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:
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India’s manufacturing share in GDP has failed to rise significantly over time.
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In contrast, East Asian economies leveraged manufacturing as the engine of growth and exports.
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This has constrained job creation, especially for semi-skilled labour.
Dutch Disease Argument:
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Economist Arvind Subramanian applies the Dutch Disease framework to India’s context.
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Traditionally, Dutch Disease occurs when a boom in one sector (e.g., natural resources) leads to:
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Rising wages
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Currency appreciation
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Loss of manufacturing competitiveness
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In India, the alleged “boom” came from high public sector salaries, not natural resources.
Impact of High Public Sector Wages:
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Elevated government wages:
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Drew workers away from manufacturing
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Increased domestic demand and prices
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Made imports cheaper relative to domestic manufactures
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Result: Erosion of manufacturing competitiveness without productivity gains.
Technology & Productivity Puzzle:
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The editorial questions why technological progress failed to offset higher wages.
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Manufacturing in India became dependent on abundant cheap labour, reducing incentives to invest in automation and innovation.
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Government intervention and policy uncertainty may have discouraged capital-intensive upgrades.
Induced Innovation & Missed Opportunity:
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Induced Innovation Theory suggests:
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Labour scarcity + high wages → technological advancement
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Historical examples:
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19th-century Britain
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Germany and advanced economies
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India failed to trigger this cycle, even in services:
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Entry-level salaries in the software industry have stagnated since the 2000s, signalling reliance on labour abundance over productivity gains.
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Relevant Prelims Points:
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Issue: Persistent stagnation of manufacturing in India.
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Causes:
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High public sector wages
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Weak technology adoption
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Import competition
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Key Theories:
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Dutch Disease
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Induced Innovation
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Impact:
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Incomplete structural transformation
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Limited industrial employment
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Relevant Mains Points:
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Conceptual Clarity:
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Dutch Disease: Sectoral boom harming manufacturing competitiveness.
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Induced Innovation: High wages drive capital- and technology-intensive growth.
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Structural Transformation: Shift from agriculture → manufacturing → services.
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Analytical Perspective:
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India leapfrogged into services without consolidating manufacturing.
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Way Forward:
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Encourage technology adoption and automation
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Align wage growth with productivity
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Stable industrial policy and export competitiveness
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Strengthen manufacturing-led job creation
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UPSC Relevance (GS-wise):
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GS 3: Manufacturing, industrial growth, economic development
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GS 1: Post-reform economic trajectory and structural change