11 January 2024 – The Hindu

Economic Development Situation in India

What obstacles does India’s growth trajectory currently face?

Imagining a New Economic Future for India:

• India’s growth paradigm comes under scrutiny in the book “Breaking the Mould: Reimagining India’s Economic Future,” written by Raghuram Rajan and Rohit Lamba.
• It challenges the notion that, in contrast to past trends seen in established and industrialising nations, putting the expansion of the service sector ahead of that of the industrial sector can result in sustainable development.

Challenges Facing the Manufacturing Sector:

• India has struggled to increase the manufacturing sector’s economic contribution; growth has stagnated at or below 20%.
• This raises questions about India’s economy’s viability as it moves from an agrarian to a primarily service-based one, skipping a normal developmental stage in the process.

Growth Potential for Global Business Services:

• Rajan and Lamba see a chance for India to capitalise on the global expansion of commercial services, which is made possible by advanced information technology.
• India may become a major player in the growing outsourcing of business services by multinational corporations, given that it can solve the issue of scalability.

Youth Aspirations and the Employment Crisis:

• India is facing a crisis in employment, especially for young people (15–24 years old), where the jobless rate is over 40%.
• Young workers have high expectations, and the nation needs to act quickly to encourage private companies to create significant jobs.

Challenges of the Service Sector Model:

• The modern Indian service sector is growing in high-tech services, but it is having trouble creating jobs overall, especially in low-skill, low-value services.
• The industry’s division begs the question of whether it can produce revenue streams that support young people’s goals.

Lack of Skills and the Quality of Higher Education:

• The service sector-led model in India is seriously challenged by the lack of skilled labour. Even though 2.2 million STEM graduates have been produced, most of them are regarded as unemployed because of insufficient training.
• In order to address this and provide a qualified workforce for higher human capital sectors, continued investment in higher education is needed.

PLI Programme and Direct Employment Creation:

• The Production-Linked Incentive (PLI) programme is perceived as an effort to draw companies to establish production facilities in India in an effort to address the current employment crisis.
• However, there are questions over the scheme’s production-linking rather than employment-linking nature, as well as issues regarding the viability of firms following the termination of incentive schemes.

The necessity of a thorough economic approach:

• A comprehensive strategy that incorporates concepts from the manufacturing and service sectors is needed to address India’s employment crisis.
• Beyond PLI programmes, it is imperative to encourage private business to grow, which necessitates changes to labour and land regulations. Even though these improvements are fiscally neutral, political opposition could arise.

The Need to Address Demographic Challenges Immediately:

• India’s demographic dividend—with a median population age of 28—could become a burden if swift and extensive action isn’t taken.
• Sustainable economic growth requires a trifecta of increasing investment in higher education, regulatory reforms, and the creation of high-value jobs.

What Are India’s Manufacturing and Services Sector Growth Drivers?

Manufacturing Industry:

Increase in Government Investment:

• Significant funding, totaling Rs. 2,403 crore for the manufacturing of electronics and IT hardware and Rs. 757 million for the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME – India) in 2022–2023 was provided by the Indian government in its most recent budget.
• The purpose of this calculated bet is to support the manufacturing industry and promote the development of electric vehicle technology.

Increasing Market Share:

• India has all the necessary components for a major industrial push: a sizable domestic market, a massive pool of semi-skilled labour, government programmes like Made in India, and large investments.
• India is now competitive on a global scale thanks to government incentives including free land for base establishment and a constant, round-the-clock electricity supply.

Strong Domestic Demand:

• The Indian middle class is expected to account for 17% of global consumption by 2030, which means the home market is expected to develop significantly.

Industry 4.0’s Potential for Global Hubs:

• India’s industrial sector is moving quickly towards Industry 4.0, which is defined by data analytics and linked processes.
• Because of their emphasis on research and development, the nation’s businesses are already leaders in the world market, especially in industries like medicines and textiles.
• The focus on fields like robotics and automation gives India much more potential to emerge as a global centre for innovative manufacturing.

Sector of Services:

Trade Surplus of Services as a Counterbalancing Factor:

• In the past, the significant shortfall in exports of goods has been partially compensated for by the ongoing surplus in services trade with India.
• During the 2020–21 fiscal year, this surplus increased to an impressive $89 billion.
• The services trade surplus has the potential to increase much higher with targeted government initiatives and renewed emphasis, potentially eliminating the deficit generated by goods exports.

