Context:
The outlook for our economic future has been reshaped by the COVID-19 pandemic. Globalization is now receding, making way for the resurgence of industrial policies and strategic state-led economic interventions worldwide. While India has sustained its growth momentum and rebounded relatively swiftly from the pandemic, it has entered a phase of ‘premature deindustrialization.’
Relevance:
GS3- Indian Economy
- Indian Economy and issues relating to Planning
- Mobilization of Resources
- Growth, Development and Employment
- Changes in Industrial Policy and their Effects on Industrial Growth
- Inclusive Growth and issues arising from it
Mains Question:
India needs deep industrialisation along with a growth of the service sector that has the power of changing the foundations of society
Studying the Changes:
- Despite the recovery, the benefits of high growth have disproportionately favored a small minority, exacerbating existing inequalities.
- While luxury cars experience high demand, ordinary citizens grapple with soaring food prices, reflecting a fundamental flaw in India’s growth structure.
- This situation prompts a longstanding question: why has India struggled to break free from industrial stagnation and generate employment?
India’s Industrialisation Journey:
- For 75 years, India has struggled to achieve significant industrialization. The contribution of manufacturing to both output and employment has consistently remained stagnant and below 20%, except for the period of ‘Dream Run, 2003–08.’
- Even the economic reforms of 1991, which aimed to promote labor-intensive industrialization, did not change this reality.
- India currently faces a critical juncture with stagnant industrial investment, high unemployment rates, and persistent disguised unemployment.
- The trade deficit, driven largely by imported goods, is widening, and India is failing to produce the goods it consumes, let alone export them.
Further Analysis:
Employment in the Services Sector:
- The employment elasticity of services-led growth is low. India’s experience with services-driven growth since the late 1980s has had two negative consequences.
- Firstly, it failed to absorb labor leaving agriculture in the same manner as manufacturing would have.
- Secondly, the service sector demanded a large, highly skilled workforce that India could not adequately supply. Although the sector absorbed some migrating labor in cities, it displayed significant inequality.
- The wages of workers with a college degree were considerably higher than those without one.
- Inequality stemming from services-driven growth is therefore much greater than that from manufacturing-led growth.
- The Gini index of inequality for regular wages in the services sector was 44 compared to 35 for manufacturing (Periodic Labour Force Survey, 2021-22).
Growth of Human Capital:
- The emphasis on higher education has led to the neglect of mass school education. These higher education institutions have nurtured self-serving elites who played a role in India’s IT “revolution” but also contributed to industrial stagnation.
- The investment in human capital has been inherently unequal, making India one of the most educationally unequal countries globally.
- According to Yasheng Huang, a Chinese economist, the lack of sufficient human capital has hindered rural Indians from initiating entrepreneurial ventures on a scale comparable to China’s rural entrepreneurship growth.
Returns on Education:
- Furthermore, the returns on education vary across social classes. While school enrollment rates are high, the accessibility of higher education is not as restricted as before. However, the differing quality of schooling directly impacts the quality of higher education, influencing labor market outcomes.
- The proposition of high-skill services primarily benefits the traditional elite rather than the majority of first-generation graduates from rural and small-town colleges. Many of these students experience meager returns on their educational investments.
- The poor quality of most state-run schools and colleges is closely tied to the elites’ disengagement from public education. These fault lines, revealing new forms of class division in India, also mirror older divisions rooted in the caste system.
The Cultural Angle:
- The absence of widespread education has resulted in a crucial cultural prerequisite for industrialization being absent. Economic historian Joel Mokyr asserts that the ascent of practical knowledge is fundamental to technological advancement and growth in contemporary economies.
- Despite expectations of foreign direct investment in India diffusing technology, this largely did not occur, except in specific enclaves. A culture conducive to growth necessitates a reassessment of the value placed on labor, production, and technology.
- India has traditionally looked down upon certain occupations, particularly those deemed essential (such as electrical work and welding), which has hindered spontaneous innovation in manufacturing.
- Industrialists argue that India undervalues the vocational skills essential for manufacturing, and some skills are not appreciated even when they command higher wages. Artisanal knowledge lacks the same social respect as scholasticism or metaphysical abstraction.
Conclusion:
Increasing returns and efficiency result from innovation and its diffusion, which are contingent on widespread education and collective absorptive capacity. India requires substantial industrialization, not just in the service sector, to wield the transformative power capable of reshaping the foundations of society.
