It is widely believed that India is forging a separate successful path to development, in contrast to the traditional comparative-advantage based development of China and the other east-Asian Tigers. At its extreme, this argument holds that India’s growth engines are its high-end services and now manufacturing sectors with their globalising, world-beating companies.
This is a fundamental misdiagnosis. The vaunted successes in IT-based services and now in manufacturing niches are welcome. But they are a high-wage, capital- or skill-intensive drop in India’s low-wage, unskilled, labour-abundant ocean. India’s growth should be churning in these labour-abundant waters, but it isn’t.
Agriculture is stagnant, hobbled not just by very high external protection but also by crazy subsidies captured by comparatively rich farmers and middlemen, absence of property rights, terrible rural irrigation and infrastructure, and draconian domestic restrictions that fragment the internal market. Non-tradable services sectors – where potential employment generation is huge – are also crippled by domestic restrictions. Backbone services sectors (such as banking, insurance and retail) suffer from external protection as well. Last – and crucially – India’s glaring development gap is in manufacturing, for all sorts of Union and state-level policies – on labour markets, infrastructure, power generation, subsidies, the public sector, repressed agriculture and services sectors, uncertain property rights, and remaining zones of protection against imports and inward investment – conspire to prevent labour-intensive industrial production.
India needs its Industrial Revolution if it is to grow out of poverty. That means putting the impoverished in the countryside into (initially) low-wage work in mass manufacturing. That is what China and other parts of east Asia have done. These realities should be clearer now that the Indian economy has taken a sharp turn for the worse this year, in a climate of global economic crisis. This exposes the pathetic, do-nothing, zero-reform record of the Congress-led government since 2004. More generally, it lays bare India’s huge reform gaps and its brittle, decaying institutions.
Dr Razeen Sally is the author of Trade Policy, New Century: The WTO, FTAs and Asia Rising.