Economists have divided all economic activities that take place in an economy into three broad categories. In the first category are included all those economic activities that human beings have been performing since the beginning of civilization. These activities are where persons work with different elements of nature viz. agriculture, animal husbandry, fishing, etc. and are called âprimary activitiesâ. In the second category are included those economic activities where human beings work with manmade elements, such as manufacturing and processing. Through these activities, workers add value to natural resources by processing them or by transforming intermediate inputs and components into finished goods. These activities are described as âsecondary activitiesâ. Along with these economic activities, there are others in which human beings make improvements to the state of products and persons through a variety of intangibles. These activities are categorized as âtertiary activitiesâ or âservicesâ. In economic analysis, these broad categories of economic activities are described as the three sectors of the economy.
The relative importance of each sector or group of economic activities for an economy can be estimated by measuring its contribution to the national income or employment. Development economists have evolved certain stylized facts, based on their empirical research, regarding the relationship between inter-sectional trends in income and employment and the level of development of an economy.1 These stylized facts are expressed in terms of relative importance of different sectors of an economy at different stages of development. These stages are also described as periods of structural changes. Initially, structural change in terms of relative contribution to national income and employment occurs from primary to secondary sector and later to services. These inter-sectoral shifts have been described as three distinct phases of development experienced by economies during three distinct historical periods.
All developed economies were initially dominated by primary economic activities, when a substantial proportion of their working population was engaged in primary economic activities. The second phase began between 1760 and 1880, described as the post-agricultural period, during which these developed economies experienced (at varying dates) that the proportion of working population engaged in primary economic activity registered a marked decline and shifted to work in the manufacturing sector (i.e., secondary sector). This phase emerges as a consequence when an economy achieves industrial revolution. The third phase began after the 1960s, which is described as the post-industrial phase, when these economies experienced (at varying dates) decline in employment in the manufacturing sector and rise in the proportion of working population in services. The post-industrial phase of development is also described as the emergence of the âservice economy2â. These inter-sectoral trends in employment are accompanied by similar trends in the contribution of different sectors to national income.
Contrary to these trends, in the case of Indian economy, it has been observed that services are emerging as an important contributor to its growth process. Since the 1980s, the service sector has been contributing more than 50 per cent to its domestic product. This fact has led to the belief, amongst observers, that the Indian economy has evolved its own new path of development in which the economy leapfrogs from being an economy dominated by primary economic activities directly to a stage of development where services occupy the dominant position. In this process of leapfrogging, the Indian economy has skipped the stage in its process of development where the manufacturing sector generally dominates. This has happened because the Indian economy has missed industrial revolution. This historical fact is quite puzzling, because according to my own understanding of history, India was once an important manufacturing nation, much before the advent of the Industrial Revolution in England. I have also read in historical writings that the manufactured products of India were globally traded in exchange of bullion, because at that time other economies had nothing to offer in exchange for them except bullion.
Skipping the stage in the process of development in which the manufacturing sector emerges as a dominant sector of the economy is quite a significant loss. Historically speaking, in the literature on economic development, dominance of the manufacturing sector in the economy and economic development are considered synonymous. Only those economies that have undergone a manufacturing revolution have been able to achieve a long-term sustained process of development. It is the emergence of the manufacturing revolution that provided them with the possibility of continuous growth in the material wealth of the economy. The possibility of growth in the agrarian economies is constrained by the availability of fertile land, and even fertility of land is subject to diminishing returns.
Even Aristotle, while writing about sectoral composition of economic activities of an economy, suggested that primary activities are necessary for livelihood, but cannot become the source of unlimited wealth. He divided economic activities into two broad categories. The first category of economic activities consisted of activities that he termed as ânatural art of acquisitionâ, and the other set of economic activities he defined as âman-made art of exchangeâ. The first category of economic activities included those activities that helped man to obtain livelihood from nature. Aristotle believed that Mother Nature has the capacity to provide for only bare subsistence, in the same way milk is provided for the young infant by the mother. Thus, activities that depend on nature, nature herself sets limitation.3
It is also an important historical fact that the efficiency and quality of products produced by other sectors of the economy largely depends on the existence of a well-developed manufacturing sector. The production of agricultural capital goods and inputs by the manufacturing sector, for example, tractor combine harvesters, fertilizers and water pumps, has transformed the agricultural sector. Similarly, production of varying means of transportation, communication and information by the manufacturing sector have altered the way business is conducted in modern economies, across all sectors. One cannot ignore the importance of modern equipment such as CT-scan, X-ray and ECG machines, and several pharmaceutical products produced by the manufacturing sector, which have improved efficiency, reliability and quality of the healthcare sector.
In view of these important contributions of the manufacturing sector in the process of development of an economy, it becomes a matter of great concern that an economy, which was once upon a time an important manufacturing nation of the world, is now known for its service sector. This historical puzzle needs an appropriate answer that will tell us how a major manufacturing nation has to skip that stage of development in which the manufacturing sector makes significant contribution to income as well as employment. The historical puzzle motivated me to explore the story underlying this paradox in greater details. A Story of Indian Manufacturing is the outcome of my intellectual journey of exploration for finding an answer to this puzzle. I have followed a particular route for my intellectual journey. I do not claim that it was the best route to follow. I will welcome if scholars follow different routes to solve the puzzle from various perspectives to enrich our understanding. There are possibilities that different routes may lead to different destinations or may converge at the same point. It is due to this reason that the title of this book is A Story of Indian Manufacturing rather than The Story of Indian Manufacturing. My intellectual journey led me to the study of several writings of historians. This exposure has happened as a consequence of the nature of my exploration. I hope my historian friends will pardon me for intruding into their domain, which is almost like the entry of a mosquito into oneâs sacred space.
1.1 Traditional Flexible Manufacturing: Beginning the Story of Indian Manufacturing
The roots of the word âmanufactureâ are two Latin wordsâ, manu and facers. Here, manu means âhandâ and facer means âto makeâ. This signifies that manufacturing in earlier times was associated with handicrafts. This early form of manufacturing in India, in its embryonic stage, was carried out by artisans in the villages since ages. The process of social and economic division of labour created separation between craftsmen and farmers. Despite the separation of functions, for a considerable period of history, craftsmen remained an integral part of the agrarian economy. It is also an important fact that the separation of functions between craftsmen and the rest of the village economy was organized on caste lines. The social organization of production in the village economy did not facilitate the origin of market-mediated processes of exchange between craftsmen and other economic activities that were part of the village economy. This was happening because of the existence of a unique type of symbiotic relationship between artisans and other occupational groups in the villages. This symbiotic relationship was created by a distinct Indian social institution known as the âjajmani systemâ.4 Through this institution, society had evolved a âgift exchangeâ relationship amongst different occupational groups to provide the requisite supply of different kinds of manpower needed to run a village economy.
However, most of the economies of the world, especially of Europe and South and Southeast Asia, experienced the emergence of a peculiar form of manufacturing during the sixteenth, and in some cases during the seventeenth century, which has been variously described as the protean stage of industrialization,5 industry before industrialization,6 proto-factory,7 nascent capitalism,8 commercial manufacturing9 and proto-industry.10 Of all the terms used to describe this phenomenon, the term âproto-industryâ caught the attention of a large number of scholars. Initially, this term was used by Freudenberger and Redlick.11 However, it received the attention that it deserved from the scholars after it was described in the writings of Mendles.12 Proto-industry was used as one of the themes for discussion at the International Economic History Congress held in Budapest. The t...