CREATING A MANUFACTURING DRIVEN ECOSYSTEM TO ACCELERATE ECONOMIC GROWTH

Posted by : Abhinav Kumar, CEO

The country has huge untapped potential to become a global manufacturing hub, but economic growth has been primarily driven by the services sector growth for decades. In contrast, growth in manufacturing has been abysmal despite the availability of cheap labour and other resources.

While the rapid growth of the services sector has served the nation well right from the 1990s, the pandemic has shown why the nation needs to shift its focus on boosting the crucial manufacturing sector.

Industrialization is viewed as the most important engine of economic growth. The special characteristics attributed to the manufacturing sector can be interpreted in many ways: rapid technological changes, economies of scale, and easy integration into global production networks. Additionally, a number of investigators have confirmed that transformation from agriculture to manufacturing, and further from manufacturing to services is the process of economic development. The reason for the strong relationship between industrialization and economic development is that the manufacturing sector is the driver of productivity growth. This, in turn, is the lifeblood of technological development. Therefore, it was once generally accepted that “since the industrial revolution, no country has become a major economy without becoming an industrial power.

This is whence the manufacturing sector has played a stellar role in growth and development of any industrialized country. The emerging and developing countries place manufacturing at the driver’s seat in their journey of economic growth. It has been the backbone of all developed and developing nations. It is where the research starts, where new technologies are born, where scientists and engineers and others are challenged to develop new and better processes, products and technologies.

The manufacturing sector is the main source of technology-driven productivity growth in modern economies. It is not much of an exaggeration to say that manufacturing is what has made the modern world. Thanks to the fact that the manufacturing activities lend themselves much more easily to mechanization and chemical processing than do other types of economic activities, the manufacturing sector has been the main source of productivity growth throughout history.

In order to accelerate economic growth, it is essential to create a manufacturing driven ecosystem. An ecosystem is formed when different entities come together in meaningful ways to solve shared challenges and meet shared objectives. Effective ecosystems enable a cumulative “network” effect for participants and create value greater than the sum of parts, driving higher performance and creating exponential results.

The manufacturing sector has been the „learning centre‟ of capitalism in technological terms. Owing to its ability to produce productive inputs, what happens in the manufacturing sector has been extremely important in the productivity growth of other sectors. The increases in agricultural productivity that we have seen in the last century and half would not have been remotely possible without the developments of manufacturing industries producing agricultural machinery, chemical fertilizers, pesticides, and increasingly genetic engineering.

The rapid increase in the productivity of services like logistics and retail in the last couple of decades were also made possible by manufacturing industries producing more efficient transport equipment, computers, and mechanized warehouses.

The manufacturing sector has also been the source of organizational innovation. Productivity growth in the last two centuries has been driven not just by technological changes but also organizational changes, most of which originated in the manufacturing sector.

The manufacturing sector, producing physical and non-perishable products, has higher readability than agriculture and, especially, services. At the root of the low tradability of services lies the fact that many services require their providers and consumers to be in the same location.

It is very significant to remember that productivity growth in other sectors of the economy is a result of innovation in the manufacturing sector. The world’s most productive farms are heavy users of chemicals, fertilizers, pesticides, and agricultural machinery. And the world’s most productive service firms rely on top computer technology, transport equipment and, in some instances, mechanized warehouses.

The importance of the manufacturing sector for a country’s overall infrastructure for innovation cannot be highlighted enough. Even in advanced countries, where manufacturing production is supposed to be on the decline, the bulk of innovation happens in the manufacturing sector. Every economic activity stimulates another economic activity. So, just as manufacturing stimulates the provision of services, services stimulate manufacturing production. But evidence shows that manufacturing has a stronger “multiplier effect” than services. Economies of scale are more easily achieved in the manufacturing sector than in the service sector. This is because manufacturing activities lend themselves more easily to mechanization and chemical processing.

An increase in manufacturing sector growth rate will positively affect the growth rate of the services sector, in both the short-run and long-run meanings. Nevertheless, the development of the manufacturing sector promotes the incentives of savings, as well as accelerates the pace of technological accumulation. Compared with other sectors, the manufacturing industry has a higher demand for capital and investment, thus providing special opportunities for both capital and technological accumulation. It is the manufacturing sector that enhances the utilization of domestic
human capital and institutions. So, while it is true that some services are increasingly contributing to economy-wide productivity growth, these services cannot thrive without a vibrant manufacturing sector. Governments in high-income countries shouldn’t let their factories rot away, and governments in developing countries are wrong to think that they
can skip the industrialization phase.

Manufacturing sector also plays a significant role as an employment generator. Among all sectors, manufacturing distributes wealth most equitably among the work-force; hence is a key factor to pull people above the poverty line.

In the nutshell, manufacturing industries help in modernizing agriculture; which forms the backbone of our economy. Apart from this, they also reduce the heavy dependence of people on agricultural income. This becomes possible because of creation of new jobs in secondary and tertiary sectors. Development in the industrial sector also helps in eradication of unemployment and poverty. Export of manufactured goods expand trade and commerce and brings in much needed foreign exchange. It would be highly incorrect to say that a country with high level of manufacturing activities becomes always attain prosperity.