WHY MANUFACTURING HAS LAGGED IN INDIA

NEWS – Economist Arvind Subramanian, in discussions around his book A Sixth of Humanity, revisits why India has failed to industrialise like China or South Korea, despite starting from comparable conditions in the early 20th century. The core issue: manufacturing stagnation, with its share in GDP largely flat and recently overshadowed by services.

HIGHLIGHTS

Core Argument: ‘Dutch Disease’ in an Unusual Avatar

• Traditionally, Dutch disease explains how windfall gains (like oil discoveries) hurt manufacturing by:
  • Raising wages economy-wide
  • Appreciating currency
  • Making exports uncompetitive and increasing imports
• Applied to India:
  • High public sector wages attracted labour away from manufacturing
  • Raised domestic costs and prices
  • Reduced competitiveness of Indian manufacturing
  • Led to weaker export performance and stagnation

How Public Sector Expansion Affected Manufacturing

• Government jobs offered higher salaries and stability
• Manufacturing struggled to match wages given its productivity levels
• Higher consumption by government employees pushed domestic prices up
• Under free trade, cheaper imports displaced local manufacturing
• Result: Real exchange rate appreciation, hurting tradable manufacturing

But Does the Dutch Disease Fully Explain India?

• Original theory explains natural resource windfalls, not policy choices
• Public wages = political decision; outcomes more complex
• Raises deeper question:
  • If high wages were a constraint,
  • Why didn’t technological upgrading happen over time?

Technology Question: Why No Productivity Leap?

• Theory of Induced Innovation suggests:
  • High wages → incentive to innovate → higher productivity
• Seen in:
  • Britain (Industrial Revolution)
  • Germany, Japan, South Korea (automation-driven growth)
• In India:
  • Private sector growth did not translate into wage growth
  • Entry-level IT salaries stagnating since early 2000s
  • New-age unicorns rely more on cheap labour platforms than tech innovation
  • Suggests dependence on abundant labour prevented deeper tech investment

Broader Concerns

• Limited technological upgrading in manufacturing
• Rising inequality despite private sector dynamism
• Manufacturing failing to deliver:
  • Large-scale jobs
  • Productivity gains
  • Middle-class formation (unlike China, Korea)