Modi must shift from manufacturing to services. ‘Make in India’ needs course correction

Services’ share in India’s GVA increased from 48% to 57% in 8 years without being the primary focus. Imagine what the sector can do if Modi govt sets its eyes on it.

The most recent trade data we have, for January 2023, shows that the Narendra Modi government is likely making a medium-term policy error in keeping ‘Make in India’ and enhancing manufacturing at the forefront, and relegating the services sector to a secondary position.

This positioning should instead be flipped. With more than eight years of ‘Make in India’ having elapsed, it is time for such a course correction, something the Modi government has shown it is nimble enough to do.

Data for January shows that our services exports surged to about $32 billion, almost the same as our slowing merchandise exports. The reason for this should pique the government’s interest.

India’s merchandise exports and services exports behave in opposite ways in reaction to a slowdown in the global economy, especially the developed world.

Near-recessionary conditions in the US and Europe have made them significantly cut back on their merchandise imports from countries like India. Not only is economic activity slowing, but high inflation and fuel costs have made transporting goods from India increasingly unviable for American and European companies.

The same conditions, however, have meant that India is becoming an increasingly attractive source of services exports. India offers high-quality services at competitive prices, exactly what ailing companies in the developed world need. And there’s no transport cost. This is why, while India’s goods exports actually contracted 6.5 per cent in January, our services exports surged nearly 50 per cent that same month.

Factors driving India’s services sector

What’s more remarkable is that this growth isn’t solely being driven by the usual IT/ITeS sectors, where we already have a solid global reputation. The growth is also coming from a segment called ‘other business services’, which includes exports of research and development-based services, and professional and management consulting services such as auditing, accounting and legal services.

The ‘other business services’ category saw net payments to India–after subtracting the payments India made to other countries–at $8.6 billion in the first half of this financial year, more than triple what it was the same period of the previous year. Remember, this is despite a hugely depreciated rupee. In other words, more dollars came in despite one dollar now buying a lot more than it used to.

The share of this segment in total services sector inflows also grew to 13 per cent from about 5 per cent over the same period, meaning it grew faster than our conventionally popular services.

The absolute numbers are still small, however, but this is precisely the opportunity that India can exploit. The thing with merchandise exports is that it will almost always be hostage to global conditions. But services exports not only benefit when things are looking bad globally, they are also likely to be retained even when conditions improve because the quality India offers is at par with what can be got elsewhere, at competitive prices.

It’s not as if companies in the US will stop outsourcing their accounting or auditing to India just because their profits increase. However, if the Indian government pushes for the growth of these sectors in terms of quantity as well as quality by setting up top-notch training institutes, it can ensure that India becomes the go-to place for such services during highs and lows alike.

What’s more, while services that require in-person contact run up against immigration and visa rules, services that can be completely remote do not.

Why govt can go beyond political choices

From a political point of view, it makes sense why the Modi government has chosen to back manufacturing over services. Increasing employment in manufacturing is a quicker process than in services. Not only does the actual act of building a factory create jobs, but with enough incentives, it can be done quickly, following which factory-worker employment goes up. Another advantage is that it increases demand for low-skilled workers. 

In services, investments yield delayed results. You first need to skill the workers in accountancy, auditing, and the other in-demand services. Politically, especially when India conducts assembly elections every year, there’s more bang for buck from encouraging manufacturing growth rather than services.

There is also the spectre of ‘jobless growth’ that loomed over the UPA’s services sector push, but addressing that is a matter of identifying those services whose demand is growing rather than simply relying on the old faithfuls.

The Modi government has also shown it does have a medium-term vision. The Goods and Services Tax, Insolvency and Bankruptcy Code, and Account Aggregator setup are a few examples of big reforms that have long gestation periods before they actually show results. Making services the prime focus could be another.

The argument here is not to dissuade the government from boosting India’s manufacturing capabilities. There’s little doubt that needs to be done for our economic and geopolitical security. However, a lot has been written about how, no matter how much we try, we will not be able to replace China as the factory of the world.

So, in that sense, Atma Nirbhar Bharat needs to gel much better with Make in India. We need to ensure we import less from countries like China, but we shouldn’t devote such overwhelming attention and resources to trying to compete with it on merchandise exports.

Let’s look at this another way. The Make in India campaign was launched in September 2014. Since then, the share of the services sector in India’s GVA (gross value added) has increased from about 48 per cent in 2014 to a little over 57 per cent in the first half of 2022-23. This is what the services sector has done without being the primary focus of the government. Imagine what it can do if it does become the focus.

It’s time for the Modi government to refocus its attention from Make in India to ‘Service in India’—or some other pithy slogan the government is so good at coming up with. We should strive to increasingly ‘make’ for ourselves, but also increasingly ‘service’ the world.

Views are personal.

(Edited by Prashant)

Source: The Print