Examining the Causes of India's Stagnant Manufacturing Share in GDP Compared to East Asian Peers
Despite starting from similar levels in the 20th century, India's manufacturing sector has lagged behind China and South Korea. The share of manufacturing in India's GDP has remained relatively constant and recently lost ground to services. The article explores the 'Dutch disease' framework, suggesting that high government salaries and a booming services sector (like IT) have driven up economy-wide wages and caused real exchange rate appreciation. This makes Indian manufacturing less competitive against cheap imports. Additionally, a lack of technological upgrading and reliance on abundant cheap labor has led to stagnation.
Key Points
- The 'Dutch disease' refers to how a windfall in one sector (like services) can negatively impact other sectors like manufacturing.
- High entry-level salaries in the software industry have drawn talent away from manufacturing.
- Indian manufacturing has failed to adopt adequate technological upgrades, relying instead on low-skilled labor.
- Structural transformation in India has stagnated, leading to lopsided growth and increasing inequality.
Exam Facts
- Concept: Dutch disease (originally coined for Groningen gas fields in 1959).
- Book Reference: 'A Sixth of Humanity' by Arvind Subramanian.
- Theory: 'Induced innovation' (Robert C. Allen).
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