Encouraging the Knowledge-Based Economy Transition:

• An important factor driving India’s transition from a “assembly economy” to a “knowledge-based economy” is the services industry.
• The nation’s economic development and competitiveness in the global market depend on this shift.
• This shift is largely driven by the surplus in the services sector, which highlights the growing significance of knowledge-centric operations.

The programme for workforce development called Skill India:

• The goal of the Skill India programme is to boost India’s standing internationally and assist the expanding services sector.
• By 2022, nearly 40 crore youth were to receive thorough training in skills that are important to the market under this programme.
• The government wants to create a workforce that can meet the demands of the changing knowledge-based and services-driven economy, thus it is investing in skill development.

What Actions Can Be Done to Increase Inclusivity in the Growth?

Employee Engagement and Development:

• India has a large and young population that offers a huge potential workforce. To fully realise this potential, though, issues like increasing employment, raising the standard of education, developing skills, and encouraging women to enter the labour force must be resolved.

The Role of Private Investment in Economic Growth:

• Acknowledging private investment as a crucial catalyst for economic expansion, the Indian government has taken steps to improve business accessibility, lower corporate taxation, provide credit guarantees, and entice foreign direct investment. To further facilitate company operations, further reforms are necessary, especially in the areas of labour, land, and logistics.

Increasing International Competitiveness:

• India has to diversify its exports, improve its infrastructure, encourage innovation and digitization, and integrate with regional and international value chains in order to increase its competitiveness in the global market.
• Even with initiatives such as the Phased Manufacturing Programme (PMP), Made in India, and Public-Private Investing (PLI), more trade liberalisation and regulatory streamlining are required to ensure fair competition between domestic and foreign businesses.

Ambient Sustainability and Climate Objectives:

• In order to meet climate change targets, India has committed to lowering its carbon intensity and raising its capacity for renewable energy.
• While green bonds help finance environmentally beneficial projects, more work needs to be done to protect India’s development and well-being in order to address environmental issues like air pollution, water scarcity, waste management, and biodiversity loss.

Stability of the Economy and Financial Development:

• Maintaining a low and steady rate of inflation encourages investment and trust in India. It is imperative to give sufficient liquidity and credit availability top priority, particularly for small and medium-sized businesses.
• Savings and investing will be made easier by the continued growth of financial markets and institutions.

International Trade Agreements and Integration:

• India can improve its overall competitiveness, diversify its exports, and lower trade obstacles to fortify its international economic links.
• In order to benefit Indian goods and services, regional and bilateral trade agreements present chances for market expansion.

Innovation and Sectoral Growth:

• India’s long-term development depends on fostering innovation, growth, and jobs in important industries like manufacturing, services, agriculture, and renewable energy.
• Economic advancement can be fueled by a proactive policy framework and a strategic concentration on certain industries.

Opportunities for Diversification in High-Growth Industries:

• It is imperative to investigate options outside of the prevailing information technology and IT-enabled services in order to improve economic prospects.
• For example, Indian lawyers stand to gain greatly from the opening up of the domestic legal services market, which offers them lucrative chances in America, Europe, and Australia.

Spotting Potential Growth Areas in the Service Sector:

• Diversification is emphasised, and focus should be placed on areas that show promise, like higher education, hospitality, and medical tourism.
• The goal of this tactical change is to extend economic growth beyond of the boundaries of conventional industries.

Promoting Competitiveness via Reform of Subsidies:

• The government is in favour of the services sector giving up its reliance on government handouts, claiming that this will increase firm competition.
• Redirecting subsidy monies to individuals who require them more helps optimise the overall economic environment for long-term growth.

Way Forward:

• India’s economic prognosis is positive for the fiscal year 2023–2024 because of government initiatives that have formalised the economy and increased financial access to underserved parts of the population. A systematic approach encompassing trade, industrial, institutional, monetary, and fiscal policies is necessary to maintain this upward trajectory. By putting this all-encompassing plan into practice, India’s enormous economic potential may be realised, promoting steady, steady progress and moving the country closer to wealth.