Manufacturing vs Services debates are export pessimism in a new form

Raghuram Rajan and Rohit Lamba in their recent book Breaking the Mould: Reimagining India’s Economic Future recommend that instead of trying to promote manufacturing, the nation’s money could be better spent on strengthening its competitive advantage in Services. They argue that we ought to be realistic about how value-addition within global supply chains is continuously changing and must therefore move from brawn to brain because the manufacturing path that China took will not work anymore.

Today, technology allows direct services exports not only in IT but also in professional and management services, apart from higher skilled manufacturing-related services exports such as chip design, etc. They argue that we already do 20% of global chip design. Additionally, we host 1,600 Global Capability Centres, representing 40% of the worldwide number, which include large R&D and design outfits. We must strengthen this competitive advantage and create an environment that fosters ideas and entrepreneurship so that many more firms with new product offerings are started in India, to capture high value-added segments of supply chains.

The book is prima facie reasonable. However, submitting a blueprint for a revised agenda of development by debating the choice between Services and Manufacturing ignores the fact that we are the fifth-largest manufacturer, though not a successful exporter, and thus need to do something about this weakness. It also ignores UNCTAD’s finding that at least 84 countries – both developed and developing, accounting for about 90% of global GDP -- adopt formal industrial development strategies. Our manufacturing support schemes, including the PLI schemes, are neither unique nor bigger.

Also, the book does not present the global services picture. Undoubtedly, exports of Computer/R&D and other digitally delivered services are growing faster than export of goods. India is one of the leaders in this services sub-segment. However, this sub-segment is less than a third of global services ($7.1 trillion), which itself was only 23% of total trade in 2022. India is not very significant in other services sub-sectors. If we must entirely forget manufacturing and instead promote services, reasons for poor standing in other types of services merit discussion.

The authors highlight that India, China and South Korea had almost similar per capita incomes till the 1950s. We now lag. The world order witnessed epochal changes after WWII and in the 1980s. Export pessimism prevented India from partaking in the post-WWII trade and development boom. South Korea, with no such inhibitions, benefited, and is now a high-income OECD country. Rajan and Lamba do relate an amusingly interesting story about South Korea but skip discussing the ‘how and why’.

Chinese successes came in the 1990s. The collapse of the Soviet Union and the end of the Cold War coincided with the dawn of the internet revolution and sharp improvement in transport technologies which, together with the ‘Washington Consensus’ of a newly ‘unipolar world’, created the globalisation boom, where pricing efficiency and profitability governed locational choice, not ideologies or politics. The authors bring out some aspects of the Chinese model, like the existence of widespread decentralised economic empowerment. Local governments account for 51% share of government expenditure (creating better de facto ‘ease of doing business’) in a politically authoritarian State.

Once again, changes loom ahead. The steadily intensifying US-China trade war, the Russia-Ukraine conflict, the Middle East fracas, all indicate so. National and economic security and ideological issues may start displacing the pure profit calculus of the now-decaying Washington Consensus and alter trading behaviours. It is thus important to discuss exactly what differentiates us from China/South Korea.

An emerging economy suffers from shortages of two types of resources -- financial capital and managerial skills. Both are equally valuable. Strategies involving allocation/re-allocation of either can damage or enhance outcomes. Post-Independence, India adopted planned development, self-reliance and balanced growth through centralised controls, creating a large, centralised machinery to ‘guide’ manufacturing/exports/commerce.

As against this, the principal focus of the initial modernisation drives of both South Korea and China was in creating and managing global quality ‘playing fields’ -- cities and industrial areas -- and not in analysing or deciding how to use them. That was left for the actual entrepreneurs to decide. South Korea, being tiny, did not need de-centralisation, unlike populous China. This difference in basics still exists.

Though liberalisation happened in 1991, the imbibed attitudes of Indian officialdom toward markets, competition, urban and industrial locations and development, decentralised decision-making, and the importance of quality standards, etc., remain intact, as does the structure of the governance machinery, designed to manage plan implementation.

Consequently, we lack governance skills/empowerment and global quality non-transport infrastructure even a few kilometres outside our capital cities. This could be the primary reason why Indian uniqueness/deficiencies exist in the wide array of aspects mentioned by the authors, such as rural distress, low employment ratios and gender imbalance in labour participation, deficiencies in educational attainments, etc., all slowing down capability creation.

It could be that it is this lack of decentralisation and widespread urbanisation, and ill-balanced of use of scarce management resources vis-a-vis our competitive peers that needs greater attention of policymakers and commentators, and not the Manufacturing vs Services debate highlighted by the book.