India’s Economic Future: The Untapped Potential of IT and Manufacturing Sectors

Albert Einstein once said that judging a fish by its ability to climb a tree will make it believe it is foolish. This analogy applies to predictions about India’s IT and manufacturing sectors. Despite only 0.7% of the labour force working in Information Technology (IT) and 11% in manufacturing, gloomy forecasts suggest these sectors have peaked. These predictions cite automation, robotics, immigration backlash, and anti-globalization trade barriers as reasons for stagnation. However, we believe that these doomsday predictions are inaccurate for a low-income, low-productivity country like India. In the next five years, IT employment could rise from 3.5 million to 6 million, and manufacturing could increase from 10% to 20% of the labor force in ten years. 

Superficial Analysis: These predictions fail by indiscriminately applying the labor market dynamics of wealthy countries like the US (with a per capita income of $45,000) to a poor country like India (with a per capita income of $1,500). The US is rich because of its highly efficient and productive land, labor, and capital markets. In contrast, India remains poor partly because 50% of its labour force contributes only 11% to its GDP. Additionally, India has just 18,000 companies with a paid-up capital of more than Rs 10 crores. The challenge for the US is preventing poverty, while India’s challenge is lifting people out of it. The journey to a per capita income of $8,000 involves addressing internal issues that perpetuate poverty.

Lack of Historical Perspective: The predictions suffer from “presentism,” the mistaken belief that current times are unprecedented. Historically, technological changes unfold over extended periods. Carlota Perez, in her book “Technological Revolutions and Financial Capital,” notes that technological revolutions, occurring roughly every half-century, only bear fruit after decades of turbulent adaptation and assimilation. Technological progress is gradual, akin to a gentle sunrise rather than a sudden burst of light.

Impulsive Judgments: These predictions underestimate India’s vast domestic market and the robust ecosystem supporting its IT industry. India continues to attract significant Foreign Direct Investment (FDI), with $60 billion concentrated in manufacturing sectors where domestic consumption is growing. The “Make-in-India” initiative can focus on domestic markets until global conditions improve. Additionally, India’s IT sector, with its strong network effects, produces more engineers than the US and China combined. Despite temporary challenges like the H1B visa issues, the broader technological trend benefits India’s IT industry. Cities like Bangalore and Hyderabad are global hubs capable of quickly mobilizing skilled labor, such as Hadoop programmers.

While India is not immune to the impacts of technological change, and its economic resurgence isn’t guaranteed, its relative poverty and late arrival to the productivity race present unique opportunities. Unlike Western nations grappling with job losses due to technology, India still has significant potential to enhance productivity and expand its middle class.

India is more than a country; it is the world’s most populous nation. Geoffrey West’s book “Scale” explores the non-linear and exponential growth of size. Similarly, India’s scale and diversity mean that predictions based on smaller economies may not apply. Historical successes, such as the Green Revolution, which defied pessimistic predictions of mass starvation, demonstrate India’s capacity to overcome daunting challenges.

Optimists recognize that pessimists often receive more intellectual respect as they appear wiser. However, it would be naive to believe that India can create sufficient good jobs without addressing critical issues like infrastructure development, regulatory reforms, and human capital enhancement. Nevertheless, the notion that India has reached its peak in manufacturing and IT employment is both premature and misleading. For policymakers, it is essential to understand that failing to create an 800-million-strong middle class will not be due to automation or protectionism, but rather our inability to make land, labor, and capital markets more productive.

India has the potential to defy these pessimistic predictions. The focus should be on leveraging its vast domestic market, enhancing productivity, and investing in human capital to ensure a prosperous future. With the right policies and investments, India can significantly increase employment in IT and manufacturing, thus proving the doomsayers wrong.



Comments are closed.