Why services alone won't work for India: Sanjeev Sanyal on the manufacturing gap

Economist Sanjeev Sanyal has said India must expand both manufacturing and services over the next few decades, arguing that a country of 1.4 billion needs "the whole array of things" - from agriculture and construction to electronics, pharmaceuticals and shipbuilding - to secure long-term growth and strategic resilience.

Speaking on TheOddCastShow podcast, Sanyal, who is a member of the Prime Minister's Economic Advisory Council, said India became a services-driven economy earlier than most nations because of historical constraints on manufacturing and the rise of exportable digital services.

Asked whether manufacturing or services will dominate the next 10, 20 or 30 years and what is good for the country, Sanyal replied: "In a country which is as big as ours, I don't think you can do one and not the other. It's not the case that we'll do only manufacturing. We have 1.4 billion people, about a billion of those are in working age or shortly will be. So, we need the whole array of things which will include agriculture, construction, manufacturing and other utilities. It'll also have services."

He said India had become a services-driven economy earlier than expected because of both historical restrictions and technological timing. "There are two reasons for this. First, our infrastructure and red tape environment system was much more attuned towards basically restraining our good sector. So when we began to open up in the '90s, it took us a long time to get the infrastructure up there. So, it turned out that we expanded into services because there were lesser restrictions there. And the second reason is that we happened to be going through a high growth phase at a time of history when services became exportable." 

Sanyal said this mix was not a problem, but added that India must build a scale manufacturing base. "We have become heavily dominated by services. I have no problem with that. But I do not think it is healthy for India not to build out a manufacturing sector," the economist said. 

He cited electronics and pharmaceuticals as areas of proven capability, and then pointed to shipbuilding as a critical, underdeveloped sector. "There are areas where we can compete. I'm quite confident and we are demonstrating that in electronics. We are world-class pharmaceuticals. And, now we are trying to build out other sectors. I'll give you the example of shipbuilding."

He argued that India's dependence on foreign ships was a strategic vulnerability. Shipbuilding is a sector where the country should be doing very well, the economist said. "We have a long coastline. We ourselves have a need for ships. But 95% of our goods imports and exports are essentially done on foreign ships. Now this is a huge vulnerability because imagine a situation where we are at war and or we face sanctions - and we end up essentially 95% of our goods can't go in and out because we are dependent on foreign ships."

He added that India's trade flows make it functionally similar to an island economy: "I keep telling people that from an economic perspective, we are actually an island. Because we don't trade with Pakistan at all and with China although we trade, we do not trade with the part of China that we have a border with. So when you're looking at India, the entire goods trade basically goes in and out by sea. We are as much an island nation as Britain or Japan from an economic perspective."

Sanyal said India's current merchant fleet size is inadequate and that ships is something that the country should focus on. "India only has 481 ships of any size for doing trade. That is just too few. And just to put it in context, China has 6,000 and and we hardly build any ships in this country."

"This is a strange situation because we actually have the technology for building ships. So not only do we need ships, we actually have the technology for building ships. There are very few countries in the world that can build nuclear submarines. We can build them. There are very few countries in the world which can build aircraft carriers. We know how to build them. But for some reasons we don't build tankers which are much simpler to build."