India missed the manufacturing bus, and the consequences are still visible today. While countries like China and South Korea built large, competitive manufacturing sectors that fueled growth, exports, and employment, India’s industrial growth stalled. Instead, the economy leapfrogged from agriculture to services, leaving millions stuck in low-productivity jobs and limiting wage growth. The question is: why did India’s industrialisation fail to take off when the opportunity was there?

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The Stalled Growth of Manufacturing

Manufacturing has historically been central to economic transformation. It absorbs surplus labour, increases productivity, and generates export capacity. Countries such as China and South Korea made deliberate efforts to create strong manufacturing sectors. India, by contrast, saw the share of manufacturing in GDP remain mostly flat for decades.

Services expanded rapidly, often outpacing manufacturing growth. While this helped create a modern economy in cities and technology hubs, it left a large part of the workforce in low-paying, informal jobs. The unusual pattern of skipping large-scale industrialisation has contributed to persistent inequality in wages and employment opportunities.

Understanding the Dutch Disease

One explanation offered by economist Arvind Subramanian in his book “A Sixth of Humanity” is that India suffered from a type of Dutch disease but not in the traditional sense. The classic Dutch disease occurs when a natural resource boom makes other sectors less competitive. It was first observed in the Netherlands after discovering Groningen gas in 1959.

The mechanism works like this: a booming sector raises wages and prices across the economy, appreciates the real exchange rate, and makes exports from other sectors more expensive. In the Dutch case, the gas boom made Dutch manufacturing less competitive at home and abroad.

Applying Dutch Disease to India’s Public Sector

Subramanian applies this logic to India’s large public sector. Instead of a natural resource boom, India experienced relatively high and stable government salaries. These wages drew workers away from manufacturing, increased economy-wide wages, and raised domestic prices.

Even without formal currency appreciation, higher prices effectively made Indian goods more expensive compared to imports. The result was a crowding-out effect where local manufacturing struggled to compete. In this sense, India’s state policy may have inadvertently limited industrial growth.

Limits of the Dutch Disease Explanation

While this idea provides some insight, it has limitations. Dutch disease typically applies to sudden resource windfalls, not planned government wage policies. The origin of the wage increase whether natural resources or public sector policy is different. However, the outcome of higher wages and prices affecting manufacturing remains similar.

This leads to another puzzle: if wages were high, why did technology not respond? Economic theory suggests that higher wages should incentivise firms to innovate and adopt labour-saving methods. Historical examples, like Britain’s Industrial Revolution, show that high wages often spur mechanisation and productivity growth.

Cheap Labour and Technological Stagnation: India Missed the Manufacturing Bus

In India, manufacturing became reliant on cheap labour rather than technology. Even as markets expanded and some state interventions declined, private sector growth often did not lead to higher wages or increased productivity.

This pattern is also visible in India’s services sector. Many modern platforms, including IT services, food delivery, and ride-hailing, rely heavily on low-paid labour rather than technological innovation. Entry-level wages in major IT firms have seen limited growth since the early 2000s, indicating that the economy continues to favour abundant, cheap labour over productivity-driven investment.

Regulatory and Policy Challenges: India Missed the Manufacturing Bus

Another factor in India’s industrial stagnation is the regulatory environment. Excessive bureaucracy, restrictive labour laws, and complex licensing systems may have discouraged firms from investing in productivity-enhancing technologies. While high public sector wages created pressures for technological upgrading, structural hurdles may have prevented it.

At the same time, private firms may have chosen low-wage, low-productivity paths because abundant labour made them viable. The combination of regulatory limits, policy choices, and a labour-rich environment created a development trap that slowed industrialisation.

Reimagining Industrial Growth: India Missed the Manufacturing Bus

The deeper lesson for India is that manufacturing cannot thrive on cheap labour alone. Sustained growth requires technology adoption, skills development, and productivity increases. If India wants to avoid remaining stuck between a high-growth service sector and a large low-productivity workforce, reforms must focus on encouraging innovation in industry, improving infrastructure, and supporting industrial competitiveness.

The Dutch disease perspective explains part of India’s story, but the main challenge lies in why high wages did not trigger innovation and industrial expansion. Addressing this gap is essential for building a robust manufacturing base that can provide jobs, exports, and sustainable economic growth for the future.