Manufacturing versus services: It’s not one or the other

livemint.com:

An economy produces two broad types of output: farm and non-farm. The non-farm sector comprises industry and services. As the economy develops, their expansion drives economic growth.

Whether the manufacturing or services sector grows faster depends on the policy environment, domestic and global demand, and the sector’s comparative advantage. In recent decades, services have expanded rapidly in several developing countries, including India, followed by construction, with limited manufacturing expansion. In the early 1980s, the share of services in India’s economy was around 40%.

In 2022-23, it was 58%. Government policies in India have been more favourable to services. First, labour laws in services are less cumbersome.

Second, highly skilled services, like in the information technology (IT) sector, depend less on physical infrastructure such as roads and ports for production and delivery, and India has been a laggard in such infrastructure. Third, business and environmental permits are easier to obtain in services. Fourth, land acquisition costs are lower as less is needed.

For sectors such as IT, the policies of other countries, especially of the US, have also helped. Khanna and Morales (2021) show that the US’s H-1B programme induced Indians to opt for computer science occupations. It helped drive a shift in production from the US to India, aiding our IT industry’s growth.

There is, however, a catch in terms of the level and distribution of welfare gains when the services sector expands. Among major Indian states, Bihar, with the lowest per-person income, has one of the highest shares of services in its state economy. Services form just over half the economy in Maharashtra and West Bengal, but the former’s per capita