Introduction

Manufacturing has historically been the backbone of structural transformation, productivity growth, and mass employment. While economies such as China and South Korea used manufacturing to transition from agrarian to industrial societies, India’s manufacturing share in GDP has stagnated and, in recent years, declined relative to services. 

Why in the News?

India’s manufacturing sector has recently lost relative ground to services, despite decades of policy emphasis on industrialisation. This is significant because manufacturing traditionally absorbs surplus labour and drives productivity convergence. The article highlights a sharp contrast with China and South Korea, where manufacturing shares expanded rapidly. A key concern raised is that high public sector wages, limited technological upgrading, and reliance on services-led growth have made Indian manufacturing less competitive, contributing to wage stagnation, inequality, and weak employment outcomes.

Why has India lagged behind China and South Korea in manufacturing growth?

1. Relative manufacturing performance: Shows India’s manufacturing share in GDP remaining stagnant while China and South Korea experienced sustained expansion.
2. Structural divergence: Reflects different growth models, with India relying on services while East Asia leveraged labour-intensive manufacturing.
3. Growth consequences: Results in weaker productivity growth and limited mass employment creation.

How do public sector wages distort manufacturing competitiveness?

1. High government salaries: Raise economy-wide wage benchmarks beyond productivity levels in manufacturing.
2. Cost escalation: Increases prices of non-tradable services, raising input costs for manufacturing firms.
3. Labour diversion: Pulls skilled workers away from manufacturing into public employment.
4. Competitiveness impact: Makes Indian manufactured goods less competitive in global markets.

What is the role of the ‘Dutch disease’ mechanism in India’s case?

1. Conceptual framework: Explains how income windfalls distort relative prices across sectors.
2. Indian variant: Public sector wage expansion acts as a de facto windfall similar to natural resource booms.
3. Real exchange rate appreciation: Makes imports cheaper and exports less competitive.
4. Manufacturing crowding-out: Reduces incentives for domestic industrial production.

Why has technological upgrading in manufacturing remained weak?

1. Limited productivity pressure: Firms rely on cheap labour rather than innovation.
2. Absence of induced innovation: High wages have not translated into capital-intensive or technology-driven growth.
3. Contrast with East Asia: China and South Korea used competitive pressures to upgrade technology.
4. Outcome: Indian manufacturing remains trapped in low productivity equilibrium.

How has services-led growth shaped income distribution and employment?

1. Skewed wage growth: Benefits high-skill workers disproportionately.
2. Inequality expansion: Concentrates income gains among elite service sector employees.
3. Employment mismatch: Services fail to absorb surplus labour from agriculture.
4. Structural imbalance: Weakens broad-based economic transformation.

Why has private sector dynamism not translated into manufacturing expansion?

1. Sectoral allocation: Private investment favours services over manufacturing.
2. Technological complacency: Growth driven by labour abundance rather than innovation.
3. Limited spillovers: Services growth generates fewer backward and forward linkages.
4. Long-term constraint: Manufacturing stagnation limits sustained productivity gains.

Conclusion

India’s manufacturing stagnation is best understood as a structural political-economy outcome rather than a cyclical or policy-intent failure. The article demonstrates that high public sector wages, acting as an economy-wide benchmark, have raised costs, appreciated the real exchange rate, and weakened manufacturing competitiveness. Simultaneously, services-led growth has generated productivity and income gains without inducing technological upgrading or mass employment, unlike East Asian manufacturing-led transitions. In the absence of sustained productivity pressure and induced innovation, Indian manufacturing has remained trapped in a low-productivity equilibrium. Reversing this trajectory requires addressing wage–productivity mismatches, technology incentives, and structural distortions, without which manufacturing cannot play its intended role in employment generation and inclusive growth.

PYQ Relevance

[UPSC 2017] Account for the failure of the manufacturing sector in achieving the goal of labor-intensive exports. Suggest measures for more labor-intensive rather than capital-intensive exports. 

Linkage: The article directly explains manufacturing failure through public sector wage distortions, weak technological upgrading, real exchange rate appreciation, and services-led growth. This offers a structural political-economy explanation to this question.

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