Why Does India's Economic Growth Process Falter?

A t the outset, it is relevant to describe briefly what may be called an “appropriate economic development path” for a developing economy, which has been experienced by the developed countries, newly industrialised economies (NIEs), China, and Malaysia (culled from various sources). By and large, developing economies are dominated by agriculture, supplemented by unorganised industrial and service sectors in terms of the gross domestic product (GDP) composition. The unorganised sector is predominant in the occupational structure of the labour force (employment composition), with the organised sector having a marginal presence. On the external front, such economies experience trade deficits and exports comprise largely agro and processed products, supplemented by light manufactured goods. There are hardly any heavy manufactured goods in the export basket for obvious reasons.

However, when economic growth takes place, in which “industrialisation” spearheads the whole process, agricultural development takes place, followed by service sector development. Industrial development is characterised by a structural shift in the compositions of manufacturing value added (MVA) and industrial employment. The growth of industry gives a fillip to the growth of the organised sector in the entire economy. Organised sector employment growth will outweigh that of unorganised sector employment. In organised industry, the share of consumer goods will steadily decline, compensated for by a steady increase in the shares of capital goods, basic goods, and intermediate goods industries. The economic transformation facilitated by industrial development leads to a transformation of the export basket as well where the relative shares of agro and processed goods are compensated for by the increase in the shares of manufactured goods – initially light manufactured goods but later heavy manufactured goods. The countries that have pursued this path of economic development have achieved economic prosperity and such economies experience continuous trade surpluses, current account surpluses, and have strong and stable currencies (such as NIEs, China, and Malaysia).