Context

• In the past 50 years, the economic trajectories of China and India have presented economic historians with a compelling puzzle; China, an autocracy, has seen robust wage growth yet meagre public market returns, reporting an approximate 13% decline in the last two decades.
• In contrast, India, a democracy, has experienced substantial returns in its public market, around 1,300% in the same period, while wage growth has been comparatively weak.
• Amid these developments, it is crucial to examine India’s economic journey, persistent challenges and underlying factors shaping these outcomes, as well as potential strategies for addressing India’s unique challenges.

An Analysis of India’s Economic Journey: Progress and Persistent Challenges

• India’s Progress
  • India has made noteworthy progress since its independence in 1947, transforming itself into the world’s largest democracy despite its deeply hierarchical society.
  • In just a few decades, life expectancy increased from 31 to 68 years, and the country rose to middle-income status.
  • However, India’s aspirations for social justice are hindered by historical constraints.
  • Social mobility, critical for economic growth and equity, remains 40% lower in middle-income nations like India than in high-income countries.
  • Additionally, the global track record for countries transitioning to high-income status is dismal.
  • Only 34 economies, with a combined population of around 250 million, have reached this milestone since 1990, underscoring the considerable challenges India faces.
• India’s Challenges
  • India’s challenge centres on employed poverty rather than unemployment.
  • The labour force distribution reveals a stagnant structure: 45% in agriculture, 14% in construction, 30% in services, and only 11% in manufacturing.
  • Most of India’s agricultural workers are trapped in informal self-employment, eking out a living with minimal productivity.
  • This phenomenon, termed self-exploitation, stands in stark contrast to China’s success in shifting millions from farms to factories.
  • While India has a sizeable labour force and adequate land and capital, it has not replicated China’s scale of manufacturing growth despite substantial foreign direct investment and macroeconomic stability.

The Importance of Manufacturing for India’s Economic Growth

• A Pathway Out of Poverty by Providing Jobs
  • Manufacturing can play a crucial role in India's development due to its capacity to create jobs across the skill spectrum, enhance productivity, and stimulate broader economic activity.
  • In countries like China, manufacturing provided a pathway out of poverty for millions, who transitioned from farming to factory work, gaining access to stable wages and better working conditions.
  • In India, however, only 11% of the labour force is employed in manufacturing, which has kept wage growth sluggish and poverty levels high despite overall economic growth.
• Less Reliance on Agriculture
  • For India, expanding the manufacturing sector could transform its labour force structure, decreasing the reliance on low-productivity agriculture and creating new opportunities for unskilled and semi-skilled workers.
  • The goal would be to gradually increase manufacturing employment to 25% of the labour force by 2035.
  • It would require a combination of policy reforms, infrastructure investments, and regulatory changes to support industry growth.

Structural Constraints Hindering Manufacturing Growth

• Regulatory Barriers and Regulatory Cholesterol
  • One of the biggest challenges for manufacturing in India is what is often referred to as regulatory cholesterol.
  • It is a complex and burdensome regulatory environment that disproportionately affects small and medium enterprises (SMEs).
  • The Indian business landscape is dotted with myriad compliance requirements, filings, and licensing needs that can be especially cumbersome for smaller firms.
  • These regulations, while intended to ensure standards and safety, often lead to excessive compliance costs, and discourage formalisation, which in turn limits these firms’ growth potential and productivity.
• Informal Employment and Limited Scale of Small Enterprises
  • A significant portion of India’s manufacturing sector is dominated by informal enterprises, which are typically small-scale and lack the resources to upgrade technology, train workers, or access formal financing.
  • The informal nature of these enterprises makes it challenging to improve productivity and achieve economies of scale, which are crucial for competing in global markets.
  • Large companies, which tend to be more productive and capable of employing thousands of workers, are relatively rare in India’s manufacturing sector.
  • This structural characteristic has kept the manufacturing sector fragmented and unable to drive large-scale employment.
• Infrastructure and Skill Gaps
  • While infrastructure and skills were previously cited as major obstacles to manufacturing, recent improvements have lessened these barriers.
  • Massive investments in infrastructure have improved India’s transportation networks, energy supply, and logistics systems, essential for the smooth functioning of manufacturing operations.
  • Skill development has also seen significant progress through initiatives like the National Education Policy (NEP) 2020, which aims to enhance educational quality and employability by promoting holistic learning and vocational training.
  • Despite these advances, gaps remain, particularly in skill alignment with industry needs.
  • Although education levels are rising, there remains a mismatch between the skills workers possess and the skills required by modern manufacturing jobs.
• Low Levels of Investment in Technology and Innovation
  • Another structural constraint in India’s manufacturing sector is the relatively low level of technological investment and innovation.
  • Many Indian firms, especially small and medium-sized enterprises, operate with limited technological resources, which reduces their competitiveness on a global scale.
  • Unlike China, where technological advancements and productivity gains have fuelled rapid manufacturing growth, India’s manufacturing sector is still heavily reliant on labour-intensive, low-productivity activities.

India’s Path Forward to Realising the Full Potential of India’s Manufacturing Sector

• Balancing Democracy and Economic Development
  • India faces a unique challenge in balancing democratic values with economic growth.
  • Unlike China, which prioritised rapid industrialisation at the expense of personal freedoms, India’s democratic framework calls for a more nuanced approach.
  • The potential for manufacturing employment to rise to 18-20% of the workforce within the next decade is a realistic goal.
• Domestic Consumption as a Growth Engine and Strategic Manufacturing Policy
  • India’s large domestic market presents a growth opportunity that China has historically underutilised, having prioritized exports and investment, however, India must harness this market to bolster manufacturing.
  • By promoting Make for India policies, domestic manufacturing could fulfil local demand while also building the foundation for export competitiveness.
  • For instance, the automotive sector in India has flourished by supporting both domestic and international manufacturers, creating a level playing field that enabled the development of supply chains, scale, and exports.
• Infrastructure Investments
  • Infrastructure investments should continue, with a particular focus on improving logistics and transportation networks to reduce costs for manufacturers.
  • Expanding vocational training programs to bridge skill gaps and align educational outcomes with industry demands is also critical.
  • Finally, policies that encourage innovation, research, and technology adoption within manufacturing can help India move up the value chain and compete globally.

Conclusion

• Despite its democratic achievements, India has yet to fulfil its tryst with destiny by establishing widespread prosperity.
• Nevertheless, recent reforms and a policy focus on manufacturing could help India overcome its economic challenges.
• By creating high-productivity firms and expanding employment opportunities in manufacturing, India can set a course toward sustained economic growth.