Wednesday, February 6, 2013

India's manufacturing sector paradox

Arguably India's biggest economic challenge is job creation, specifically in the transition of the current more than half of workforce working in agriculture. Across the world, such labor market transitions have been achieved through manufacturing.

The McKinsey Global Institute has a recent report which explores the state of global manufacturing. It shows that India's share of global manufacturing has been rising fast over the recent years.

Manufacturing share of GDP was around 13% in 2010.

The MGI report has a graphic of the typical trajectory of manufacturing share of GDP, growing as economy develops and declining as economy falls. 

The graphic below shows the growth trajectories of manufacturing's share of total employment. But in India's case, is there a trend of the curve already starting to move downward.

The latest figures on the Indian economy shows that manufacturing share of both employment and gross value added has been declining. They averaged 11.1% and 15.5% in the 1999-00 to 2004-05 period, and declined to 10.5% and 15.3% in the 2004-05 to 2009-10 period. The compounded annual growth rate (CAGR) of employment and gross value added in manufacturing was minus 2.29% and 7.85% in the 2004-05 to 2009-10 period. In other words, even as manufacturing grew, its pace of employment creation fell. Answering this paradox is critical to satisfactorily addressing India's great jobs market challenge.

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