INDIA'S INDUSTRIALISATION 

The COVID-19 pandemic has reshaped perspectives on the global economic landscape. With globalization experiencing a retreat, there is a resurgence of interest in industrial policy and strategic state-led interventions across the globe. Notable examples include the Inflation Reduction Act in the U.S., the European Green Deal, and India’s Atmanirbhar Bharat initiative.

2. India's Economic Trajectory

• Despite maintaining its growth momentum, India finds itself facing the challenge of 'premature deindustrialization' in the aftermath of the pandemic.
• While the country demonstrated resilience in recovering from the crisis, it has encountered difficulties in breaking away from industrial stagnation and addressing unemployment.
• Furthermore, the benefits of high growth have disproportionately favoured a small minority, exacerbating existing socio-economic disparities.
• This imbalance is evident in the shortage of high-end cars juxtaposed with the struggle of the common populace to cope with soaring food prices, reflecting inherent flaws in India's growth model.
• Raghuram Rajan and Rohit Lamba present an unconventional perspective in their work "Breaking the Mould: Reimagining India’s Economic Future." Rather than adhering to the traditional manufacturing-led growth paradigm, they advocate for a shift towards high-skill, services-driven growth.
• This approach challenges prevailing notions and seeks to tackle the persistent issue of industrial stagnation while fostering employment opportunities in the services sector.

3. Challenges of Breaking the Mould

Historical Industrial Stagnation

Over the past 75 years, India has struggled to achieve significant industrialization. Despite occasional spurts, such as the 'Dream Run' from 2003 to 2008, the manufacturing sector's contribution to output and employment has remained stagnant, consistently below 20%. Even the economic reforms of 1991, aimed at promoting labour-intensive industrialization, failed to substantially alter this reality. Currently, India faces a critical juncture marked by stagnant industrial investment, high unemployment rates, and chronic disguised unemployment. Moreover, the widening trade deficit, driven largely by imported goods, underscores India's failure to meet domestic demands, let alone engage in substantial export activity.

Revisiting Industrial Policy

In this context, Rajan and Lamba's proposal to prioritize high-skill services, powered by information technology, as a means to stimulate manufacturing, challenges conventional wisdom. Traditionally, the belief has been that service growth is contingent upon manufacturing growth. However, India's current industrial policy may not be conducive to addressing these challenges and could potentially exacerbate them.

Implications of Services-led Growth

• Services-driven growth, experienced by India since the late 1980s, has exhibited poor employment elasticity. Unlike manufacturing, the service sector has struggled to absorb labour transitioning from agriculture, primarily due to the need for a highly skilled workforce.
• Early investments in higher education have led to the neglect of mass school education, fostering an education system that caters primarily to self-serving elites. Consequently, the quality of education is deeply unequal, perpetuating disparities in labour market outcomes and hindering entrepreneurial ventures, particularly in rural areas.
• Returns to education vary significantly across social groups, with traditional elites benefiting disproportionately from high-skill services. This exacerbates existing fault lines rooted in India's caste system, with first-generation graduates from rural areas and small towns experiencing poor returns on their education investments. The quality disparity in state-run schools and colleges further exacerbates these inequalities, reflecting entrenched class divides in Indian society.

4. Cultural Factors Hindering Industrialisation

• The absence of widespread education poses a significant cultural barrier to industrialization in India. Economic historian Joel Mokyr emphasizes the importance of the proliferation of useful knowledge for technological progress and economic growth in modern economies. However, in India, the lack of mass education has hindered the development and diffusion of such knowledge.
• Foreign direct investment, intended to facilitate the transfer of technology and innovation, has been limited in India, with only select enclaves experiencing significant inflows. This failure to attract substantial FDI has hampered the country's technological advancement and industrial growth.
• Certain essential occupations, such as electrical work and welding, have been undervalued in Indian society. This cultural attitude towards such professions has impeded organic innovation in manufacturing. Industrialists argue that India overlooks the vocational skills necessary for manufacturing, even if these skills command higher wages.
• Artisanal knowledge, vital for innovation in manufacturing, does not receive the same social respect as scholasticism or metaphysical abstraction. This cultural bias undermines the potential for innovation and efficiency in the manufacturing sector.
• Mass education and collective absorptive capacity are essential for fostering innovation and its diffusion, which, in turn, drive increasing returns and efficiency in industrial processes. Therefore, India must prioritize deep industrialization, not solely focusing on the service sector, to fundamentally transform societal foundations.