Overemphasis on services sector

India’s economy is dominated by the service sector which forms the largest share in GDP.  While the service sector contributes 56%, manufacturing sector contributes only 16% to the GDP, as per 2011 data. The share of services has been increasing over the years while that of manufacturing has stagnated . Even though the government has not consciously made policies that led to the increasing share of service sector, the ecosystem for service, especially the IT sector was much more favourable than that for manufacturing and hence service sector has flourished in the recent years.

The absence of enabling support system for manufacturing in the form of infrastructure, power supply, flexible labour laws, etc. can also be termed as its neglect by the government. Manufacturing sector is very important in the sense that itprovides employment to large number of people entering the workforce after education and also those shifting from agriculture.Service sector can only provide limited employment while manufacturing can provide more employment for the same amount of output from both the sectors. For instance, service sector contributes a massive 56% to the GDP but provides employment to only 26% of the workforce, whereas the manufacturing sector inspite of contributing a measly 16% to the GDP provides jobs to 22% of the labour force.

Currently in India, the employment share of agriculture is decreasing  but the workforce is shifting from farm to low productivity employment, instead of finding employment in manufacturing sector which has the potential to provide gainful employment. On top of this, an overemphasis on service sector by the government, even though it is a shorter path to faster economic growth, will not provide enough jobs to the increasing labour force in the future. This can lead to a high amount of unemployment and underemployment which can further lead to social unrest as well.

The experience of other countries shows that the economy first advances from being an agriculture economy to a manufacturing dominated one and then finally to a service economy. India, on the other hand, has directly moved from agriculture to a service economy, skipping manufacturing in between.

But the government has woken up recently and in one of the major initiatives, launched the National Manufacturing Policy in 2011 which aims to increase the share of manufacturing in GDP to 25% and create 100 million jobs in the manufacturing sector by 2025. As a part of this policy, it has announced various National Investment and Manufacturing Zones (NIMZs) along the Delhi Mumbai Industrial Corridor (DMIC) and other areas.

It is expected that the proper execution of these plans by the government and industry in tandem will ensure that India reaps its demographic dividend and does not let it turn into a demographic disaster.

Question for UPSC Mains:
“Overemphasis on services and neglect of the manufacturing sector can turn India’s demographic dividend into disaster.” Comment.

Topics: ,