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Sumant Sinha Image

Recently, I had the good fortune to judge two MBA student activities, which I found were quite interesting. The first event was part of a national business school debate competition called Acumen. The topic of the debate was ‘Manufacturing, and not services, is the true measure of the health of the economy.’ The debate pitted the south zone winners, IIM Kozhikode, versus the west zone winners, Symbiosis. The second event was a business plan contest at IIM Ahmedabad’s Confluence, where MBA students were asked to come up with a high impact, multi-billion dollar business plan.
Participation at both events was spirited, competitive and of a high quality. But that is not the only reason why they were interesting. In the Acumen debate, the side speaking for services appeared to have the tougher task. It is recognised that India jumped straight from an agriculture- dependent economy to a services-dominated one. But this does not mean India has somehow become a developed economy, in which services typically tend to account for almost 60% of the economy’s output. All it means is that India has had to sidestep one important phase of our development process, because the government was not able to create an enabling environment through deregulation of the license raj, the creation of infrastructure, correcting the inefficient tax system, freeing the financial markets and reducing interest rates, thereby increasing the ability of people to invest in manufacturing.

Services, on the other hand, it is well recognised, were never under the stern gaze of our government and so, could develop unhindered. In addition, infrastructure was somewhat less important for the delivery of services, taxes were light, if at all, and regulations were less important. This explains the rapid development of our entertainment, software services and business process outsourcing sectors.

But now the manufacturing sector is showing signs of growth. These green shoots need to be nurtured and developed, for, the sector is beginning to create jobs and emerge from its India- focused, tariff-protected, China-will-kill-me mindset. We are discovering that all else being equal, our costs are not much higher than in China—labour costs are roughly the same, cost of capital has been aligned. Yes, Chinese companies do have advantages of scale and lower infrastructure costs, but that can be overcome by more capable management, smarter systems and processes to some extent. The manufacturing sector in India has now clearly begun to capture the imagination.

In the IIM Ahmedabad business contest, all shortlisted plans were focused on domestic market opportunities. The top three were all geared towards infrastructure buildout. While one dealt with creating a cold chain for agri-products, another envisaged creating a personalised mass rapid transport system, using magnetic levitation technology. The third dealt with generating power for Indian villages using biomass derived from special plantations set up for this purpose in rural areas.

Interestingly, the common theme was improving India’s infrastructure, even though each tackled a different sector such as agriculture, power and transportation. While this partly reflects the state of our poor infrastructure, it also throws up opportunities for future investments. On a per capita consumption basis, in almost every sector that one can think of, India inevitably ranks in the bottom left corner of the chart. While on the one hand this shows the distance we have to traverse to provide our citizens with adequate living standards, it is also a pointer to the sources of future growth of the economy.

• Thanks to past policy, India’s investment in manufacturing was stunted
• Services will still contribute, but we can’t skip this development phase
• More, with our need for jobs, all sectors must fire at the same time

Our future growth will be driven by the manufacturing sector and infrastructure buildout. Services will naturally continue to contribute, but the incremental kicker to our growth rates will come from manufacturing and infrastructure development. I do not think India will miraculously somehow skip the manufacturing phase of our economic development. In a way, we cannot afford to either, because our population growth is so intense and our unemployment so acute, that all parts of the economy have to fire at the same time. As FDI investors look to diversify their China exposure, as Indian companies get more confident about their global expansion, as infrastructure buildout takes off, India’s manufacturing and infrastructure sectors will begin to drive India’s economic growth more substantially.

Source: The Financial Express