India loses edge due to failure to build industrial base

16 October 2017

India's failure to build a solid industrial base and its overdependence on outsourcing services made the economy heavily dependent on external environment and the resultant ''upside-down'' economic structure made economic growth also dependent on external forces, says a report in the Global Times based on a Chinese research report.

Even in term of the services industry, outsourcing services have become the core of the sector, making economic growth heavily dependent on the external environment, says a research report published by Liu Dian, assistant research fellow at the Chongyang Institute for Financial Studies, Renmin University of China.

While Prime Minister Narendra Modi  wants India to be manufacturing hub for the world, his `Make-in-India' initiative has not met with much success as not many are willing to come without some extra gains.

India's manufacturing growth has plummeted since Modi took over from 10.7 per cent a year earlier to 1.2 per cent in fiscal second quarter ended 30 September 2017-18 while GDP growth declined to 5.7 per cent - far below the anticipated level of 6.5 per cent.

With outsourcing, and not manufacturing, emerging as the core sector of the economy, the slowdown in GDP growth is worrying for the government as it has no control over the economy now, which is dependent on external demand.

With the world economy in the slow lane and India's traditional partners, including Europe and the US, following a path of protectionism have all combined to pull down economic growth and development of India.

While the service industries may partially replace the manufacturing industry, it can't totally diminish the role of industrial development to the economic growth, says the report.

The report also points out that while India's GDP has grown at a faster rate in recent times, urbanisation rate, which should be closely correlated to GDP growth, did not keep pace.

The "upside down" economic structure may be the core of the problem. The prosperity of the tertiary industry in India is not based on the industrialisation of the country; it is the result of the direct grafting of Western industry onto its small-scale peasant economy. The financial and information technology-based high-end services industry in India has high demand for professional talent, but it cannot absorb a large number of people. Hence, India's GDP growth has not led to significant growth in non-farm employment, says the report.

The high-end services industry has created several developed cities like Bangalore and Mumbai. However, on the vast South Asian subcontinent, these cities are just a few bustling islands. With the gap between cities and the vast rural areas widening, and with inadequate infrastructure, India's huge economy lacks development momentum.

If the Indian government cannot provide jobs for hundreds of millions of rural residents entering the cities through economic reform, if it cannot build a solid foundation of industrialization and bridge the social gap - even if India achieved the world's fastest GDP growth, it would be just a beautiful facade.

Obviously, there is a lack of new economic growth points and that is why although India's GDP is growing rapidly, employment has not followed suit. And the gap could widen if outsourcing industry slackens.

 search domain-b