Syllabus
GS Paper 3 – Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth
Applications where to apply?
When asked about
– Jobless Growth
– $ 7 trillion economy
– Industrial Policy
– Manufacturing and Service sector
Context
The COVID-19 pandemic has prompted nations, including India, to reconsider their economic strategies amidst challenges of industrial stagnation and inequality. The article emphasises the need for deep industrialization to address fundamental structural issues in the Indian economy.
Source
The Hindu | Editorial dated 14th February 2024
Why India needs deep industrialisation
The COVID-19 pandemic has reshaped global economic strategies, with a retreat from globalization and a resurgence of state-led interventions. India, despite a quick recovery from the pandemic, faces challenges like premature deindustrialization and unequal economic growth.
Raghuram Rajan and Rohit Lamba propose a shift towards high-skill services-driven growth in their book “Breaking the Mould: Reimagining India’s Economic Future.”
Why break the mould now?
India’s Industrial Stagnation
- India’s manufacturing sector has consistently remained stagnant, except during 2003-08, with a share below 20% in output and employment.
- The 1991 economic reforms aimed at labour-intensive industrialization but failed to significantly alter India’s industrial landscape.
- Reasons for stagnation:
- Missing Cultural Prerequisites for Industrialization:
- Lack of mass education and cultural valuation of certain occupations hinder technological progress.
- India’s undervaluation of vocational skills impedes innovation in manufacturing. India has looked down upon certain occupations, particularly those that are essential (electrical, welding, etc.), partly impeding organic innovation in manufacturing.
- Missing Cultural Prerequisites for Industrialization:
- Infrastructure bottlenecks: Inadequate infrastructure like power, transportation, and logistics hampered manufacturing competitiveness
- Land acquisition hurdles: Complex land acquisition processes delayed and increased investment costs for new manufacturing units.
- Labour reforms: Rigid labour laws discouraged flexibility and investment in labour-intensive manufacturing.
- Global competition: Low-cost manufacturers like China posed fierce competition in several sectors.
- Implications of stagnation:
- Industrial investment stagnation
- High levels of unemployment leading to jobless growth
- India’s widening trade deficit highlights its reliance on imported goods and lack of domestic production.
- Insufficient domestic production forces India to rely heavily on imports for various goods, from machinery to electronics. This increases vulnerability to external shocks and fluctuations in global prices, impacting trade balance and economic stability.
- Limited technological advancement: A robust manufacturing sector fosters innovation and technology adoption. Without its full potential, India risks lagging behind in technological advancements, impacting competitiveness and long-term growth.
- Widening inequality: The current growth pattern, heavily reliant on services, primarily benefits skilled professionals. This exacerbates income inequality, leaving a large portion of the population behind and hampering overall social and economic development.
Contradicting Classical Wisdom
Raghuram Rajan and Rohit Lamba advocate for promoting high-skill services, powered by information technology, to stimulate manufacturing. This approach challenges the traditional notion that services growth depends on manufacturing growth.
Challenges with Services-led Growth
- Poor Employment Elasticity:
- Services-driven growth struggles to absorb labour exiting agriculture, unlike manufacturing.
- The service sector demands a highly skilled workforce, exacerbating inequality.
- Inequality in Education and Employment:
- Early investments in higher education neglected mass school education, fostering inequality.
- The quality of schooling affects higher education and subsequently labour market outcomes.
- 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).
- Cultural and Social Implications:
- The high-skill services approach benefits the traditional elite but leaves out rural and small-town graduates.
- Regional Disparity: Growth might be concentrated in major cities, leaving rural and underdeveloped regions lagging behind, widening regional disparities.
- India’s caste system exacerbates these socio-economic divides.
- Limited Resilience: A less diverse economy with a weaker manufacturing base may be less resilient to external crises and economic downturns.
Need for Deep Industrialization
Mass education and collective absorptive capacity are crucial for innovation and industrial growth. India requires a transformation that values labour, production, and technology to drive societal change.
Key Terms
- Premature deindustrialisation is a phenomenon where a country’s manufacturing sector declines before it has reached its full potential.
- The Gini index is a widely used measure of income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality). A higher Gini Index indicates a wider income gap between individuals in a society. The Lorenz Curve, its visual counterpart, plots the cumulative percentage of income against the cumulative percentage of population.
- Employment elasticity measures the percentage change in employment associated with a 1% increase in economic growth.
Conclusion
India’s economic future is at a crossroads, marked by the challenges of industrial stagnation and inequality. The proposition of high-skill services-driven growth challenges conventional wisdom but raises concerns about its implications for inequality and societal divisions. Addressing India’s economic challenges requires a holistic approach that values education, innovation, and inclusive industrialization.
RELATED TOPICS
The Industrial Policy of 1991
The Industrial Policy of 1991 was a landmark economic reform introduced by the government led by Prime Minister Narasimha Rao and Finance Minister Manmohan Singh. It marked a significant shift from the previous focus on import substitution and centralized planning towards a more liberal and market-oriented approach.
Features of the 1991 Industrial Policy:
- Liberalization: Reduced licensing requirements for industries, allowing for greater private sector participation and competition.
- De-reservation: Removed several industries from the reserved list for the public sector, opening them up to private investment.
- Foreign Direct Investment (FDI): Increased FDI limits in various sectors, attracting foreign capital and technology.
- Public Sector Reform: Focused on improving performance and profitability of public sector enterprises.
- Trade Liberalization: Reduced tariffs and other trade barriers to promote exports and integration with the global economy.
A draft – Statement on Industrial Policy 2022 Make in India for the world – has been circulated to different ministries for their views and comments. It was prepared by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
References
Practice Question
Examine the proposition of high-skill services-driven growth in the context of India’s economic trajectory. Discuss the challenges and implications of this approach. [250 words]