The Indian economy’s growth trajectory is facing challenges, partly due to external geopolitical factors such as the ongoing conflicts in West Asia and Ukraine, and also internal factors related to productivity and employment. Recent economic data suggests that while India’s growth is slowing slightly, it aligns with global trends post-COVID recovery. However, the core issue, as has been observed for decades, is India’s difficulty in generating enough “good” jobs that offer stability, fair wages, and growth opportunities.
Human capital and manufacturing investment
The government has been actively pushing for enhanced productivity and wages through investments in human capital, recognizing that this strategy could yield more widespread benefits than physical capital investments alone, which often substitute for workers. Efforts to enhance skilling and apprenticeships, along with financial support for manufacturing under programs like “Make in India,” are part of this approach. The idea is that improving human capital and productivity will increase the number of well-paying jobs, which is essential for sustained economic growth.
Additionally, India’s increasing foreign direct investment (FDI) and its entry into global manufacturing networks indicate promising signs for long-term growth. India’s move towards diversifying its supply chains, as multinationals and governments reduce their dependence on China, is also expected to support India’s ambitions in the manufacturing sector. The introduction of the Goods and Services Tax (GST), which has simplified trade within the country by reducing barriers, has also been a positive development. However, these structural improvements have not yet resulted in significant productivity or employment gains, especially in sectors like apparel, where India lags behind competitors such as Bangladesh.
Manufacturing constraints and structural rigidities
A new study by economists Abhishek Anand, Arvind Subramanian, and Naveen Thomas reveals significant issues in India’s manufacturing sector that hinder productivity and job growth. The study highlights that economies of scale—a critical factor in improving efficiency and employment—are often lost in India due to the way manufacturing data is reported and how businesses are structured. The Annual Survey of Industries (ASI), a key source of manufacturing data, has allowed firms to amalgamate data from multiple plants, which masks the reality of small, uncompetitive plant sizes. This obscures India’s lack of large-scale manufacturing units, which could otherwise benefit from economies of scale and produce better jobs.
For instance, in Bangladesh’s thriving apparel sector, around 40% of employment occurs in plants with over 1,000 workers, whereas in India, that figure is closer to 10%. Indian firms face a mix of regulatory and political risks, which discourage them from scaling up. According to the study, CEOs report that they often avoid expanding plant sizes due to complex regulatory landscapes and concerns about potential legal disputes, which could place them at a disadvantage relative to both the government and labor forces. This mix of regulatory hurdles and political risks is seen as an ongoing impediment to the growth of India’s manufacturing sector.
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Learning from East Asia and Bangladesh
Indian policymakers often look to the East Asian “miracle” of economic growth, led by countries like South Korea and Taiwan, which rapidly industrialized and achieved high levels of productivity. However, these countries often relied on less democratic means and more authoritarian labor policies to achieve rapid growth. Bangladesh, though not a model for democracy, succeeded in building an apparel industry with a global competitive edge, thanks to larger plant sizes and lower regulatory barriers.
India’s challenges are unique, with complex political and social dynamics that shape its business environment. Ease of doing business is crucial, but India’s business environment also demands policies that consider its social and legal landscapes. Policies geared solely towards improving business rankings may miss the factors that contribute to long-term productivity and job creation, such as the capacity for businesses to scale and navigate legal and regulatory frameworks effectively.
Moving forward: Addressing local challenges
To bridge these gaps, Indian policymakers will need to adopt a more localized approach. The business environment for smaller firms and industries operating at state and local levels often diverges significantly from the conditions in New Delhi and large, national corporations. Encouraging growth in these sectors will require reforms that address state-specific regulatory frameworks, simplify compliance, and reduce bureaucratic barriers.
Reflecting on the distinct realities of smaller Indian enterprises, alongside efforts to integrate them into broader global production networks, could help India achieve balanced growth that creates high-quality jobs. A focus on human capital investment, paired with local governance reform, can support a manufacturing sector that not only grows but also provides meaningful employment, benefiting a larger share of India’s population.
