Column: Towards de-industrialisation

Written by Madan Sabnavis | Updated: Dec 14 2013, 09:42am hrs
We have drawn some amount of solace from the latest Q2 GDP growth numbers, which indicate a possible recovery over Q1 from 4.4% to 4.8%. The contribution to growth is more from the farm and services sectors, which is commendable. However, a broader issue is whether or not GDP growth can be feasible at higher levels with the manufacturing sector playing a minimalist role This issue is serious because the pattern so far has been a growth model that runs on services. These services are almost broadly divided equally across the organised and unorganised sectors with transport (excluding railways), trade and restaurants being mainly in the latter. Growth in these sectors cannot be sustained unless there is high growth in industrymanufacturing in particular as services support business activity.

It is here that it is often argued that India missed one important step in economic transformation where we shifted from an agrarian to service driven economy without really having an industrial revolution. The question is whether there is reason to believe that there has been de-industrialisation in the last two decades

The de-industrialisation hypothesis can be looked at from four points of view. The first is the growth rate in manufacturing relative to other segments. The second is share of manufacturing in GDP, which will indicate its relative importance. The third is share in capital formationhere one should distinguish between infrastructure and manufacturing as investments in mining or power would not really be classified as manufacturing. Last, in terms of employment have there been signs of migration to other sectors

If all or most of these are visible, then there is a problem as the diminishing importance of industry is not good for the future of an economy that still has gaps in terms of unemployment, poverty, inequality, growing urbanisation, social amenities and so on.

The accompanying table provides information on these fours aspects of de-industrialisation. The averages for four quinquenniums have been calculated to iron out single year disturbances through extreme numbers.

The four pre-requisites of the de-industrialisation hypothesis can be analysed sequentially. Growth in manufacturing has been cyclical across the time periods witnessing alternately high and lower growth rates in these periods. While this trend is similar to that witnessed in overall GDP growth, the intensity of decline or increase of manufacturing growth has been steeper both ways. Two conclusions may be drawn. The first is that higher manufacturing growth does propel GDP growth, but a slowdown does not bring down growth to the same extent as the other sectors provide support. Second, we evidently have to work on this sector if we are looking at double-digit GDP growth rates in future as the services sector can buffer against a decline but cannot, on its own, drive GDP growth on a sustained basis.

The share of manufacturing in GDP has remained more or less flat over these periods. This is interesting because during this period of 20 years the share of agriculture has come down sharply from 26.7% to 14.5%, but has not gone in favour of manufacturing. It has shifted in a big way to services with the non-government sector gaining the most. The other interesting conclusion here is that the government is not too intrusive, as the share of personal social and community services has varied between 13.1% and 14.4% during this period.

The capital formation story is even more startling. The share of manufacturing has come down from 38.8% to 28.8%, which can be contrasted to levels of above 35% in countries like China, Korea, Malaysia and Thailand. The shares of services has again increased with the three sub-groupstrade, transport and communications; finance, insurance and real estate; and social and community serviceswitnessing an increase of between 3% and 4% in share over this period. Within industry, construction has witnessed a larger share, which may be attributed to the focus on building roads, airports, ports, etc. This gives one the sense of de-industrialisation where less investment is being channelled to this segment. It also reflects the existence of spare capacity in industry, which could be one reason as to why larger doses of investment are not taking place.

Last, the employment profile follows the same trend as in GDP and capital formation. The private organised sector has been used here to gauge whether this sector has provided more job opportunities to labour. With a diversion being witnessed from the primary to the services sector, it is not surprising that manufacturing is attracting less labour in the organised sector. The share has been declining continuously through the four points of time chosen and a fall of over 10% is quite alarming. Interestingly, again the services sector has dominated and, within this group, the finance sector has been the major beneficiary with the share increasing from 3.6% to 20.5%. Quite clearly, given that the remuneration packages offered in this sector are higher than that in manufacturing, there is a disincentive to work for this sector.

What does all this indicate The manufacturing sector has certainly lost its sheen and there are traces of the process of de-industrialisation which is more of a voluntary nature, unlike in the pre-Independence days when the colonial model was to make countries less industrialised with the focus being on agriculture and extraction of raw materials. Should we do anything about it Yes, it is necessary because the services sector-driven model is not sustainable unless manufacturing grows. The solutions are known to all as to what should be done to drive forward industry which should get translated into action lest we lose this major foundation which appears to be weakening over time.

The author is chief economist, CARE Ratings. Views are personal