ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Exploring the Feasibility of ‘Make in India’

Structural Change Forecasts for India

India’s government claims to “transform India into a global manufacturing hub” and in the process raise manufacturing to 25% of gross domestic product and create 100 million new manufacturing jobs. This would entail a structural change comparable to that witnessed by several East Asian countries beginning in the 1960s. This study projects a formal-sector manufacturing boom over 20 years at the sectoral level, assuming India can take the necessary steps to initiate such a boom. Projection parameters are carefully constructed based on the Indian and the East Asian historical experience. The projections break out the key growth areas of formal-sector manufacturing and modern services to capture their unique characteristics. The results show large positive gains to aggregate output and employment from initiating an East Asia-style manufacturing boom. Reflective of the small size of the formal-sector manufacturing employment currently, the results indicate that the government’s specific employment goals appear unattainable in the next 20 years.

The question of structural change in India has returned to the forefront of policy with Prime Minister Narendra Modi’s high-profile “Make in India” campaign to “transform India into a global manufacturing hub.” Structural change involves shifting economic activity—including the labour force—towards higher-productivity activities. Almost half of India’s labour force works in extremely low-productivity agriculture, and most of the rest work in low-productivity informal activities. The potential for welfare improvements from successful structural change strategies has always been massive in India. The Indian economy is perceived to have achieved one structural transformation goal, that is, shifting output—if not employment—away from agriculture. However, for doing so, the economy deviated from the typical Kuznets (1966) pattern by relying on services rather than manufacturing to achieve this shift. The reliance on services to fuel growth so early in its economic development causes India to stand out, particularly relative to East Asia. India’s pattern of structural change also stands out in contrast to standard Heckscher–Ohlin trade theory. India’s obvious factor abundance in labour implies comparative advantage in labour-intensive activities. Instead, services growth has proven less labour-intensive than manufacturing growth.

Even manufacturing has grown in a surprisingly capital-intensive fashion. The labour intensity of formal-sector manufacturing, a source of structural transformations elsewhere, is declining in India, in contrast to several other Asian economies (Kochhar et al 2006; Das et al 2009; Kapoor 2014). India’s firms operate in more capital-intensive industries than predicted from the experience of other countries with similar labour supplies, development levels, and institutional quality (Hasan et al 2013). For instance, the three least employment-intensive manufacturing industries are among the four largest industries by output, which comprise nearly half of all formal manufacturing output.1 Even within the same industry, India’s firms use more capital and less labour than comparable firms in other countries (Hasan et al 2013). One can infer from the size of capital-intensive industries that their firms grow faster, and that is borne out in the data. Capital intensity helps explain the economy’s much weaker progress at shifting labour out of agriculture than at shifting output.

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Updated On : 22nd Mar, 2019
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