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Opinion | A development story with an epilogue yet to be written

India’s quest for a structural transformation of its economy has had some riddles that still await solutions

The growing global anger against Chinese belligerence was overdue. Among other things, this anger also has implications for how India should compare its economic performance with its northern neighbour. That entails going back to some of the key insights of traditional development economics.

The easiest way to compare the economic performance of two countries is to take a look at how average incomes are moving. Most economic comparisons of India and China have revolved around this simple measure. There is a good reason why average incomes matter so much. They give us a good idea of the standard of living that an average citizen can maintain.

India had an average income of $2,100 in 2019. China was at a similar level in 2006, which means that India lags China by 13 years in terms of this very simple metric. Take a look at some other Asian countries. Indonesia had an average income of around $2,100 in 2007, Thailand in 2002, Malaysia in 1988, and South Korea in 1983. This provides an idea of the gap that India has to close in the years ahead.

However, the great development economists of an earlier era said that the process of economic development is about the structural transformation of traditional economies. Countries develop as people move from low-productivity to high-productivity activities, from agriculture to industry, from villages to cities, from small scale to large scale production, from traditional to modern technology. This is broadly the route that many successful Asian countries, beginning with Japan, have take since the end of World War II.

Here is some data that offers a view of the relative performance of the six Asian countries mentioned above—India, China, South Korea, Malaysia, Thailand and Indonesia. I have considered just two aspects of their structural transformation, the proportion of the labour force outside agriculture, and the share of industrial production in national output. The data is for the specific years when these six countries were at around $2,100 income on a per capita basis, as mentioned earlier. The income data is taken from the International Monetary Fund while the other data cited here is from the World Bank.

All six countries had broadly similar levels of labour force participation in agriculture at similar levels of average income. Around four out of 10 workers were employed on the farm. This means that workers had already begun to leave farming to seek jobs elsewhere. Industry (including construction) is one sector that has absorbed this labour. India compares well with the other five countries on this count as well, though most of the Indian industrial labour force works in tiny enterprises, rather than large ones.

Where the stories diverge is in the second part of the structural transformation arc. The contribution of industrial production to national output is far lower in India than it was in the other Asian countries when their average incomes were around $2,100. In their case, the ratio ranged from 35% in the case of Korea, to 47% in the case of China. The others were somewhere in between. India has less than a quarter of its economic output coming from industry (which includes construction in the World Bank database).

The inability of India to have more if its economic output come from industry has two explanations. The first one is that India has leapfrogged the intermediate stage of industrial development to move from a farm economy to a services economy. The second one is that India is experiencing what Dani Rodrik has described as “premature deindustrialization". In this context, Saon Ray and Sabyasachi Kar have in an insightful recent paper written about the “developer’s dilemma" of balancing the twin objectives of structural transformation and inclusive growth (Kuznets’ Tension In India: Two Episodes, Wider working paper).

However, India’s structural transformation story has some successes as well. One of them that is worth mentioning is that it has a far more sophisticated economy than suggested by its income level. India is 42nd among the 133 economies included in the Economic Complexity Index, which is no mean achievement for a country that is 107th in terms of per capita income. The old Indian planning strategy has seen ample failures, but its big success was the creation of a diversified industrial structure. For example, in the high noon of Nehruvian planning between 1955 and 1965, industrial production growth averaged 8% a year, far outpacing the rest of the economy. More important in the context of this column, production of capital goods went up by 16% a year while intermediate goods production growth averaged 8% a year.

In that phase, the focus on capital goods and intermediate goods was as much about geo-strategy as it was about economics. The diversification of the Indian economy—as well as investments in technology—provided the strategic depth that a country emerging from the clutches of colonialism had to pursue as part of a broader effort to safeguard its sovereign interests. The problem was that the same policy framework that provided strategic depth to the Indian economy also led to the normalization of economic inefficiency. This important historical lesson—and paradox—should resonate in our times when industrial policy backed by protectionism could be making a comeback.

Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics

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