Today's Editorial

Why India Needs Deep Industrialization

Relevance-GS Paper III

Why in the News?

India’s economic challenges require deep industrialization as a solution to issues like premature deindustrialization, inequality, and educational disparities, hindering conventional growth models.

Shift in Global Trends:

• Global Policy Response: The COVID-19 pandemic has shifted global economic perspectives, leading to a retreat from globalization and a resurgence of industrial policies worldwide.
• The Inflation Reduction Act in the U.S., the European Green Deal, and India’s Atmanirbhar Bharat are prominent examples.
• Economic Landscape in India: India’s growth momentum has been sustained. India faces several economic challenges. It recovered relatively quickly from the pandemic, yet it has entered a phase of ‘premature deindustrialisation’.

Historical Industrial Stagnation and Current Crossroads:

• Persistent Stagnation: India, for over 75 years, has struggled to industrialise sufficiently. Its manufacturing share in output and employment has always been stagnant and below 20%, except during the ‘Dream Run, 2003–08’.
• Implications of 1991 Economic Reforms: Even the 1991 economic reforms, which came with the promise of labour-intensive industrialisation, did not bring promised changes.
• Current Economic Crossroads:  India is now at a crossroads. Its industrial investment is stagnating, with high levels of unemployment and chronic disguised unemployment.  Its trade deficit, largely driven by imported goods, has been widening. India is not even producing the goods it consumes, let alone exporting. 

High-Skill Services vs. Manufacturing-Led Growth:

• Departure from Conventional Wisdom: Raghuram Rajan and Rohit Lamba advocate for a shift from traditional manufacturing-led growth to high-skill, services-driven growth, challenging conventional wisdom.
• Alignment Issues with Current Industrial Policy: Despite the proposed shift, concerns arise about its alignment with India's current industrial policy. They propose leveraging India's strength in high-value services to drive growth, emphasising the need to prioritise quality over quantity in job creation.
• This approach is at odds with the traditional focus on low-skilled manufacturing and raises questions about its compatibility with India's existing industrial strategy.

Challenges of Services-Led Growth

• Employment Elasticity Challenges: The employment elasticity of services-led growth is poor. India’s experience with services-driven growth since the late 1980s had two negative implications:
•  First, it could not absorb the labour exiting agriculture in the same way that manufacturing would have.
• Second, the service sector required a large highly skilled workforce that India could not adequately supply. Even as the sector absorbed some labour which migrated to cities, it was deeply unequal.
• Skilled Workforce Disparities: The service sector demands a highly skilled workforce, leading to unequal wages and exacerbating social inequality. Inequality from services-driven growth is thus much higher than from manufacturing-led growth.
• Social Inequality Amplified: 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).

Education Divides, Hindering Growth:

• Elitism and Industrial Stagnation: The early investments in higher education contributed to the near abandonment of mass school education.
• These higher education institutions cultivated self-serving elites who played a role in India’s IT “revolution” while contributing to industrial stagnation.
•  Unequal Investments in Human Capital: Investments in human capital were deeply unequal from the get-go. India is one of the world’s most unequal countries in terms of education.
•  Rural Entrepreneurship Challenges: As per Yasheng Huang, a Chinese economist, Rural entrepreneurship was able to grow out of the traditional agricultural sector on a massive scale in China. The rural Indians, in contrast, hampered by a poor endowment of human capital, were not able to start entrepreneurial ventures remotely on the scale of the Chinese.
• Differential Education Outcomes: The returns to education differ across classes and social groups. School enrolment is high. Higher education is not as inaccessible as it was earlier. But the differential quality of schooling feeds into the quality of higher education, which feeds into labour market outcomes.
•  High-Skill Services and Socio-Economic Divide: The high-skill services pitch would suit the traditional elite but not the majority of first-generation graduates from colleges in rural areas and small towns. The majority of these students reap poor returns on their investments in education.
•  Class and Caste Dynamics in Education: The poor quality of most state-run schools and colleges is closely linked to the elites’ renunciation of public education. Even as these fault lines are new forms of class divide in India, they reflect older ones rooted in the caste system.

Imperatives for Deep Industrialization

• Prerequisite for Industrialization: The lack of mass education meant that an important cultural prerequisite for industrialisation was missing. Economic historian Joel Mokyr suggests that the rise of useful knowledge is key to technological progress and growth in modern economies.
• For instance, foreign direct investment in India, which was supposed to diffuse technology, did not take place except in some enclaves. 
• Neglect of Vocational Skills: Certain essential occupations, such as electrical work and welding, have been undervalued, hampering organic innovation in manufacturing.
• This has led to the undervaluing of vocational skills needed for manufacturing, and artisanal knowledge has not been as respected as academic. This has limited the country's ability to innovate and achieve efficiency in manufacturing.

Therefore, India needs to prioritize deep industrialization, not just rely on the service sector, to bring about significant societal change.

Conclusion

The imperative for deep industrialization in India is clear, given the existing economic challenges. A balanced approach that prioritizes both industrialization and the service sector is essential for addressing the country's economic imbalances and fostering inclusive growth.

Mains PYQ

Q. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product (GDP) in the post-reform period.” Give reasons. How far the recent changes in Industrial Policy are capable of increasing the industrial growth rate? (UPSC 2017)