Services account for many more of the larger establishments in India compared to manufacturing. Services are also much more urbanized than manufacturing. While large manufacturing firms are moving away from the urban core to the rural periphery, the same trend is not evident for organized services.
Bigger states like Maharashtra and Tamil Nadu appear to have a higher share of large plants. Six states—West Bengal, Uttar Pradesh, Tamil Nadu, Andhra Pradesh, Gujarat, and Maharashtra—account for 60% of all enterprise plant counts, in both manufacturing and services.
While Union territories such as Delhi, Chandigarh, and Puducherry are the most urbanized, some medium-sized states such as Gujarat, Haryana and Tamil Nadu are experiencing increased urbanization in both manufacturing and services, whereas large states such as Madhya Pradesh have experienced an above-average urbanization in services but a below-average urbanization in manufacturing. With the exception of Gujarat, urbanization rates are much higher in services vis-à-vis manufacturing.
Both manufacturing and services show a concentrated industry composition. More than 80% of establishments in manufacturing belong to six industries: food products and beverages, tobacco products, textiles, apparel, wood and wood products, and furniture manufacturing. Within services, two industries, hotels and restaurants and land transport, contribute about half of the plant count. A few other services such as education and health services, financial intermediation, and other business services also feature prominently.
Within services, it is not surprising that computers and related activities record the highest usage of computers and internet, with the usage of new technologies in organized services always being considerably higher than that in unorganized services.
Other organized services with high use of technology include financial intermediation, post and telecommunications, other business activities and supporting/auxiliary transport activities, and travel agencies. Education and health services also record a high usage of computers, but show lower internet usage.
Services establishments in richer states adopt technology somewhat more than those in poor ones, while those in urban areas have greater usage ratios than their rural counterparts.
India’s spatial trends
First, relative to manufacturing, economic activity in services tends to be spread around larger distance bands.
Second, distance from the top 3 cities versus top 7 cities has a different relationship for the two sectors. Activity for organized manufacturing tends to decline faster and in a more regular pattern from the three largest cities compared to services, where activity is relatively more spread out.
Third, both sectors have moved into closer proximity to the big three cities. The pattern, however, is especially prominent for services compared to manufacturing. Thus, even though improvements in transport infrastructure are helping activate intermediate sized cities, the importance of the largest cities is undeniable and important.
What drives growth at the district level in India? District-level population and demographic dividend are good predictors of the economic activity in both manufacturing and services. The local district-level composite infrastructure index that includes measures such as the quality of roads, telecom, electricity and safe drinking water are good predictors of both manufacturing and services. Infrastructure and distance to railways matter a lot more for manufacturing than services.
Although education does not have a positive influence on economic activity in manufacturing, it exhibits a positive and significant association with growth in services output.
Technology penetration is not associated with manufacturing, but it is significantly associated with average employment and output growth in services. This result is broadly consistent with the literature that underscores the importance of internet for the services sector.
Manufacturing and services are friends and not foes. The two sectors are growing together in India. The possibility of a crowding-out phenomenon existing between manufacturing and services activity is not supported by the evidence from 600 districts.
What should be done?
Relative to manufacturing and agriculture, services have attracted a lower profile in India’s development discourse. Services offer several advantages over manufacturing. They create many more jobs, and contribute more to output and productivity growth. They also employ more women, and are less likely to despoil the environment. Services are also less vulnerable to global trade protectionism.
Although services are more urbanized than manufacturing, they are not tied to big cities. This raises the possibility that services could be the new growth driver that can promote inclusive spatial development, and create more jobs in secondary cities. Services have the potential to better spread spatial gains, if complemented by policies such as investment in digital literacy and better regulation.
Ejaz Ghani is lead economist at the World Bank.
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