Sunday, January 23, 2011

The Leap over Manufacturing

The biggest change that LPG brought to the Indian economy was the rapid structural change. From a country whose exports were agricultural products and agriculture formed a huge part of the GDP, India now primarily exports services (although we also export agri-products) and the tertiary sector accounts for over 50% of GDP.

That's not to say that it's all s rosy, of course. Even today, 60% of the population is engaged in agriculture (more on that later). But the wonders that services has done to our nation cannot be missed. Consider the case of Hyderabad, a once laid back little town that could bast of little more than biryani. Today, it is one of India's top IT hubs, with MNCs from Microsoft to Facebook to Infosys participating in re-shaping it. People who were once accustomed to adding an hour to their scheduled meeting time now had to travel far and early to get to work on time.

Services - 'trade invisibles' - now acts as a major offset to the trade deficit, bringing it down to levels low enough to be managed by minor forex transactions or a god surplus in the capital account. Services have brought in much-needed foreign exchange but have not created employment on the scale expected, probably because of the skilled nature or work. Still, the revolution has brought unprecedented prosperity to the middle class, who in turn have led the growth story.

A strange aspect of the revolution is the leap over manufacturing. Normally, a country moves from agriculture to manufacturing and finally to services. That's what China is doing right now, as in South Korea. But India has a low manufacturing base (although it is catching up) and Indian products are not exactly world-renowned. The popularity of Indian manufacturing is small before that of Indian services.

Indeed, LPG actually created jobless growth (or created fewer jobs than expected, depending on your economic point of view). But today, thanks to an expansion of the private sector and stable macro-indicators, India is all set to fill in the gap. The best indicator of this is the ever-increasing fraction of Engineering products being exported from India or being used here itself.

20 Years of LPG saw a boom in Indian services, IT in particular. Now, we are ready to go back and pick up manufacturing too. And this time, there will be jobs.

No comments: