Why manufacturing has lagged in India, Pg12

Key Highlights:

• India's manufacturing sector has underperformed compared to countries like China and South Korea, remaining stagnant as a share of GDP.
• Economist Arvind Subramanian attributes this to high government salaries drawing workers away from manufacturing, increasing prices, and reducing competitiveness.
• The Dutch disease theory is used to explain how an economic windfall or policy decision can negatively impact other sectors like manufacturing.
• The article questions why technological growth didn't occur to make manufacturing more productive and sustain higher wages in India.

Detailed Insights:

• The Dutch disease explains how discovering natural resources can raise wages, appreciate currency, and hurt manufacturing through cheaper imports.
• Applying the Dutch disease to India suggests high public sector salaries increased demand, raised domestic prices, and boosted cheaper imports, hurting domestic manufacturing.
• The article questions whether government intervention hindered technology adoption or if manufacturing became reliant on cheap labor, preventing technological upgrades.
• The theory of induced innovation suggests labor scarcity and high wages can induce technological growth, as seen in 19th-century Britain and modern economies like Germany.
• Despite private sector growth, entry-level salaries in India's software industry have stagnated since the 2000s, indicating a reliance on abundant labor rather than technological advancement.

Key Concepts Involved:

• Dutch Disease: An economic phenomenon where a boom in one sector negatively impacts other sectors, particularly manufacturing.
• Induced Innovation: The theory that scarcity of labor and high wages can drive technological advancements and capital-biased growth.
• Structural Transformation: A shift in the economy's structure, typically from agriculture to manufacturing and then to services.