Opinion Raghuram Rajan and Rohit Lamba are wrong. India should not give up on manufacturing

As a policy analyst from China with some first-hand experience in the country’s economic planning and industrial regime, a few thoughts that popped in my head may turn out helpful and relevant in India’s case.

In the above-mentioned book, the authors celebrated that India had diverged from the standard development model, the one followed by China — from agriculture to low-skilled manufacturing, then high-skilled manufacturing and, finally, services — by leapfrogging intermediate steps. They also argue that India must not turn back now, as pursuing a manufacturing-led growth path is a dead end.

Instead, they believe, India should focus on building a nation based on the services sector. They provide a broad array of points to support this argument, which can essentially be summarised in three key ideas.

First of all, the value-added in the manufacturing sector is too low. The authors refer to the “smile curve” theory, which posits that in the value chain, processes like design and sales, in general, provide much higher value-added than manufacturing itself. Hence, India no longer needs to focus on the manufacturing sector and should instead leap to the high-value-added services sector.

Second, the global manufacturing arena is very crowded already. China has effectively dominated global labour-intensive manufacturing, and the remaining market space is being divided by countries like Vietnam, Bangladesh and Mexico. Therefore, even if India attempts to enter this space, it would be an uphill battle. More importantly, securing a foothold will not guarantee India’s industrial upgrading in the future. Consequently, the authors argue that the Modi administration should leave its manufacturing ambition alone and shift its policy focus to services instead.

Third, a globally competitive manufacturing sector demands a highly skilled workforce. The majority of Indian workers today lack the physical and educational qualifications required for world-class manufacturing. Many are not even qualified for basic jobs on the factory floor. Thus, they suggest that India should concentrate on the human capital of a relatively small qualified workforce, capable of participating in high-end international division of labour. Thereby, more benefits will trickle down to the larger population.

While Rajan and Lamba are respected intellectuals in India, renowned for their global perspectives, their prescriptions appear flawed, if not misleading. Ironically, their book is titled Breaking the Mould, but the authors themselves seem to remain trapped in their own views and exhibit a strong preference for the shining tip, instead of the masses.

I seriously doubt that the high-end services may thrive independently of a healthy corresponding manufacturing sector. Take the US as an example; in Manhattan, shining downtown businesses like banking, law, marketing and management consulting all depend on the substantial profits generated by messy industries such as energy, defence, pharmaceuticals and aviation, be it domestically or abroad. Without a solid industrial profit base, how long can business sectors remain prosperous?

In an era in which industrialised countries of the West dominate the global value chain, India’s services sector could certainly benefit from outsourcing. But what if the West no longer favours India’s services exports, in the same fashion it turned against China’s manufactured goods? Remember, Trump’s tariff threat against India may extend to the services sector as part of the bargain.

Moreover, the “smile curve” theory is deeply problematic. Even in the context of modern management consulting, it has been criticised for its disregard of economic statecraft in favour of commercial profit, which has led to the hollowing out of industries in Western economies. To my surprise, some renowned Indian economists still base their policy advice on such a theory.

Rajan and Lamba’s examples clearly illustrate their disconnect. For instance, they point to Apple’s market value being about 50 times that of Foxconn, and wonder why India does not emulate Apple by focusing on R&D, design, consulting and sales, instead of basic manufacturing like Foxconn. This highlights just how detached India’s economic experts are from the factory floor and economic operations in the real world.

Now finished with the book, I am struck by the realisation that Prime Minister Narendra Modi’s government, despite its rough, heavy-handed and crony capitalist economic statecraft, has got the big-picture strategy right. What is puzzling, however, is that even if the Modi government has been correct in prioritising manufacturing, little meaningful inroads have been made into India’s manufacturing future despite high-sounding slogans and acronyms.

While the hope was to raise the share of manufacturing in the Indian economy to 25 per cent by 2025, it unexpectedly decreased to 14.3 per cent last year. That’s why the Modi government has been harping on increasing services exports. Merchandise exports have plunged and India has been losing to Vietnam and Malaysia in the China Plus One formulation as well. After all, if India didn’t focus on services, its economy would have been in even worse shape today.

Developing manufacturing is the best approach for super-populous economies like India and China to survive, grow and thrive on the global stage. That Rajan and Lamba’s logic is flawed does not automatically prove what the Modi government has been doing is flawless. To do the right thing, strategic vision alone is not enough. One also requires a country to have the capacity to implement such a vision.

The writer is among China’s new generation of India watchers. He has worked for several years as an analyst at China’s influential National Development and Reform Commission (NDRC) and is currently on leave as a visiting fellow at Harvard University