A Development Story With an Epilogue Yet to be Written

Context: An economic comparison with the neighbouring countries and India’s past provides lessons for a structural transformation of its economy.

An Analysis of India’s economic comparison with other nearby economies:

• Huge Gap to be covered: While India had an average income per capita of $2,100 in 2019:

• China was at a similar level in 2006 – India lags by 13 years, Indonesia in 2007, Thailand in 2002, Malaysia in 1988, South Korea in 1983.

Analysis of India’s Structural Transformation in comparison to its past other economies:

• Positives: 

• Similar levels of labour force participation in agriculture: 4/10 workers were employed on the farm.

• Industry (including construction) absorbed the remaining labour.

• Sophisticated Economy: India is 42nd among the 133 economies included in the Economic Complexity Index, which is no mean achievement for a country that is 107th in terms of per capita income. 

• Diversified Industrial Structure: Even though Indian planning had its failure; it nevertheless created a diversified industrial structure.

• Between 1955 and 1965, industrial production growth averaged 8% a year,
• Production of capital goods went up by 16% a year while intermediate goods production growth averaged 8% a year.
• Geostrategic Interests: Investments in technology provided the strategic depth that a country emerging from the clutches of colonialism needed to pursue.
• Negatives: Paradox of India’s Industrial Production.

• Low contribution of industrial production to national output: Industrial production contributes to just 25% to the national output compared to 35% in Korea and 47% in China.

• Leapfrogged the intermediate stage: Industrial development was skipped to move from farm economy to services economy.
• Premature deindustrialization: “Developer Dilemma” of balancing the twin objectives of structural transformation and inclusive growth.  

• Normalization of Economic Inefficiencies: Policy framework that provided strategic depth to the Indian economy also led to the normalization of economic inefficiency.

Conclusion: The important historical lesson—and paradox—should resonate in our times when industrial policy backed by protectionism could be making a comeback.