October 18, 2005

Growing Big

The Telegraph, 18.10.2005

S.L. Rao makes an important point in his article, “Making it work better” (Oct 10), but he could be 25 years too late in coming out with it. Yes, manufacturing is important but only pro tanto. This is because India has very little room for manoeuvre in the competitive international market. On the high end, there are countries with cutting-edge technologies such as Japan or South Korea, and on the lower end, there are countries with huge manufacturing capabilities — often catering to companies from the upper end of the market — such as China or Vietnam. We have missed the bus in the Seventies; when we were supposed to liberalize our “import substitution” regime and promote manufacturing, we were content with the abysmal “Hindu rate of growth”.

In 2005, India is mainly a service-sector economy — and that is where its unique selling point lies. We have nothing to attract foreign investors in manufacturing — stringent labour laws, poor infrastructure, slow-moving babus are deterrents enough. The strength of our economy lies in software development, research and development, business process outsourcing and hopefully, knowledge-process outsourcing in the future. There is nothing wrong about this model. It is also not true that providing jobs en masse in a service-sector economy is a problem. After all, ever since Margaret Thatcher abandoned an uncompetitive manufacturing sector in Britain, Europe’s second largest economy has also been its fastest growing and most prosperous, with one of the lowest rates of unemployment.

There are two compelling arguments in favour of promoting manufacturing. One, that you should not keep all your eggs in the same basket, that is, one must always promote diversified growth. Two, no sector within the economy should be strangled or its growth impeded. But in essence, the importance of manufacturing has now diminished: India in that respect has the potential to be a 21st century economy, while China is rebuilding a 19th-century model.


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