Context and Background
- India’s manufacturing sector underperformed compared to China and South Korea, despite similar early starting points.
- Manufacturing’s share in India’s GDP has remained largely stagnant and recently declined relative to services.
- In contrast, China and South Korea achieved deep industrialisation-led structural transformation.
Manufacturing Underperformance: Core Explanation
- Economist Arvind Subramanian, in A Sixth of Humanity, attributes lag to policy-induced distortions.
- High public sector wages attracted labour away from manufacturing.
- This raised economy-wide wages, increasing production costs for manufacturing firms.
- Higher costs reduced international competitiveness of Indian manufactured goods.
- This mechanism is analysed using the Dutch disease framework.
Dutch Disease: Conceptual Framework
- Originally explained effects of natural resource windfalls on manufacturing decline.
- Resource discovery raises wages and appreciates currency, hurting export competitiveness.
- Manufacturing becomes unviable due to cheap imports and rising domestic costs.
- Applied to India: expansion of high-paying government services acted similarly.
- Increased government salaries raised domestic prices and real exchange rate.
- Even without nominal currency appreciation, higher prices boosted imports.
- Domestic manufacturing lost demand due to price-sensitive competition.
Limits of the Dutch Disease Explanation
- Unlike natural resources, public sector wage increases are policy choices, not windfalls.
- This raises questions on long-term adjustment through technological upgrading.
- If wages were high, manufacturing should have adopted productivity-enhancing technologies.
Role of Technology and Induced Innovation
- Induced innovation theory suggests high wages encourage capital-intensive technologies.
- Historical examples: Britain’s Industrial Revolution driven by high wages and scarcity.
- Modern cases: Germany, Japan, South Korea used automation amid ageing workforces.
- These economies achieved higher productivity and wage growth through innovation.
India’s Technological and Wage Stagnation
- India’s private sector growth failed to generate broad-based wage increases.
- Entry-level salaries in software firms stagnated since early 2000s.
- Growth concentrated in services, not productivity-led manufacturing.
- Software and platform firms rely on abundant cheap labour, not deep innovation.
- Rapid growth coexists with rising inequality and limited technological upgrading.
Structural Questions Going Forward
- Manufacturing may have remained dependent on cheap labour reserves.
- Insufficient investment in technology led to long-term productivity stagnation.
- Key question: did policy constrain innovation, or did firms avoid upgrading deliberately?
- India’s challenge lies in aligning technology, wages, and manufacturing competitiveness.