India cannot grow into a major economy on services alone. Since the industrial revolution, no country has become a major economy without becoming an industrial power.
Arvind Panagariya, a professor of Indian political economy at Columbia University, USA, puts the issue clearly. He noted that some have argued that India can focus on IT, grow rapidly in services, skip industrialization, and yet transform itself from a primarily rural and agricultural country into a modern economy. He dismissed such ideas as “hopelessly flawed” and “far-fetched”.
“The right strategy for India is to walk on two legs: traditional labour intensive industry and modern IT. Both legs need strengthening through further reforms ….”
Industrialisation cannot take off without adequate infrastructure: By one estimate, economic losses from congestion and poor roads alone are as high as US$4 to 6 billion a year. Cost of most infrastructure services in India is about 50% to 100% higher than in China. The average cost of electricity for manufacturing in India is about double that in China; railway transport costs in India are three times those in China. China has spent over eight times as much as India on its infrastructure.
If there are budgetary constraints, the answer is to privatise these infrastructure projects.
Job creation is much slower in India and will continue to remain so until India’s infrastructure is brought up to date to attract the many manufacturers who will come to use India’s low cost workers and efficient services.