We have drawn some amount of solace from the latest Q2 GDP growth numbers, which indicate a possible recovery over Q1 from 4.4% to 4.8%. The contribution to growth is more from the farm and services sectors, which is commendable. However, a broader issue is whether or not GDP growth can be feasible at higher levels with the manufacturing sector playing a minimalist role? This issue is serious because the pattern so far has been a growth model that runs on services. These services are almost broadly divided equally across the organised and unorganised sectors with transport (excluding railways), trade and restaurants being mainly in the latter. Growth in these sectors cannot be sustained unless there is high growth in industry—manufacturing in particular as services support business activity.
It is here that it is often argued that India missed one important step in economic transformation where we shifted from an agrarian to service driven economy without really having an industrial revolution. The question is whether there is reason to believe that there has been de-industrialisation in the last two decades?
The de-industrialisation hypothesis can be looked at from four points of view. The first is the growth rate in manufacturing relative to other segments. The second is share of manufacturing in GDP, which will indicate its relative importance. The third is share in capital formation—here one should distinguish between infrastructure and manufacturing as investments in mining or power would not really be classified as manufacturing. Last, in terms of employment have there been signs of migration to other sectors?
If all or most of these are visible, then there is a problem as the diminishing importance of industry is not good for the future of an economy that still has gaps in terms of unemployment, poverty, inequality, growing urbanisation, social amenities and so on.
The accompanying table provides information on these fours aspects of de-industrialisation. The averages for four quinquenniums have been calculated to iron out single year disturbances through extreme numbers.
The four pre-requisites of the de-industrialisation hypothesis can be analysed sequentially. Growth in manufacturing has been cyclical across the time periods witnessing alternately high and lower growth rates in these periods. While this trend is similar to that witnessed in overall GDP growth, the intensity of decline or increase of manufacturing growth has been steeper both ways. Two conclusions may be drawn. The first is that higher manufacturing growth does propel GDP growth,