By Jorn Madslien
BBC News Online business reporter
As the Indian government prepares to publish its budget on Thursday, several leading economists and business executives warn that the country cannot rely on the service sector in its battle against poverty.
Investment is desperately needed to create manufacturing work.
Currently, India's service sector accounts for more than half its economic output. The country's well educated labour force has long been touted as an attractive asset for foreign investors.
But IT firms and research centres cannot on their own employ the massive army of jobseekers that is about to emerge in India. The country is home to a sixth of the world population and more than half of them are under 25 years old.
"So if you want to create jobs fast enough [for young people growing up] you need to create manufacturing jobs," explained Standard Chartered's chief economist and head of global resources, Gerard Lyons.
Standard of living
In the past, most of the young would have become farmers or farm workers. But given the relatively low contribution farming makes to India's economy, this option will not be available in the future.
Finance Minister Chidambaram might use the budget to fight red tape.
"Seventy-two per cent of people live in villages and they depend on 24% of gross domestic product from agriculture," explains Y. C. Deveshwar, chairman of the diversified conglomerate ITC.
So obviously, dramatic changes are required in order to "improve the standard of living for every person in India", said Sunil Kant Munjal, managing director of the leading bicycle maker Hero Cycles.
As such, agreed Mr Deveshwar, India's "reform agenda is also a developmental agenda".
It would be wrong, though, to see the challenges ahead as little more than a drain on central resources, Mr Deveshwar said.
"India has a huge human resource. You can look at it as a problem or you can look at it as an opportunity," he said.
The call to arms from leading Indian manufacturing executives coincides with the expiration of World Trade Organisation quota restrictions which previously protected Indian exports to the US and the European Union.
The industrialists have repeatedly urged India's finance minister Palaniappan Chidambaram to use the budget to encourage investment in the manufacturing sector.
The next generation may not be able to rely on jobs in farming.
"India has traditionally been a manufacturing country," insisted Mr Munjal.
But to facilitate a revived vitality in the sector, the government should take a step back and adopt a more hands-off approach, industrialists urge.
"India has historically been compared unfavourably with the 'Asian tiger' economies as the Indian 'elephant', overburdened by a bloated bureaucracy and state interference in the economy,"observed Oxford Analytica.
Some observers expect Mr Chidambaram to use the budget to attack procedural delays that make it more difficult for both Indians and foreigners to invest.
The finance minister is also expected to set aside cash for a range of infrastructure projects that should make it easier to do business.
Crucially, in the next four or five years, India will push ahead with a massive road building project that will "link every city, town and village", says Mr Munjal.
But the budget will bring little relief for Indian exporters. Their profits, which have been partially exempt from taxes in recent years, will be fully taxable in 2004-05.
Taking on China
Economists do not bemoan this. Rather, they insist India's manufacturing sector must learn to stand on its own feet.
Can India do for South Asia what China is currently doing for East Asia?
"India is going to have to become as competitive as China in the manufacturing sector," Mr Lyons said.
One route towards this goal would be a greater reliance on the home market by companies making "Indian products offering Indian solutions for Indian conditions", said Vinay Deshpande, Encore Software's chief executive.
Then, over time, such products could be adapted for exports, Mr Deshpande said.
Eventually, the whole region should benefit from a healthy manufacturing sector in India.
"India has the potential to do to South Asia what China is currently doing to East Asia," said Mr Lyons, referring to how India could become an engine for economic growth in the region.
Relying on the home market would off course require strong demand, and the creation of new factory jobs should help, said Mr Munjal.
"If you are able to create more jobs, you are also going to create more wealth and a large consumer market," he said.
In addition, to speed things up, "there is a real need to translate high domestic savings to high domestic consumption" and banks should prepare to lend more against future earnings - for example by using mortgages, car loans and credit cards, Mr Lyons urged.
"Foreign as well as domestic banks need to be prepared to take on more risk," he said.
A greater willingness by the banks to take on risk should benefit small and medium-sized manufacturing companies too, and it is bound to happen since "that is going to be the next engine of growth", said Mr Low.
Consequently, both Indian and foreign banks are expected to lend more freely to manufacturers in the near future. Meanwhile, foreign investors are also waking up to the potential of the sector, making it easier for them to raise finance on international stock markets.
"India is among London Stock Exchange's top three target markets, along with Russia and China," said Martin Graham, director of market services at London Stock Exchange.
"We think it is important that smaller companies get access to equity capital at an early stage of their development," said Mr Graham.
"New sources of finance have to be found for these companies to turn them from regional to truly global players."