Over the past half-century, economists have found India’s and China’s economic trajectories particularly compelling. While China’s authoritarian approach has driven substantial wage growth, it has offered modest returns for shareholders (with public market returns decreasing by 13% over the past two decades). In contrast, India, a democracy, has achieved remarkable public market returns (around 1,300% during the same period) but has struggled with wage stagnation. Key factors in India’s economic puzzle are its limited job pool since independence and slower job creation since liberalization in 1991. To strengthen its economic transformation, India must focus on creating manufacturing jobs and nurturing high-productivity enterprises.
India’s Economic Progress Since Independence
Since gaining independence in 1947, India has made significant strides, transforming itself into the world’s largest democracy despite social and economic challenges. Life expectancy has more than doubled from 31 to 68 years, and the country is now classified as a middle-income economy. However, India faces persistent challenges in achieving social mobility, a common issue in middle-income nations where upward mobility rates are roughly 40% lower than in high-income countries.
Indermit Gill, World Bank Chief Economist underscores this issue, noting that among the 108 middle-income countries striving to reach high-income status, only 34 have succeeded since 1990. These success stories involve economies with much smaller populations than India, suggesting that India’s pathway will be distinct, requiring scalable solutions.
Labour Market Dynamics and the Role of Manufacturing
India’s economic challenge isn’t primarily about unemployment but rather “employed poverty.” Only a small portion of the workforce is in manufacturing (11%) and construction (14%), while 45% remains in agriculture, often in informal, low-productivity jobs. A sustainable pathway to lift farmers out of poverty involves reducing the agricultural workforce and shifting workers into more productive sectors. Although India isn’t aiming to replicate China’s model, the success of China’s farm-to-factory transition demonstrates how industrial employment can lift millions out of poverty.
Why India’s Transition to Manufacturing Has Lagged
The slow transition of India’s workforce from agriculture to manufacturing isn’t due to limitations in land, labour, or capital. India has ample land and labour resources, with 30% of the workforce experiencing underemployment. Capital has also become more available, with half of the country’s foreign direct investment since 1947 arriving within the last five years.
This lag also isn’t explained by cultural or legal factors. India’s economic growth has accelerated significantly since the 1990s, and despite room for improvement, law and order conditions remain broadly favourable for investment. The real challenge lies in macroeconomic management and productivity growth, as excessive reliance on monetary and fiscal policies cannot sustain long-term development. While India may not achieve manufacturing employment levels comparable to developed countries, a goal of increasing this sector’s share of the labour force to 25% by 2035 (adding roughly 1% annually) is achievable.
Infrastructure and Skill Development: Essential for Economic Transformation in India
India’s infrastructure and skill gaps have historically hampered industrial expansion. However, recent infrastructure investments have significantly reduced these barriers, facilitating economic activity across the country.
In terms of skills, there are promising developments. The Annual Status of Education Report (ASER) now highlights improved school attendance and learning outcomes. Additionally, the National Education Policy (NEP) 2020 introduces a transformative roadmap aimed at breaking employability barriers. Short-term, focused training programs, like those for mobile phone assembly, could address the immediate need for manufacturing workers without extensive retraining, supporting India’s push towards greater industrial employment.
The Burden of Regulatory Compliance on Small Enterprises
Excessive regulatory compliance has constrained India’s industrial growth, particularly for smaller and informal businesses that struggle with the burden of numerous filings, penalties, and compliance requirements. Recent initiatives, including Jan Vishwas 2.0, the Enterprise Digilocker, and the National Open Compliance Framework, aim to streamline regulations. Looking ahead, implementing new labor codes, promoting competition in social security (e.g., EPFO and ESI), and reducing the gap between gross and net wages will ease constraints on employers, enhancing job creation.
Leveraging Domestic Consumption to Boost Growth
India’s strong domestic consumption provides a unique growth driver, sustaining service-sector jobs in areas such as sales and logistics. By contrast, China’s export-oriented model is increasingly seen as a missed opportunity for fostering domestic consumption. India’s approach to manufacturing, epitomized by the “Make in India” initiative, can leverage smart policy choices to enable “Make for India,” balancing production for both domestic and export markets.
India’s automotive sector demonstrates how smart policy can build robust supply chains and promote exports. Tariffs that protect domestic manufacturers create incentives for companies to invest in India rather than simply importing finished products. These policies, when framed to enable market access for domestic production, catalyze learning-by-doing, technology transfer, and manager alumni effect, which boosts economic complexity, adds value, and raises wages.
Realizing India’s Potential in Manufacturing
India’s recent achievements in electronics assembly hint at its potential to expand labour-intensive manufacturing. China’s growth strategy required its population to accept trade-offs between economic gains and certain freedoms, but India can achieve economic prosperity through democratic means. India missed her connection with destiny despite building the world’s largest democracy as she didn’t create mass prosperity. But she will make it possible through high-productivity firms and factories.
