Why is it in news?
- A recent discussion on A Sixth of Humanity by economist Arvind Subramanian revisits why India has lagged behind China and South Korea in industrialisation despite comparable starting points.
- The argument applies the ‘Dutch Disease’ framework to India — suggesting that high public-sector wages distorted labour markets, pulled workers away from manufacturing, raised domestic prices, appreciated the real exchange rate, and weakened manufacturing competitiveness.
- The debate reopens larger questions on technological upgradation, wage dynamics, inequality, and structural transformation in India’s growth model.
Relevance
- GS-III: Economy — Growth, Structural Transformation, Employment
- Manufacturing stagnation, wage–productivity dynamics, inequality
- GS-III: Industry & Infrastructure / Industrial Policy
- Technology adoption, export orientation, PLI, R&D ecosystem
Key Facts & Data
- Manufacturing share in GDP
- India: broadly 15–17% for three decades, declining recently relative to services
- China: rose from ~25% (1990s) to 28–30%+ during industrial boom
- South Korea: sustained 25–27% during export-led industrialisation
- Employment structure
- India: manufacturing employs ~11–12% of workforce; large informal share
- China/South Korea: manufacturing central to productivity & wage gains
- Wage dynamics in India
- Entry-level IT wages stagnant since early 2000s (real terms barely improved)
- Platform firms (Swiggy, Zomato, Ola, Blinkit) rely on labour-intensive, low-productivity models rather than technology-deepening
- Inequality signal
- Top-end wealth and corporate profits grew faster than median wage/productivity, indicating lop-sided growth.
Dutch Disease
- Originally used to study Netherlands’ 1959 Groningen gas discovery.
- Mechanism:
- Resource boom → higher wages & capital shift into booming sector
- Currency appreciation / price rise → imports cheaper, exports costlier
- Manufacturing becomes uncompetitive → stagnation or decline
- Extension to India (policy variant):
- Expansion of high-wage government sector → manufacturing cannot match wages at existing productivity
- Higher incomes raise domestic prices → real exchange-rate appreciation even without nominal rupee change
- Demand tilts toward cheaper imports, hurting local manufacturing.
Critical Interpretation of the Argument
- Strengths of the hypothesis
- Explains factor-market distortion: skilled labour moves to safer, better-paid government jobs
- Clarifies link between wages, prices, competitiveness, and structural transformation
- Limitations
- Classic Dutch-disease arises from natural-resource windfalls, not deliberate wage policy
- Ignores why firms did not upgrade technology over time to sustain higher wages
- Public sector wages may be symptom, not core cause, of weak industrial policy and ecosystem gaps.
Technology & Wage Question
- Induced-innovation theory (Habakkuk, Allen, Acemoglu)
- High wages → firms invest in automation, capital-biased technology → productivity & wage growth
- Seen in Germany, Japan, South Korea with labour scarcity
- India’s contrast
- Large labour reserves reduced incentive to automate
- Manufacturing became labour-absorbing but low-productivity, limiting wage growth
- Services growth did not diffuse productivity economy-wide.
Structural Bottlenecks Beyond Wages
- Shallow export orientation vs. East Asian export discipline
- Weak firm size-upgrading (missing middle; dominance of micro-units)
- Patchy industrial policy and cluster-level support
- Low R&D intensity and technology adoption
- Logistics, power, and compliance frictions historically higher than peers.
Policy Implications
- Shift from labour-abundance reliance to technology-deep manufacturing
- Strengthen export-linked manufacturing clusters and scale-up pathways
- Invest in skills, automation readiness, design & R&D
- Reform wage-productivity linkages: raise productivity alongside wages, not suppress wages
- Leverage PLIs, supply-chain localisation, semiconductors, electronics, green manufacturing with stronger technology absorption.
