Breaking the Mould

1. India's Current Path Falls Short: Jobless Growth and Rising Inequality

Too many of our youth don’t have jobs and don’t have a hope of getting one.

Growth isn't enough. Despite being the fastest-growing large economy, India's current growth rate is insufficient to create jobs for millions entering the workforce, leading to high youth unemployment and low female labor force participation. This jobless growth exacerbates inequality, with the upper class thriving while others struggle.

Wasted potential. India risks squandering its demographic dividend – the advantage of a young population – by failing to equip its people with skills and create adequate employment opportunities. This is reflected in stagnant manufacturing employment and a worrying increase in the share of workers in low-productivity agriculture.

Complacency is dangerous. While some government initiatives like GST and digital transfers show implementation strength, others like demonetization and certain PLI schemes have been ineffectual or damaging. A lack of confidence from the private sector is evident in tepid investment, suggesting the current trajectory isn't inspiring long-term economic optimism.

2. The Old Manufacturing Ladder is Broken: Global Supply Chains Favor Brain Over Brawn

The China path—of starting with low-skilled assembly and moving up from there—will not work well for us because China and others are already there and have competed down the profits.

Changing global economics. The traditional export-led manufacturing path, starting with cheap labor and low-skilled assembly, is no longer as viable for late developers like India. China and other emerging markets have already captured these segments and driven down profits through intense competition and developed logistics.

The smile curve. Value addition in global supply chains is increasingly concentrated at the ends: R&D, design (beginning), and branding, marketing, content (end). Manufacturing in the middle adds modest value, especially low-skilled assembly, which is highly competitive and offers tiny profits.

• R&D/Design (High Value)
• Manufacturing (Low Value)
• Branding/Marketing/Content (High Value)

Competing for the past. Offering large subsidies to attract low-skilled assembly, as India is doing, is competing for the past rather than the future. This approach ignores the changed global landscape and India's potential strengths in higher-value activities.

3. India Missed the Manufacturing Bus Due to Foundational Weaknesses, Not Just Timing

India, for a variety of reasons we will come to later, missed the manufacturing bus when China took it.

Capability gap. India's lower average education levels, especially in rural areas, compared to China when it liberalized, hindered the bottom-up emergence of small, competitive manufacturing businesses. This lack of basic literacy and numeracy made it harder for small entrepreneurs to thrive.

Governance impediments. Unlike China's decentralized, competitive local governments that facilitated business growth (sometimes through "competitive cronyism"), India's more centralized system and lack of empowered local governance failed to provide a similarly enabling environment for manufacturing. Labor laws that penalize scale and unpredictable tariffs on intermediate goods also hurt competitiveness.

Democratic constraints. While democracy offers intrinsic benefits, it also makes it harder for the government to suppress market forces (like wage demands or exchange rate appreciation) or acquire land quickly for infrastructure, unlike authoritarian regimes that prioritized manufacturing growth. This meant India couldn't replicate the specific, often heavy-handed, policies used by East Asian tigers.

4. Services and Innovation Offer a New, High-Value Path Aligned with India's Strengths

India must pivot from brawn to brain, even at this early stage of development.

New frontiers in services. Technology has made services far more tradable, either directly (like remote consulting or online education) or embedded within manufactured goods (like chip design or software in cars). India has a significant advantage here due to its English-speaking population and growing pool of skilled professionals.

Scale and productivity. While not all services require scale, many high-skilled business services benefit from it, allowing firms to grow based on exports and create jobs. Digital platforms and cloud computing also enable small service providers and manufacturers (like Tilfi or Moglix) to access global markets and increase productivity without necessarily becoming large corporations themselves.

Beyond exports. Domestically oriented services like education, health care, and finance also offer significant job creation potential across the skills spectrum. These sectors are crucial for enhancing human capital, which in turn supports growth in all areas, including higher-skilled manufacturing.

5. Investing in Human Capabilities from Childhood is the Essential Foundation for Growth

To truly break the mould, we must simultaneously create an environment that fosters ideas and entrepreneurship so that many more firms with radically different, useful product offerings are started in India, with the intent of capturing the high value-added segments of supply chains.

Early challenges. India's human capital challenges begin early with high rates of maternal and child malnutrition, leading to stunting that impairs cognitive and physical development. Poor learning outcomes in primary schools, despite high enrollment, further limit children's potential and contribute to high dropout rates.

Skills mismatch. The higher education system, while producing a small elite, largely fails to provide marketable skills, leaving many graduates unemployed or underemployed. This skills mismatch is a major constraint on attracting high-value jobs and utilizing India's young population effectively.

Prioritizing capabilities. Addressing these issues requires a fundamental shift in government focus from targeted benefits and subsidies to sustained investment in quality public services:

• Improving nutrition programs (like ICDS) with better funding, training, and outcome-based incentives.
• Reforming schooling to focus on foundational learning, teacher support, and leveraging technology and community involvement (like the Delhi experiment).
• Expanding and improving the quality of higher education and vocational training to meet the needs of a modern economy.

