Covid-19 pandemic has India scrambling to boost its manufacturing sector

For decades, the services industry powered India’s growth and tempered unemployment in the world’s second-most populous nation. The coronavirus pandemic is now leading to calls for an urgent rebalancing of the economy toward manufacturing.

High-contact services jobs from airlines to hotels and malls to multiplexes were the first to collapse amid protracted lockdowns aimed at containing the virus. The decline of the sector, which typically accounts for 55% of the economy, is forcing people to seek work on rural farms or in the undersized manufacturing industry.

Ramesh Jakhar, 55, is among those hit. He used to drive a bus for the Sam International School in New Delhi, where he earned 16,000 rupees ($215) a month. Now he tends buffaloes and sells milk after returning to his village near the capital.

“Times are really tough,” said Jakhar, whose unemployed adult son has also returned to their village with his young family. “We’ve been forced to cut back on what we can spend.”

 

Unlike China, which saw workers move en masse from farms to factories, India transitioned into a services economy -- with the sector providing more than 32% of overall employment as of 2020, up from 17% in 1981. At the same time, the share of agriculture in jobs dropped to 42% from 72% and manufacturing has plateaued at 25%.

“India has leapfrogged from agriculture to services, and missed on manufacturing so far,” said Sonal Varma, an economist at Nomura Holdings Inc. in Singapore. “This is a gap we should fix.”

Boosting labor force productivity is the key to faster economic growth for India, which is recovering from an unprecedented contraction brought on by the pandemic. Data due Aug. 31. will likely show gross domestic product grew 21% in the April to June quarter from a year ago, setting the stage for an expected 9.5% full-year expansion.

But India has repeatedly failed to grow its manufacturing base despite demand from a captive market of more than 1.3 billion people. It has instead relied on a flood of imports for everything from heavy machinery to toys. Even Prime Minister Narendra Modi’s ‘Make in India’ initiative to boost manufacturing to 25% of the economy has floundered in the absence of supporting infrastructure and ease of doing business.    

 

Manufacturing has shrunk to about 13% of gross domestic product from a peak of almost 18% in 1995, according to the World Bank.

“There is a need to rebalance via targeted policy within the sectors,” said Arpita Mukherjee, a professor at the Indian Council for Research on International Economic Relations. “We can give incentives to services that have inputs in manufacturing.”

The situation gains urgency given the grim jobs market. More than a year after the first Covid-19 lockdown, the jobless rate is still above pre-pandemic levels and most high-contact service establishments from cinema halls to schools remain shut. With millions of workers mostly in the nation’s vast informal sector facing unemployment or pay cuts, households are limiting discretionary spending.

That’s bad news for an economy in which private consumption accounts for 60% of growth. For spending to be sustained, India needs jobs for its 986 million working-age population, and ensuring productivity will be key to the durable recovery of Asia’s third-largest economy from the pandemic shock.

“India will suffer from some degree of medium to long-term scarring,” said Sanjay Mathur, chief economist for Asean and India at Australia & New Zealand Banking Group Ltd. “Various companies in recreation and hospitality will not be hiring for some time.”

 

The impact of the pandemic will be felt for years. Almost 18 million people in India will be forced to switch to a different occupation by 2030, according to a report by the McKinsey Global Institute. 

To create new jobs, Modi is trying to reboot his Make in India plan by offering subsidies to everyone from smartphone to specialty steel makers. Besides, he is simplifying tax procedures to woo global investors.

Still, the job creation push likely won’t come quickly enough for people like Gaurav Kashyap, 31, who earned 50,000 rupees a month taking students to and from school in a hire-purchase van that he’s been forced to surrender. He now works as a security person in New Delhi.

“I sat at home for the first six months of the pandemic with no work,” said Kashyap. “I am hopeful of driving again if schools re-open.”