Prioritising global good over national interest: Why manufacturing critics have got it wrong


While climate change and other concerns are being addressed, India, with its per capita emissions, certainly has no burden to compromise the future of its population to bear the follies of others’ past

Being the self-proclaimed torchbearers of morality, the global north always forces the developing world to prioritise global good over national interest. Industrialisation in the worldwide south is characterised as an attack on global climate action. This thinking stems from Garret Hardin’s seminal essay, Tragedy of Commons. Hardin believed that “left to our own devices, we would exhaust all the resources available for our consumption”. However, today’s climate change agenda is akin to a situation wherein the developed world has already exhausted most of the carbon emission cap. Now they expect the developing world to prosper with limited emissions. There has been a strong positive correlation between carbon emissions and economic growth. The Environmental Kuznets Curve (EKC) hypothesis also points towards an inverted U-shaped relationship between economic growth and environmental degradation.

However, the developing world is criticised for taking the path of industrialised growth. Many commentators believe India should be persuaded against industrialisation and bolster the service sector instead. This assertion has primarily four problems:

One, despite three decades of robust growth, the export-oriented service sector in India has managed only to create less than 4 million jobs. The nature of exports is such that even high-value contracts can absorb a minuscule part of the labour force. Even with a conducive external environment and strong tailwinds of global growth, it has not contributed significantly to solving the jobs conundrum. With over half the GDP contribution share, its employment share is less than a third. This figure also includes all contractual workers, small shopkeepers, transportation workers, hospitality sector employees, self-employed traders and people engaged in menial jobs. The share of employees engaged in export-oriented services or the formal sector remains far below optimal.

Two, the inherent nature of service sector exports is that they are highly skilled or semiskilled. This disqualifies a large section of the population from being a meaningful contender for these jobs. Skilling is critical for the new set of job seekers underway and the ones who’ve recently joined the workforce. However, it is not pragmatic to expect the upskilling of large chunks of the population for them to be absorbed in the service sector. Large job pools in semi-skilled industries are required to fill the gap left to be serviced by external economies. What is being pointed out isn’t an either-or paradigm but rather a refocusing of priorities and working on the insights gathered.

Three, India is an inherently consumption-driven economy. Despite consumption growth, a large part of the demand has been serviced by foreign producers. These include essentials like apparel and textiles, durables and consumables. This is more worrisome as the largest exporter of these goods to India is China, with whom we have ongoing geopolitical tensions. It has been well acknowledged and established through multiple studies that manufacturing, especially durables, has a much higher job intensity than other sectors. The glaring hole that we are yet to fill is to be able to fully service this domestic demand. This is the low-hanging fruit we must prioritise. These are not items that require critical technologies, materials or even extensive supply chains. What is required are conducive domestic conditions, access to formal credit, business-friendly policies, robust infrastructure, policy continuity and competent power tariffs.

Four, service sector-oriented development has led to the formation of enormous urban agglomerations like Gurgaon, Mumbai and Bangalore. These cities act as the fiscal focal point for states housing them both in terms of revenues and, to a certain extent, expenditure. This, in turn, has led to islands of prosperity bursting at the seams in otherwise oceans of limited development. Fostering manufacturing towns specializing in specific product value chains is critical to overcoming this challenge and ensuring distributed development.

Five, Covid has been an illuminating experience of the need for critical supply chains to be within national boundaries. Such resilient supply chains are key to how sovereign states were able to cope with the pandemic. The experience led to the government pushing for strategic PLIs under the Aatmanirbhar Bharat Abhiyaan, where firms have been incentivised to set up manufacturing in India. It also provides an unprecedented opportunity to usher in the formation of clusters around key facilities. As has been witnessed in industries like automobiles, where large manufacturing setups have enabled engulfing MSME clusters as an indispensable part of value chains. These large investments have a multiplier effect on the local economy facilitated by mushrooming of smaller suppliers in proximity, eventually leading to a sustainable ecosystem with economies of scale.

This requires policies of self-reliance like the ones Raghuram Rajan has been critical of. He has been vocal about his views in the recently published column on India’s headways into the manufacturing sector through the PLI scheme and later expounded on how India’s trajectory of export-led manufacturing would have damaging consequences for the world. “Think of the damage done to the world if India followed China’s export-led growth path on manufacturing,” he said. What he forgets, meanwhile, is that it was the same trajectory that allowed China to increase the standard of living and end cycles of intergenerational poverty of the highest number of individuals in a record duration of time. A feat that is still unique in human history. While climate change and other concerns are being addressed, India, with its per capita emissions, certainly has no burden to compromise the future of its population to bear the follies of others’ past.

Aditya Sinha is Additional Private Secretary (Research) and Chirag Dudani is Assistant Consultant, Economic Advisory Council to the Prime Minister. Views expressed are personal.

This article originally appeared on and was reproduced here with permission


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