Diving for pearls
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Countries around the world have followed two paths to economic progress: services-led or manufacturing-led. Unlike China and Vietnam, whose economies were propelled by manufacturing for export, India’s growth since liberalization has largely been services-led, driven by increasing domestic consumption and exports. Moving ahead, India needs to find unique solutions to turbocharge its manufacturing and agricultural sectors in order to realize its double-digit growth aspirations.
The journey till date
Since 1991, India’s services sector has outgrown GDP by nearly 1.25 times, accounting today for almost 60% of GDP (at constant 2004-05 prices). Interestingly, this has put India on par with high-income economies, as disaggregated trends reveal that modern services such as finance, communications and IT have grown faster than their conventional counterparts, including transport, retail, public administration, defence and hospitality.
Rapid export growth is due to higher-quality services, especially IT and ITeS. At approximately 32%, the share of services in total exports is unique among emerging markets. Simultaneously though, agriculture’s share of the GDP has fallen, while manufacturing’s has stagnated.
Agriculture should yield more
Agriculture’s contribution to the GDP has shrunk over time. However, agricultural production needs to ramp up as the sector is critical for national food security and employs 60% of the country’s workforce. With cultivable land remaining relatively unchanged, the focus needs to be on improving crop yields.
There is substantial potential for yield improvement, as India lags far behind other countries in this regard. For instance, India’s wheat yield is 3.1 tonnes/hectare, compared to Germany’s 8.6. Apart from easing supply-side constraints, the adoption of modern technology can contribute tremendously to increasing yields.
Advanced irrigation techniques, higher farm mechanization and the use of digital technology along the value chain are potential game-changers despite well-known structural constraints such as fragmented land holdings. With even a 1-2% improvement in production every year, real GDP for agriculture would grow at 4-5% over the next decade and contribute to the overall growth aspirations of the country.
The manufacturing trajectory
Manufacturing needs to fire on all cylinders as India desperately needs to find jobs for its burgeoning workforce. Although its GDP share has remained stagnant, sub-sectors such as automobiles and pharmaceuticals have been bright spots, growing annually at greater than 20% since 2000. For the next 20 years, India will enjoy the demographic advantage of having one of the youngest workforces globally. However, to harness this potential, the country’s manufacturing sector needs to get back in order.
The widening wage differential between India and other Asian countries offers the country the opportunity to realign its manufacturing strategy with competitive costs combined with better skills and intellectual property protection. Rather than replicating China’s export-led model, it should focus on targeting domestic consumption and taking the export route in select industries where it enjoys a significant cost advantage.
Recent government initiatives such as Make in India and the bankruptcy law are a few steps in the right direction. Major reforms such as the goods and services tax bill, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act and labour reforms, currently hampered by legislative uncertainty, should be implemented on priority.
Also, more initiatives to bolster investor sentiment, improve infrastructure and enhance the ease of doing business would be important to drive India’s manufacturing engine to desired levels. India needs to target at least 9-10% real growth in manufacturing to achieve the ambition of double-digit growth in the next decade.
In the past two decades, the story of India’s economy has been one of unique, services-oriented growth. If its agriculture and manufacturing engines can fire more aggressively as services continues on its established path, achieving greater than 10% GDP growth in the forthcoming decade might not be a stretch target.
Some of this is easier said than done, but pearls don’t lie on the seashore. If you want one, you must dive for it.
Madhur Singhal, partner with Bain & Company, is a leader in its private equity practice and a member of the technology, media and telecommunications practice in India. Sambit Patra is a principal and a member of the performance improvement and industrial goods and services practices.
This is part of a special Mint-Bain series on 25 years of economic liberalization. For more on 25 years of reforms go to www.livemint.com/liberalization