(UPSC GS Paper III – Indian Economy: Industrialisation, Growth, Employment, Inequality)
Context (Introduction)
Despite beginning the 20th century at income levels comparable to China and South Korea, India’s manufacturing sector has stagnated, limiting job creation, productivity growth and broad-based income expansion.
Current Status of Manufacturing in India (with data)
- Low and Stagnant GDP Share: Manufacturing contributes ~15% of India’s GDP (World Bank, 2023), compared to ~27% in China and ~25% in South Korea during their peak industrialisation phases.
- Weak Employment Absorption: As per the Periodic Labour Force Survey (2022–23), manufacturing employs only ~11.6–12% of India’s workforce, far below East Asian peers during their growth phase.
- Services-Dominated Growth: I ndia’s services sector contributes over 55% of GDP but employs a much smaller share of workers, leading to jobless or low-quality employment growth.
- Rising Inequality: Oxfam (2023) notes that the top 10% in India hold over 77% of national wealth, reflecting growth without mass employment or wage gains.
Reasons for Manufacturing Underperformance
- Public Sector Wages and ‘Dutch Disease’ Effect: Economist Arvind Subramanian argues that relatively high government salaries raised economy-wide wages and prices. Manufacturing firms, with lower productivity, could not match these wages, making Indian manufacturing less competitive.
- Real Exchange Rate Pressure: Higher domestic prices increased imports and reduced price competitiveness of exports, even without sharp nominal rupee appreciation.
- Cheap Labour Trap: India’s abundant labour reduced incentives for firms to invest in automation and productivity-enhancing technology.
- Evidence from ASI: The Annual Survey of Industries (2022–23) shows fixed capital grew by 10.6%, while employment grew only 7.4%, with capital per worker rising to ₹23.6 lakh, indicating capital deepening without mass job creation.
Why High Wages Did Not Trigger Innovation
- Missed ‘Induced Innovation’ Pathway: In countries like Britain, Germany and South Korea, high wages pushed firms to innovate. In India, manufacturing failed to respond similarly.
- Stagnant Private Sector Wages: Entry-level salaries in IT and manufacturing-linked services have shown minimal real growth since the early 2000s (ILO and NITI Aayog studies), despite rapid firm-level expansion.
- Platform Economy without Productivity Gains: Many Indian unicorns (food delivery, ride-hailing) rely on labour abundance rather than technological upgrading, reinforcing low-wage equilibrium.
Way Forward
- Technology-Led Industrialisation: Promote adoption of Industry 4.0 technologies—automation, robotics, AI and advanced manufacturing—through targeted incentives and R&D support.
- Human Capital and Skill Deepening: Align skilling missions with industrial needs, focusing on technical education, apprenticeships, and continuous reskilling.
- Labour Market Reforms with Security: Balance flexibility with social security to encourage formal employment and productivity-linked wage growth.
- Strengthen Industrial Ecosystems: Develop integrated manufacturing clusters with plug-and-play infrastructure, logistics connectivity, and supplier networks beyond existing coastal hubs.
- MSME Upgradation and Scale: Support MSMEs in technology adoption, access to credit, and integration into global value chains.
- Stable and Predictable Policy Regime: Ensure consistency in industrial, trade, and tax policies to reduce uncertainty and encourage long-term investment.
- Export Competitiveness with Value Addition: Shift focus from low-cost exports to high-value manufacturing through standards, quality upgrading, and innovation.
- Balanced Wage Policy: Encourage wage growth aligned with productivity to induce innovation rather than suppress wages through labour abundance.
- Public–Private Collaboration: Leverage partnerships between government, industry and academia to drive innovation, technology diffusion, and skill development.
Conclusion
India’s manufacturing lag stems not only from policy choices like high public sector wages but from a deeper failure to induce technological upgrading. Without productivity-led manufacturing growth, India risks persistent jobless growth, rising inequality, and incomplete structural transformation.
Mains Question
- India’s manufacturing sector has failed to replicate the industrial success of East Asian economies. Examine the structural and policy factors behind this lag, and suggest measures to revitalise manufacturing-led growth.(250 words, 15 marks)
Source: The Hindu