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Inspired by his simple yet profound statement, this article outlines how India’s target of raising the share of manufacturing in GDP to 25% requires it to expand rapidly in at least two states: Uttar Pradesh (UP) and West Bengal.
Without it, in absolute terms, manufacturing will grow, but expanding the relative importance of this sector in the economy will become ever more difficult. Why is that?
In the 1950s, manufacturing was about 10% of India’s economy. Since 2010, it has averaged about 17.7%. When the ‘Make in India’ campaign was launched in 2014, it was 17.3%. As the economy expanded over the years, the share of agriculture declined while that of services rose.
The share of manufacturing has never reached even 20%. The reasons for this are well documented: Difficulties in obtaining a multiplicity of required licences, delays in acquiring key requirements such as land, hundreds of stringent labour regulations that make taking on labour costly and incentivize the formation of small rather than large integrated firms, and deficiencies of physical infrastructure and governance at the level of states.
Consider the top four states that contribute to Indian manufacturing. In 2004-05, Maharashtra, Gujarat, Tamil Nadu and Karnataka contributed 48% of India’s factory output.
In 2021-22, the latest year for which the relevant data is available, they were still the top four and their contribution was about the same. While Maharashtra’s contribution to the manufacturing sector fell over this period, that of the other three states increased, especially Gujarat’s.
The next three states were also ranked the same in 2004-05 as in 2021-22: UP, West Bengal and Haryana. Their combined share in the sector’s output fell from about 17.7% to 16% during this period.
Now consider the share of manufacturing in the state economy. In all the four states that contributed the most to the sector, the share of factory output in their respective economies reduced between 2004-05 and 2021-22.
The largest fall was in Maharashtra, while it was marginal in Karnataka and Tamil Nadu. Except Gujarat, in all the other three states, manufacturing now contributes less than 25% of state GDP. In Karnataka and Maharashtra, the sector contributes about 15% and 17%, respectively.
In short, though our better-industrialized states continued to account for about half the country’s manufacturing, the sector’s relative contribution to their state economies fell.
The key reason is this: As incomes rise, our consumption patterns tend to shift towards services. We spend more on hotels and restaurants, tourism, education, healthcare, transport and personal services such as grooming saloons and gyms.
As demand for services increases, the local production of services must also rise, since these cannot be imported, unlike manufactured goods. So, the share of services in the economy inevitably rises.
Also, India’s relatively prosperous states have seen a significant improvement in education levels. Young people have been going in for higher education because they do not want to work on factory floors.
These jobs not only pay less, they are seen as lower in social status than service jobs. The country’s young aspire to work in offices. Even driving a cab is preferred, which lets one earn more than one would in a factory while retaining the flexibility of work hours. These preferences mean manufacturing in these states is increasingly reliant on migrant labour.
These trends that favour the demand and supply of services mean that even if manufacturing in Gujarat, Maharashtra, Tamil Nadu and Karnataka continues to expand, its share in their state GDP and thus India’s economy is unlikely to increase.
For India’s share of manufacturing to reach 25% of GDP, we need the sector to expand rapidly in other states such as UP, West Bengal and Haryana.
Yet, even in UP and Haryana, the share of manufacturing in their state economies has not risen. Can these three states, together with Odisha and Bihar, with about 40% of India’s population, replicate the success of the top four?
They can attract local labour and workers from nearby states. However, private businesses will build factories in these states only if they are assured of good and stable governance, easily obtainable licences and land, and also of quality physical infrastructure, apart from safety.
They will also have to compete with rivals on quality and price. As UP, Bihar and Haryana do not have ports for the export of manufactured goods, industries that need to access global markets face higher transportation costs.
The challenge is steep, as the scale of factory expansion needed is massive. For example, UP’s manufacturing share in state GDP is about 14%. It would need to reach over 30-35% for India’s factory-sector to attain a share of 25% and act as a generator of jobs by the million.
These states have a window of a decade or so to industrialize at the pace required. As their youth ascend the aspiration curve, they too would not want to work in factories.
We should not forget that services will continue to account for the largest part of the Indian economy, providing jobs to an increasing number of youth.
Arithmetic, as Summers said, can be a powerful tool to understand reality.
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