Mr. Pronab sen

Born 1952 in New Delhi, India. B.A.(Hons) in Economics, University of Delhi (1972); M.B.A. (1974) and M.A. in Economics (1975), George Washington University; Ph.D. in Political Economy (1982), Johns Hopkins University. Management consultant, Washington D.C. (1974-1977). Taught at Johns Hopkins University and Delhi School of Economics (1977-1983). Indian Council for Research in International Economic Relations (1983-1987). Economic Research Unit (1987-1990). World Institute for Development Economics Research, Helsinki (1986/1989). Economic Adviser, Department of Electronics (1990-1994). Principal Adviser, Perspective Planning, Planning Commission (1994-2007). First Chief Statistician of India and Secretary, Ministry of Statistics & Programme Implementation (2007-2010). First Principal Economic Adviser, Planning Commission (2010-2012). Currently Chairman, National Statistical Commission.

What indeed is the trillion dollar question? The “Make in India” slogan is about manufacturing, and the question could well be how soon can Indian manufacturing grow to a size of $ 1 trillion. Most people, and I suspect many economists, would be surprised to learn that the turnover of the Indian manufacturing sector is already well in excess of $ 1 trillion (nearly $1.5 trillion in 2014-15).

“Surely this cannot be correct”, I hear you say. “After all, the entire Indian economy just crossed over the $ 2 trillion mark in 2014-15, as has been widely reported in the papers, and manufacturing is certainly not 75% of the economy.” True enough, but there is really no contradiction at all. The size of an economy is measured by the Gross Domestic Product (GDP), which is actually a measure of value-added and not the value of output. The total value of output in India was just over $ 4 trillion in 2014-15, i.e. double that of GDP. By this measure, the share of the manufacturing sector is 38%.

While this sounds more reasonable, it still does not quite square with the view that manufacturing is a relatively small part of the Indian economy. The figure that most people are familiar with is that manufacturing accounts for 18% of GDP. True again: the share of manufacturing value-added in total value-added (GDP) is indeed 18%. But think of the implication – a sector which accounts for 38% of total value but only 18% of the total value-added must surely be adding relatively little value compared to other sectors of the economy. This is in fact the case: for the economy as a whole the value-added to value of output ratio is 46.5%, while for manufacturing it is a mere 22%. There are some sectors, such as agriculture, financial services, professional services and public administration, where this ratio is significantly above 70%.

Why then all this fuss over manufacturing? Why at all “Make in India”? The answer lies in fact in the 78% of its value which it buys from the other sectors. No othersector has backward linkages which come even remotely close to manufacturing – thus the term ‘engine of growth’. There is no doubt that for sustained rapid growth, manufacturing has to be at the centre of the strategy. But great care needs to be taken in setting targets for the sector either in terms of its growth rate or its share in GDP. In the Indian discourse, targets such as 12% annual growth or a 25% GDP share by 2025 are blithely thrown around without fully exploring its implications, and thereby its feasibility.

Consider first the 12% growth target. It is indeed true that if India is to grow at 9% per annum, manufacturing has to grow at least at 12%. This was conclusively established while designing the Eleventh Five Year Plan. The 25% GDP share in 10 years is consistent with this relationship. For such a target to be achieved, manufacturing growth rate has to be 1.4 times the GDP growth rate. However, it was also noted in the Plan that this level of manufacturing growth cannot be achieved and sustained without exports growing at 20% plus. Why is this so?

Here then is an aphorism: “You earn from the value-added, but you spend on the full value.”

In other words, the answer lies again in the low valueadded ratio in manufacturing. Since the additional income (value-added) generated in the sector can absorb only 20% of its additional output, either all other sectors must generate sufficient surplus income to absorb the rest, or it must be exported. The former is impossible, which leaves the burden of adjustment to the latter. This then raises the real trillion dollar question: “Will the global economy sustain a 20% annual growth of Indian exports?”