The Pulse | Economy | South Asia

How India Will Chart Its Own Economic Course

The country will not become the next factory floor of the world. But it can still be an economic giant.

Akhilesh Pillalamarri
How India Will Chart Its Own Economic Course

A building in the campus of Infosys, an Indian information technology giant

Credit: The Q Speaks/Flickr

As the recent COVID-19 pandemic and Huawei’s bid to expand into the United Kingdom have demonstrated, China’s economic edge is not limited to the manufacture of cheap goods, but spans vital industries such as medicine and telecommunications. This underlies the need for countries around the world — whether developed or developing — to reduce their dependence on China for both economic and strategic reasons. A recent report at in the Wall Street Journal stated that China could potentially exchange access to a vaccine for COVID-19 with diplomatic goals, such as recognition of its claims in the South China Sea. This demonstrates why economic dependency on China is so dangerous.

In order to wean the world off Chinese manufacturing, it is essential to shift supply-chains and manufacturing to other countries. While it is not feasible that manufacturing will return to its pre-globalization levels in Western countries, there is no good reason for manufacturing not to be shifted to other Asian countries with abundant, cheap labor such as Vietnam, Indonesia, the Philippines, Thailand, and Bangladesh. However, the most important potential alternative to China is India because India alone can compete with the size of China’s labor force and multiplicity of industries and sectors. Countries like Bangladesh — which has the world’s second-largest garment sector after China — have achieved rapid industrialization, but often their growth is dependent on one or two low-end manufacturing sectors. On the other hand, India’s investment in technology education and its supply of engineers enables it to produce luxury cars, an indigenous 5G solution, and the upcoming iPhone 12.

India has incentive to encourage greater manufacturing, both because that would serve its developmental needs and as an answer to its increased rivalry with China. India and China clashed on their border in eastern Ladakh earlier this year. Moreover, India cannot project power and influence without an adequate economic base that brings in both revenue and enables it to produce vital products domestically.

It is in this context that India’s Prime Minister Narendra Modi delivered a call for a self-reliant India, or Atmanirbhar Bharat in Hindi. Compared to the previous “Make in India” program, Atmanirbhar Bharat is targeted more narrowly toward essential sectors such as defense, pharmaceuticals, and electronics. Perhaps this is for the best, as it would be incredibly difficult for India to gain a leg on China in terms of manufacturing toys and other low-end plastic goods. It is wise for India to focus its limited manufacturing capacity on producing strategically important goods instead.

Why would it be difficult for India to achieve mass industrialization and a Chinese-style economy dominated by exports? At first glance, India shares many of China’s advantages — it has an enormous young population and a relatively diversified industrial base. However, mass industrialization, on the scale of China’s, involves not only policy and regulatory changes, but changes in attitudes toward labor, education, and infrastructure that may not be immediately forthcoming.

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The most convincing explanation for this phenomenon was put forth by Sanjeev Sanyal, currently India’s principal economic adviser in the finance ministry. In his book “The Indian Renaissance,” he notes that India has pursued a “a counter-intuitive trajectory for a country that has a mass of cheap labour” by exporting mostly complex manufactured goods instead of cheap toys. Sanyal believes that mass industrialization did not, and may not, occur because of the nature of India’s human capital. After independence, India did not push for large-scale primary education programs. It instead focused on building world-class colleges and institutes in order to produce competent planners to run its economy and bureaucracy. As a result, he writes:

This dichotomy meant that the bulk of the country’s workforce was effectively not employable in anything other than subsistence agriculture. At the same time, there was a middle class that was highly educated but underemployed because of the limited opportunities provided by a closed, socialist economy. Till the late eighties, talented and skilled Indians had two worthy choices—to join the civil services (particularly the elite Indian Administrative Services) or emigrate…Those who remained behind became part of an underemployed pool of cheap white-collar workers. When reforms were finally introduced, the entrepreneurs showed a preference for deploying these easily available skilled workers rather than the relatively unemployable masses.

This model persists in India because it builds off cultural attitudes that hold intellectual labor in high regard and are averse to manual labor, which has traditionally been the province of “lower” castes. Thus, India’s developmental model, reinforced by cultural norms, explains the aspirations of both India’s middle class and poor masses. The poor do not dream of sending their children to factories but of teaching them English — the language that has become associated with the middle class — so that they too will be able to “escape” from their economic conditions by emigrating or working for a multinational company within India. Of course, as I have argued before at The Diplomat, it would be impossible for the bulk of India’s workforce to be transferred to the services sector, simply because services employ fewer people than manufacturing and agriculture.

While primary education has expanded and the literacy rate has risen in the past couple of decades, a haphazard education policy implemented without larger developmental aims in mind is not going to be of help for students. The occasional person from an impoverished background may rise into the middle classes by sheer hard work, but for the masses to transcend poverty, Indian society needs to be transformed through development. That is best achieved through manufacturing and infrastructure development that involves the bulk of India’s population, and the fastest way to get there is to train people to operate machines and work in factories. The Indian government’s new education policy, which emphasizes vocational skills, is thus a step in the right direction.

However, it will be difficult to immediately shift policy and economic patterns that are the results of forces set in motion decades ago. On top of these patterns, India’s political and legal systems do not facilitate the acquisition of land for factories and infrastructure, making it particularly difficult to transform rural Indian life. Therefore, in my view, India will continue to develop an economy with a mix of services, agricultural activity, and manufacturing (including for exports), rather than proceed along a Chinese-style developmental path. Many Indian policymakers I have spoken to about this issue seem to concur, although the problem remains that India will not be able to leverage its massive population to rapidly develop along East Asian lines. One can only hope that India can forge a viable development strategy that does not involve mass manufacturing for which it is not prepared.

In the meantime, however, India’s ability to use its sufficiently advanced technological base to focus on essential sectors such as defense, pharmaceuticals, and electronics is a good first step to rerouting some supply-chains away from China and giving it an important manufacturing advantage. Its ability to create indigenous equivalents to TikTok and Huawei also positions it as a potential alternative to China. However, India’s biggest challenge in the coming decades will be the question of how to best develop its human potential in the absence of large-scale industrialization.