played a supporting role to goods production. In 1981-90, industrial growth was 6.8% and services growth was 5.8%. But in the next decade the order got reversed: services grew by 7.8% annually, against 5.8% for industry.

I have long rejoiced. But other economists (such as Shankar Acharya, Vijay Joshi) have major qualms about it, and even express skepticism about the data.

They say the service-led surge is an outlier in India’s own history, and in that of other developing countries. They do not believe services can yield much job growth, and so want a shift to industry-led growth, which they think will produce more jobs.

Take a look at the accompanying table on the share of services in various countries and regions. It shows that the services/GDP ratio in India (51%) is actually lower than in Pakistan or Sri Lanka (54%). It is lower than in Sub-Saharan Africa (54%) or Latin America (67%). It is high in relation to East Asia (38%).

The table shows that the outlier is not India but East Asia. By adopting a strategy of growth based on manufactured exports, these countries created a big bulge in industrial growth that is exceptional.

I do wish India had not missed the bus of manufacturing-led export growth in the last three decades. Nevertheless, the table shows that India’s service-GDP ratio is by no means untypical or terribly skewed.

Despite much excitement about the splendid growth of software/BPO, these accounted for only 1.2% of GDP in 2000, and may be up to 1.8% this year. Employment in the sector will touch just one million this year, a drop in the ocean compared with the workforce of 400 million.

But Raman Roy of Spectramind estimates that every direct job in the sector creates three more in catering, transport and maintenance. If so, the sector has already created four million jobs.

Employment growth of around 20%/year means jobs will double in four years and quadruple in eight, to a total of 16 million.

That will be transformational. The organised sector today has only 27 million workers, and manufacturing jobs are shrinking. Tata Motors produced 129,400 vehicles in 1994 with 35,000 workers. In 2004, it produced 311,500 vehicles with just 21,400 workers.

Bajaj Auto produced a million vehicles in the mid-1990s with 24,000 workers. Today it produces 2.4 million vehicles with just 10,500 workers. Let nobody think that manufacturing has more job potential than services.

However, service growth is not about software alone. We are seeing broad brainpower-led growth. This is reflected in high-skill outsourcing in legal services, engineering services and film animation. Above all it is reflected in R&D.

Biotechnology has made Kiran Shaw Mazumdar of Biocon the richest woman in India. Patent applications have shot up from 4,000 in 1995 to almost 15,000 last year. Indian filings for US patents are up from 183 in 1997 to 1,700 last year.

MNCs galore are setting up R&D centres in India: Suzuki, General Motors, General Electric, Intel, Cisco, to name a few.

R&D has become a key input into manufacturing. The most obvious case is pharmaceuticals, but auto is not far behind.

Bajaj Auto once got motor-cycle technology from Kawasaki, but today its best-selling bikes are indigenously designed. TVS abandoned its collaboration with Suzuki and came up with a far better bike itself.

Tata Motors is exporting home-grown cars and trucks. The auto ancillary industry has become an R&D hub using computer-aided design.

This is just an indicative list of the way R&D is transforming industry and making it globally competitive. Brainpower, which initially boosted services, is spilling over into manufacturing through R&D.

Manufacturers who once cowered behind protectionist barriers now want to conquer the world. The consequent manufacturing boom should once again make manufacturing grow faster than services.

This may be happening already. Industrial growth in April-October this year is up 8.4%, and manufacturing growth 8.8%. Manufacturing growth in October alone was a whopping 11.3%. If this is a new trend — a big If — then manufacturing will once again overtake services as India’s growth locomotive.

An investment boom is in the works, so rapid capital goods growth seems assured for at least for a year or two. Merchandise exports grew by 20.3% in 2002-03, 17.1% in 2003-04, and 24% in the first eight months of the current fiscal year. Manufactured exports must be growing even faster (agricultural and mineral exports are slower growers that pull down the average).

Many Indian companies have become lean and mean thanks to the pressure of competition, and have benefited from a big fall in interest rates, better telecom, and some improvements in roads and ports. Yet I suspect that brainpower played a critical role in making them competitive.

So, India may have just become a manufacturing-led economy again. But this does not mean a return to past patterns: manufacturing is now brainpower-intensive. Data cannot capture this dimension. But it means that Indian manufacturing is for the first time becoming world class.

For years, I have said that I see no sign of India breaking out of the neo-Hindu growth rate of 6%.

Not now. I see signs that India may be breaking through to higher levels. Let us wait and watch to see if this is sustainable.

High oil prices may induce a global recession. Naxalite violence in 156 districts out of 602 shows that governance is deteriorating. Yet the rise of brainpower-led manufacturing is cause for hope.

What do you think?