I think the article below fails to mention that Indian governments have been ineffective at organizing, and mobilizing the natural advantages and resources of the country so that the country can be more heavily industrialized.
In addition the negative influence of the UK through its colonial heritage, and links to India through the Macaulay Brown Sahibs have not helped India industrialize more extensively than it should have after 65 years of Independence.
The article below identify the main causes of the slow industrialization process in India.
One is sure the corrupt leadership of India are aware of these facts.
What holds back India?
How do we explain these differences in the response to trade openness of two economies with very similar factor endowments? The key to answering this question is the poor response of large-scale labour-intensive manufacturing including assembly and processing activities in India. As per the conventional wisdom, these activities have served as the magnet for DFI and a conduit for rapid expansion of exports in China. But this has not happened in India. Large-scale labour-intensive manufacturing activities have been virtually absent from India. Apparel factories employing thousands of workers under a single roof found in China are non-existent in India.
The explanation for the poor performance of large-scale labour-intensive manufacturing is, in turn, to be found in the domestic policy regime—both past and present. Until the late 1980s, large Indian firms were confined to a positive list of capital-intensive sectors. Even in these sectors, their size was limited through licensing based on the perceived size of the domestic market by the authorities. The same applied to foreign companies. These restrictions were largely ended by the mega reforms of 1991 and those that immediately followed them.
But this was insufficient to stimulate large-scale labour-intensive manufacturing. In the late 1960s, India had also adopted the policy of reserving labour-intensive manufactures for the exclusive production by small-scale enterprises. Even after years of steady relaxation, the small-scale enterprises face a ceiling of 50 million rupees (approximately $1.25 million) on investment in plant and machinery. The small-scale industry list grew over time and by the late 1980s came to include virtually all labour-intensive products.
As long as this reservation was in force, high-quality labour-intensive manufactures that could compete on the world markets had no chance of emerging in vast volumes. The bulk of the small-scale enterprises operated in the protected domestic market. The problem was finally recognized in the late 1990s and the government began to gradually trim the Small Scale Industy list. Even then progress was slow and the number of reserved items fell from 821 in 1998-99 to 114 in March 2007.
Most labour-intensive products including toys, footwear, sports goods and apparel have now been off the reservation list for some years. More importantly, even for products still on the list, large-scale production has been permitted since at least March 2000 as long as the enterprise exports 50% or more of its output. This latter change means that firms predominantly interested in exporting their output have been free of such restrictions since March 2000. Yet, labour-intensive manufacturing has remained stubbornly unresponsive.
The most important factor that still holds back large firms from entering these products is a set of draconian labour laws in India. Under these laws, it is virtually impossible for a firm with 100 or more employees to fire the workers even in the face of bankruptcy. It is equally difficult for the firms to reassign the workers from one task to another. These provisions impose very low worker productivity or a high real cost of labour. Large-scale capital-intensive sectors such as automobiles, where labour costs are a tiny proportion of the total costs, can profitably operate in such an environment. But the same is not true of large-scale labour-intensive sectors labour. Few foreign manufacturers are willing to enter India outside of a small subset of capital- and skilled-labour intensive sectors.
Two additional factors have held back the labour-intensive manufacturing in India: costly power and poor transport infrastructure.
Not only do firms pay a much higher price for power in India than elsewhere in the world, they also face much greater uncertainty of supply. Likewise, despite considerable improvement, the transportation network in India remains unreliable and inefficient. The time taken to clear the goods entering and existing the ports and to move the goods between ports and manufacturing sites, which is so critical for assembly and processing activities, is much higher and more variable in India than in the competing countries such as China.
India’s path to modernisation
While high growth has helped India bring its poverty ratio (the proportion of the poor below the official poverty line) down from 36% in 1993-94 to 27% in 2004-05, its transition to a modern economy remains problematic: it must still move the vast majority of its workforce out of farming into non-farming activities. With the services leg doing all of the walking, the economy can only limp along towards this transition.
For a more rapid transformation, India must walk on two legs. That means more rapid growth of the labour-intensive manufacturing.
Krueger, Anne O. 1985. The Experience and Lessons of Asia’s Super Exporters,” in Vittotio Corbo, Anne O. Krueger, and Fernando Ossa, editors, Export Oriented Development Strategies, Boulder and London: Westview Press.
Panagariya, Arvind. 2008. India: The Emerging Giant, New York: Oxford University Press.
Prasad, Eswar and Shang-Jin Wei. (2006). ‘Understanding the Structure of Cross border Capital Flows: The Case of China,’ presented at the conference, “China at Crossroads: FX and Capital Markets Policies for the Coming Decade,” held at the Columbia University on February 2-3, 2006.
1 This article is based on chapters 12 and 13 of the author’s forthcoming book “India: The Emerging Giant” (OUP, USA) to be published in January 2008.
2 Sources: India: Foreign Direct Investment Policy, April 2006, Department of Industrial Policy & Promotion, Ministry of Commerce, Government of India combined with the Reserve Bank of India Handbook of Statistics on the Indian Economy 2005, Table 157. China: Prasad and Wei (2006, Table 6).