Context
Despite starting at levels comparable to China and South Korea, India failed to build a strong manufacturing base. Growth shifted toward services and software, while manufacturing neither expanded nor upgraded technologically, leading to stalled structural transformation.
Summary
1. Manufacturing stagnation
• Manufacturing’s share in GDP remained nearly constant, unlike in China and South Korea.
• Growth moved to services, which absorbed labour but delivered limited productivity gains.
2. High public-sector wages
• Arvind Subramanian argues that high government salaries raised economy-wide wages, drawing labour away from manufacturing.
• This increased costs and reduced manufacturing competitiveness.
3. Policy-induced Dutch disease
• Higher wages raised domestic prices, causing real exchange rate appreciation.
• Manufactured exports weakened, imports became cheaper, hurting domestic industry.
4. Lack of technological upgrading
• Manufacturing failed to respond to cost pressures through productivity-enhancing innovation.
• Growth relied on cheap labour, not technology.
5. Unequal growth outcome
• Services grew rapidly but benefits remained concentrated.
• Manufacturing failed to generate mass employment, wage growth, or productivity, increasing inequality.
