The Dutch Disease Debate and India’s Manufacturing Stagnation

Context:
Despite decades of economic growth, India’s manufacturing sector has remained stagnant as a share of GDP, unlike the rapid industrial expansion witnessed in China and South Korea. Economists debate the reasons behind this lag, with a prominent explanation invoking the Dutch Disease theory, alongside concerns over public sector wage structures, weak technological upgrading, and flawed structural transformation.

Key Highlights:

Manufacturing Performance & Comparative Perspective:

• India’s manufacturing share in GDP has failed to rise significantly over time.

• In contrast, East Asian economies leveraged manufacturing as the engine of growth and exports.

• This has constrained job creation, especially for semi-skilled labour.

Dutch Disease Argument:

• Economist Arvind Subramanian applies the Dutch Disease framework to India’s context.

• Traditionally, Dutch Disease occurs when a boom in one sector (e.g., natural resources) leads to:

  • Rising wages

  • Currency appreciation

  • Loss of manufacturing competitiveness

• In India, the alleged “boom” came from high public sector salaries, not natural resources.

Impact of High Public Sector Wages:

• Elevated government wages:

  • Drew workers away from manufacturing

  • Increased domestic demand and prices

  • Made imports cheaper relative to domestic manufactures

• Result: Erosion of manufacturing competitiveness without productivity gains.

Technology & Productivity Puzzle:

• The editorial questions why technological progress failed to offset higher wages.

• Manufacturing in India became dependent on abundant cheap labour, reducing incentives to invest in automation and innovation.

• Government intervention and policy uncertainty may have discouraged capital-intensive upgrades.

Induced Innovation & Missed Opportunity:

• Induced Innovation Theory suggests:

  • Labour scarcity + high wages → technological advancement

• Historical examples:

  • 19th-century Britain

  • Germany and advanced economies

• India failed to trigger this cycle, even in services:

  • Entry-level salaries in the software industry have stagnated since the 2000s, signalling reliance on labour abundance over productivity gains.

Relevant Prelims Points:

• Issue: Persistent stagnation of manufacturing in India.

• Causes:

  • High public sector wages

  • Weak technology adoption

  • Import competition

• Key Theories:

  • Dutch Disease

  • Induced Innovation

• Impact:

  • Incomplete structural transformation

  • Limited industrial employment

Relevant Mains Points:

• Conceptual Clarity:

  • Dutch Disease: Sectoral boom harming manufacturing competitiveness.

  • Induced Innovation: High wages drive capital- and technology-intensive growth.

  • Structural Transformation: Shift from agriculture → manufacturing → services.

• Analytical Perspective:

  • India leapfrogged into services without consolidating manufacturing.

• Way Forward:

  • Encourage technology adoption and automation

  • Align wage growth with productivity

  • Stable industrial policy and export competitiveness

  • Strengthen manufacturing-led job creation

UPSC Relevance (GS-wise):

• GS 3: Manufacturing, industrial growth, economic development

• GS 1: Post-reform economic trajectory and structural change