Has Manufacturing Emerged as the Engine of Economic Growth in India? Evidence from the ARDL Bounds Testing Approach

Abstract

Agricultural, manufacturing and service sectors are major pillars of India’s economy, contributing to employment, innovation, food security and trade. The contribution of the agricultural sector to India’s GDP stands at 18.2 per cent in comparison to 17 per cent and 55 per cent of the contribution made by manufacturing and service sectors, respectively. The growth of these three sectors has driven structural changes in the Indian economy, highlighting the need to understand the contribution of each sector in economic growth in India. Moreover, early research has undermined the role of manufacturing sector as a key contributor in India’s economic growth, indicating a gap in the literature. This paper attempts to find out the key drivers of economic growth of India out of three sectors of the economy - agriculture, manufacturing and service. To achieve this objective, the study employs the ARDL bounds testing approach using annual data spanning from 1960 to 2023. In the ARDL model, real GDP is taken as the dependent variable, while the shares of agriculture, manufacturing and service sectors in GDP are considered as the main independent variables. Additionally, five control variables are used. These are: government expenditure; gross capital formation, inflation, trade openness and population growth rate. The results of the ARDL bounds test confirm the existence of a long-run relationship between India’s real GDP and the explanatory variables. The findings further reveal that gross capital formation, trade openness and government expenditure exert positive and significant impact on economic growth, whereas the population growth and inflation exert negative and significant effect on economic growth. The most notable result is that the coefficient of the service sector’s share in GDP is positive but statistically insignificant, suggesting that the service sector has reached a level of saturation and no longer serves as a major driver of India’s economic growth. In contrast, the manufacturing sector’s share in GDP shows a positive and significant impact on economic growth, indicating that manufacturing has emerged as the main engine of economic growth of India in the current context. Similarly, the impact agricultural sector’s share on economic growth is also positive and significant, highlighting its renewed importance as a growth driver, particularly in the post-COVID-19 period. Thus, the study suggests that among the three sectors of Indian economy, the effect of manufacturing sector on economic growth is the highest, therefore it can be considered as engine of economic growth of India, followed by agriculture sector. As the manufacturing sector has the major contribution in economic growth, it is recommended that the government should focus on efficiently implementing policies such as Make in India and Startup India to strengthen this sector.