Quest for an Indian Manufacturing Future

The manufacturing sector occupies a special place in the theory and practice of economic development and structural change. Historical experience as well as economic theory stro­ngly suggest that sustained increases in per capita income occur only after the manufacturing sector reaches a certain critical size in terms of the share of GDP as well as employment. Compared to agriculture, construction or services, aggregate output growth in manufacturing is more strongly correlated with aggregate gross domestic product (GDP) growth due to extensive backward and forward linkages of this sector with the rest of the economy. And due to economies of scale and
embeddedness of new techno­logy in new investments, the growth of output causes productivity growth in this sector. These “Kaldor Laws” along with the capacity of manufacturing to show “unconditional convergence” or catch-up of labour productivity independent of country-specific characteristics make this sector special (Rodrik 2011; Storm 2015).¹ In late industrialising countries such as India, the problem takes on a new dimension—how to develop industrial capacity, infrastructure and competitiveness in a global economy consisting of far more efficient firms? A vigorous debate has raged on the extent to which industrial policies like subsidy and trade policies like tariffs contributed to late industrialisation success stories like South Korea, Taiwan or more recently China (Amsden 2001; Cherif and Hasanov 2019; Lane 2021). In the 21st century, the story of industrialisation has met a new plot twist—the challenge of climate change.

With the Indian policy commitment to manufacturing having received a new boost in the form of Make in India, the questions that confront us today are the following: Does Rodrik’s (2016) thesis of “premature deindustrialisation” indicate that it is too late for “late industrialisation”? Is there a path to industrialisation that can capitalise on the special properties of manufacturing mentioned above, while avoiding the 20th century ecological pitfalls? Can such a path draw on India’s strengths, namely an enormous number of small firm clusters all across the country, often drawing on decades, if not centuries of manufacturing tradition? And perhaps most importantly, can manufacturing create enough emp­loyment to contribute to India’s structural transition—something that it has thus far failed to do?