Book Excerpt | India's growth story diverges from the pan-Asian narrative

Asian export-led growth accelerated the typical shift in labour between sectors, but the transformation was similar to the one that rich countries had already gone through. First manufacturing expands, drawing workers from agriculture, accounting for a greater share of the total economic output of the country. Strong productivity growth in manufacturing increases worker incomes. As the population gets richer, people start demanding more services. When a country is poor, most services are done in-house—people cook their own food and someone in the household cuts their hair. As some people get richer, they employ a cook and go to a barber. As the country gets richer still, household help becomes expensive, and people go to a restaurant when they don’t want to cook. In short, productivity growth in manufacturing increases the demand for services and eventually reduces the need for workers in manufacturing.

The growth of services consequently picks up, and draws workers from both agriculture and manufacturing, reducing their share of workers. The services sector eventually dominates employment in the economy. Thus, the manufacturing share of employment in an economy as a function of its income per person first increases as workers move from agriculture to manufacturing, then decreases as they move from manufacturing to services. Typically, manufacturing’s share of workers decreases only when a country becomes quite rich, and indeed even then, given the high productivity of manufacturing jobs, its share of the economy’s output does not decrease as fast.

How Has India Fared?

Add up all the incomes paid for goods and services in the country and we get the country’s gross domestic product or GDP. Divide GDP by a country’s total population to get income per person (in the jargon, GDP per capita).

In 1961, India’s income per person was $86, South Korea’s was $94 and China’s was $76. India was right in the middle of a very poor pack of countries. India’s income per person today is around $2300, China’s is around $12,500 and Korea’s is around $35,000.6 India is no longer in the middle of the pack; it is at the bottom by a long way. Indians can have three immediate reactions to these statistics. First, of course: the comparison is unfair. We have selected two of the most successful growth stories in the history of humanity and have set India up against them. The second response is despondency: How did we get it so wrong? The third is to get defensive: India chose a different path, prioritizing stability and democracy in a diverse country rather than economic growth at any costs. There is some merit to all three reactions.

For instance, we have indeed selected two of the fastest-growing large countries for comparison. Compared to the rest, India does not fare so badly. Between 1980 and 2018, India’s GDP per capita grew at an average of 4.6 per cent per annum, and the decadal average never fell below 3 per cent. If we filter countries by those that have grown at 4.5 per cent or more for at least thirty-eight years in this period, and during which any consecutive ten-year average has not fallen below 2.9 per cent, only nine countries make the cut, and only Botswana, other than India of course, comes close to being a persistent democracy.

There is another aspect of growth worth noting. We mentioned earlier that the share of workers in manufacturing typically peaks at some point in a country’s development, and then falls. As Dani Rodrik of Harvard University has documented, since 1990 the share of manufacturing, in terms of both total workers and total output, has started decreasing in a number of countries in Africa and Latin America. This has happened long before these countries reached the levels of per capita income at which a country’s share of manufacturing typically started declining in the past. He argues this is also true for India, with the manufacturing employment share starting to decline from 2002. While there is some controversy about whether India is deindustrialising, it is undoubtedly true that services employment has picked up a bigger share of those leaving agriculture than is typical for developing countries, while the share of workers in manufacturing has stayed relatively flat. Whether this is a bug or a feature of late industrialisers like India is something we will examine in the next few chapters.

Whichever way you cut the data, it is clear that India came late to the manufacturing exports game, only beginning with its reforms in the early 1990s. Its growth since the early ’90s has certainly benefited from its increasing exports, both of manufacturing and services. But why has it not built a greater manufacturing presence?

Excerpted with permission of the publisher from Breaking the Mould: Reimagining India's Economic Future by Raghuram G. Rajan, and Rohit Lamba

Breaking the Mould: Reimagining India’s Economic Future

By Raghuram G. Rajan and

Penguin Business

pp. 336; Rs 799