India’s premature deindustrialization and Falling investment rate in the 2010s

Abstract

India’s GDP growth rate faltered in the 2010s after steadily accelerating for decades since the early 1980s. The slowdown adversely affected employment growth, poverty reduction, and nutritional status. Why did it happen? As the study demonstrates, the answer is India’s premature deindustrialization and rising import dependence on China. Capital and intermediate goods industries got hollowed out, with the manufacturing GDP share stagnating at around 15-17 percent since 1991; annual industrial growth rates have declined steeply since 2015-16, even ignoring the Pandemic years. Manufacturing employment share has declined; agriculture’s share rose in the 2010s—an unmistakable sign of premature deindustrialization.

Why did industrial capacity get depleted relative to increasing consumption? The answer is an unprecedented decline in fixed investment and savings as shares of GDP. The share of fixed investment in industry and manufacturing declined significantly. The rising fixed investment share of services is driven by telecom, Government, and other services. Relatedly, net FDI inflow and domestic capital market mobilization, as proportions of GDP, have declined in the 2010s. Up to 70 percent of FDI went into brownfield investment, not greenfield investment. Policy efforts, namely, the Make in India and Atmanirbhar (self-reliant) Bharat initiative and production-linked incentives (PLI), have yet to yield measurable results.

India now needs an industrial policy to overcome premature deindustrialization, in the changed geopolitical context. It would help reverse the decline in industrial investments and target greenfield FDI and technology acquisition. The public sector must reimagine its entrepreneurial role in long-term strategic interests, as the private corporate investment rate is yet to pick up. Raising public investment while maintaining fiscal and external balances will require raising domestic saving rates. Term-lending institutions must boost the supply of long-term credit at low and stable interest rates. The stagnant domestic R&D investment rate must rise quickly to catch up with China.