Manufacturing is key to creating jobs in services

In the last 15 years, the share of manufacturing in the Indian economy has been stagnant at around 16%. Meanwhile, the share of services has edged towards 50%. This has led to experts arguing that services are more important for job creation. Is that true? Mint takes a look

In the last 15 years, the share of manufacturing in the Indian economy has been stagnant at around 16%. Meanwhile, the share of services has edged towards 50%. This has led to experts arguing that services are more important for job creation. Is that true? Mint takes a look.

What’s manufacturing sector’s overall share?

The share of manufacturing in the Indian economy has varied between 14.7% of gross domestic product (GDP) and 16.7% of the GDP, between FY05 and FY20. GDP is a measure of the economic size of a country. As the sector has just kept pace with the growing economy, it has not created as many jobs along the way. Of course, just manufacturing cannot create enough jobs for the 10-12 million individuals who enter the workforce every year in India. In stark contrast, between 2004-05 and 2019-20, the share of services in the economy has gradually increased from 43.5% of the GDP to 50.4%.

Is manufacturing not key to job creation?

“Manufacturing activity leads to the creation of large employment in several service sector areas," writes R.C. Bhargava, chairman of the carmaker Maruti Suzuki, in Getting Competitive—A Practitioner’s Guide for India. The problem is that these jobs are not recorded as manufacturing jobs, as the creation of a job is recorded in the sector it has been created in. For instance, let us say a factory comes up on the outskirts of a city. A lot of small eateries crop up around this factory and these eateries create jobs. These jobs will be recorded in the services sector, but they were created as a result of the factory setting up.

Is there any other auto sector-specific example?

Many Indians employ drivers after buying a car. As Bhargava writes: “A recent quick survey done by Maruti Suzuki reveals that 16% of Maruti car owners use drivers." This is a key example to understand the role of manufacturers in services job creation. For the industry, this proportion of drivers must be higher, as Maruti mostly makes small cars, driven by the owners.

What is the number of jobs we’re looking at?

Bhargava estimates that if we take the whole industry, 18-20% of car owners use drivers. An estimated 10.2 million passenger cars have been sold in India in the last five years. If 18% of the owners user drivers, this means a creation of more than 1.8 million jobs just for drivers. Also, car owners employ individuals to clean their vehicles. This creates part-time jobs. Over and above this, as car sales jump, so do the advertising, financing, insurance, distribution businesses associated with it. Manufacturing of cars thus creates several jobs.

Is there any indirect impact associated?

As Bhargava writes: “The tourism industry has grown with the availability of reliable cars and resorts have sprung up around major cities. The acceleration in the road construction programme is partly due to the large number of cars used for intercity travel." The broader point is that activity leads to more economic activity and this multiplier effect creates jobs. Besides, when activity in one sector increases, it leads to job creation in the other sectors too.

Vivek Kaul is the author of Bad Money.