To reach middle-income status through export-driven manufacturing growth, India will have to beat out many cut-throat competitors. (Representational image)
India will soon have a $ 5 trillion economy, en route to $ 10 trillion by 2040. That trajectory puts India on track to surpass China in total GDP by mid-century. It will take a lot of ambition – buttressed by strong execution – to make that future a reality. But it is doable, and the geopolitical outlook is benign.
If there’s one thing the rest of the world wants, it’s an Asian alternative to China. But India is unlikely to grow its way to global influence through export-driven manufacturing for the US and European markets. That trick has been done once, and it won’t be done again.
From Scale To Redundancy
Global manufacturing supply chains became concentrated in China as formerly American production was offshored first to Japan, then to South Korea and Taiwan, and finally from there to China. These production networks consolidated massive manufacturing clusters on a scale never seen before.
But today the trend is toward redundancy and supply chain security. That’s not just a passing fashion. Modern twenty-first century production networks are not driven by the same economy-of-scale logic that dominated the last century. For high-value components in particular, continuity of supply can be more important than simple low-cost.
As a result, production networks are now diversifying out of China. India will capture some of that diversification, but it will never achieve the kind of manufacturing dominance that China once had. And without that kind of dominance, India can’t manufacture its way to middle-income status.
Luckily, it doesn’t have to.
Growth Beyond Manufacturing
Economic growth isn’t just about manufacturing. China’s growth was centred on export manufacturing because when China opened to the West, it initially kept its domestic sectors closely guarded. Only the export sector was liberalised, and the export sector quickly adjusted to global levels of productivity. The rest of the economy stayed relatively poor.
Thus, although China is a globally-competitive centre for manufacturing, its agriculture and services sectors remain productivity laggards. The overall productivity of an economy, which ultimately determines a country’s GDP per capita, is the weighted average of the level of productivity of every sector in the economy. In China’s case, manufacturing boosts GDP per capita, while other sectors drag it down.
India’s path to middle-income status likely does not involve it ever becoming the workshop of the world. Instead, India is more likely to become an $ 8,000 GDP per capita like Brazil, where exports account for around 20 percent of GDP and manufacturing accounts for only 10 percent of GDP, lower than India’s 15 percent. There are many paths to productivity.
Focus On Productivity
With 30 percent more arable land than in China and more than 40 percent of its workforce still engaged in agriculture, the fastest way to increase productivity (and thus GDP) in India would be to improve the productivity of Indian agriculture.
This would require major reforms, but every path to growth requires major reforms. India could become an agricultural powerhouse like Brazil, but only if it ends wasteful practices associated with the mandi system and moves decisively toward market-driven commercialised agriculture.
India’s services sector would also benefit from continued deregulation. Software services may be a leading sector in India, but other service industries are held back by the dead hand of unnecessary regulation and superfluous red tape. It shouldn’t be so complicated to get things done in India. Any paperwork that exists purely for the sake of generating paperwork should simply be eliminated.
Market-oriented reforms can be scary (and sometimes politically unpopular), but they are necessary, and will ultimately benefit everyone. If India wants to grow, it will have to move to an economy that has fewer low-productivity farmers and fewer low-productivity servants. Middle-class Indians can’t have cooks, cleaners, and drivers. If they do, India’s middle class will remain small—and India will remain poor.
Reforms that pull people off the farm (and out of the house) inevitably raise the spectre of mass unemployment. But in all of history, that spectre has never materialised. Today’s developed economies also used to have millions of poor farmers and domestic servants. Rising productivity created new, better opportunities for these people and their descendants. Productivity really is the tide that lifts all boats.
More efficient agriculture and services can do just as much to promote growth as more efficient manufacturing. And unlike manufacturing, agriculture and services depend relatively little on global markets.
To reach middle-income status through export-driven manufacturing growth, India will have to beat out many cut-throat competitors. Dozens of countries want to be the next workshop of the world, and they’re all going to have to share a slowly expanding pie. But productivity gains in agriculture and services are entirely under India’s own control. It would be foolish not to pursue them.
Salvatore Babones is an associate professor at the University of Sydney and director of the Indian Century Roundtable. Views are personal, and do not represent the stand of this publication.