6. Effective Governance Requires Decentralization, Transparency, and Strong Institutions

What systemic changes does India have to make to get the governance and outcomes it needs for the twenty-first century, no matter who the leader in power is?

Beyond elections. While India has free elections, it needs stronger checks and balances on government power between elections. The pliability of institutions like the media and business to government pressure undermines accountability and hinders effective governance.

Decentralization is key. India's centralized governance structure, even at the state level, makes it difficult to tailor policies to local needs and empower citizens. Devolution of functions, funds, and functionaries to local governments (panchayats and municipalities) is essential for better public service delivery and fostering local initiative.

Data and transparency. Suppressing inconvenient data and stifling criticism leaves the government navigating in the dark and unable to correct course effectively. Empowering citizens with public data on government performance and protecting the freedom to debate and protest are crucial for accountability and learning.

7. Addressing Inequality and Empowering the Disadvantaged is Crucial for Inclusive Growth

The path we propose aims to create jobs for all.

Beyond the tunnel effect. While economic growth can create hope, persistent inequality and lack of opportunity for disadvantaged groups can lead to frustration and social conflict. Inclusive development is not just a moral imperative but also essential for utilizing the full potential of India's human capital.

Rethinking affirmative action. Reservations alone are insufficient and kick in too late; they need to be part of a "reservations-plus" paradigm that includes:

• Prioritizing quality basic services (health, education) in disadvantaged regions.
• Providing catch-up support for reserved-category students in higher education.
• Encouraging diversity in private institutions and firms through nudges and norms.

Empowering women. India's low female labor force participation is a major economic and social drag. Addressing this requires:

• Creating appealing, safe jobs (part-time, flexible, in growing sectors like education/health).
• Providing affordable childcare and improving safety in public spaces and workplaces.
• Challenging societal norms that restrict women's work outside the home.

8. Strategic Global Engagement is Necessary for Prosperity and Security in a Changing World

India should play its part in addressing the enormous challenges the world faces, especially de-globalization, climate change, migration and ageing.

Soft power first. India's influence should stem from its example as a successful, inclusive democracy, not from aggressive "Tiger Warrior" posturing that alienates neighbors and potential allies. Building economic strength quietly and emphasizing cooperation aligns better with India's long-term interests.

Rethinking trade. India's reluctance to join regional trade agreements (like RCEP) hinders its integration into global supply chains and limits export opportunities. While protecting domestic interests, India must strategically engage in trade negotiations to open markets for its goods and services.

Leading on services and global challenges. India should take a leading role in shaping global rules for trade in services, pushing for mutual recognition of qualifications and data sharing frameworks. It must also actively engage on critical global issues like climate change (prioritizing adaptation and mitigation domestically while demanding fairness internationally), migration, and reforming global institutions.

9. Fostering Creativity and Entrepreneurship is Key to Becoming an Innovation Nation

How do we foster that spirit of questioning, creativity and enterprise that is so necessary for India to succeed?

Beyond traditional jobs. Future job growth will largely come from new enterprises started by Indians. This requires cultivating a national spirit of questioning, problem-solving, and risk-taking, moving beyond the traditional aspiration for government jobs.

Enabling environment. Fostering entrepreneurship requires more than just individual talent; it needs:

• Elevating the status of "tinkering" and practical problem-solving in education.
• Addressing the suspicion of businesspeople and reducing the stigma of failure through transparency and fair regulation.
• Providing enabling frameworks like digital public infrastructure (India Stack) and reducing bureaucratic hurdles.

Risk capital and government support. Innovative firms need patient risk capital, which can be mobilized from domestic sources like pension funds. Government purchases (like BSNL's deal with Tejas Networks) can also catalyze innovation and provide crucial early support for young firms, provided procurement is transparent and efficient.

10. The Wrong Way: Authoritarianism and Protectionism Undermine India's Potential

An authoritarian leadership is certainly not what India needs today.

Suppression kills creativity. Authoritarianism, characterized by centralized decision-making, disdain for consensus, and suppression of criticism and inconvenient data, is fundamentally inimical to the creativity and free thinking required for innovation-led growth. It leads to poor decision-making and prevents learning from mistakes.

Protectionism isolates. A return to protectionist policies, raising tariffs and favoring domestic monopolies or specific firms, shields inefficient businesses from competition, hurts consumers with high prices for low-quality goods, and isolates India from global supply chains and best practices.

Dividing society weakens the nation. Fanning divisive issues based on religion or caste creates internal fissures, antagonizes neighbors, and distracts from the urgent task of economic development and capability building. A nation divided against itself cannot achieve its full potential.

The right path. India's strength lies in its diverse, argumentative, and democratic nature. The path forward requires strengthening democratic institutions, empowering citizens, investing in human capabilities, fostering innovation, and engaging with the world based on cooperation and shared values, rather than retreating into insularity and authoritarianism.

Last updated: May 7, 2025