This could hurt India's growth story

Thu, 16 Sep Pre-Open

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Indian economic forecasters are a blessed lot. They don't have to fiddle around with their spread sheets a great deal when it comes to GDP forecasting. A growth in the region of 7%-8% has come to be known as India's birthright. It cannot possibly deviate too much from this number at least in the foreseeable future.

However, such complacency could well prove to be dangerous. Especially given the state of India's manufacturing. It should be noted that India's growth is not typical of other emerging nations. It indeed has some unique features to it. None so unique than the fact that India seems to have completely bypassed a revolution of sorts in manufacturing. In other words, services form a much greater percentage of its GDP than manufacturing.

And therein lies India's biggest problem. Goldman Sachs predicted a couple of months back that India will add a whopping 110 m people to global workforce by 2020. This is the highest for any nation. It will also leave China in shade whose labour force will increase by only around 15 m people.

By the looks of it, this is indeed the opportunity of a lifetime for India to take its GDP and thus the standard of living of its population to a completely different trajectory. But this does not seem possible without a credible manufacturing plan. As per the Wall Street journal, India's services sector might roughly absorb only around 40 m people out of the 110 m. Thus, it goes without saying that the rest of the job seekers will have to be either absorbed by agriculture or manufacturing.

India's agriculture sector, we believe, is already overburdened. Hence, it seems very unlikely that it could absorb still greater workforce in the coming future. Infact, we wouldn't be surprised to see people coming out of the same and moving into other sectors. The onus of absorbing the greatest percentage of India's incremental workforce will thus fall on the manufacturing sector. And this is where India's growth story will either be made or it will come apart.

Is India's manufacturing sector prepared to absorb workforce on such a large scale? Looks highly unlikely. And even if it does, it appears as if it is going to do a very poor job of it. This is because majority of India's workforce in the manufacturing space is concentrated in the small and medium enterprises (SMEs). And these are not exactly powerhouses of productivity. Furthermore, archaic labour laws and strict regulations are not allowing these SMEs to grow big enough and take advantage of India's huge demographic dividend.

This sorry state of affairs has left Indian manufacturing in a very uncomfortable position. Here, the middle layer is hugely conspicuous by its absence. We either have capital intensive and technologically very sophisticated large manufacturing firms or we have low productivity harbouring SMEs.

It is obvious that in order to have more equitable and sustainable growth, Indian manufacturing will have to undergo a sea change. Unfortunately though, there are very few signs that such a change is indeed coming. If it doesn't soon enough then we risk underutilising the tremendous power of our demographic dividend. And achieve only a pale shadow of what we possibly could have.