Industrial Evolution in Middle Income Economies: India’s journey and path forward

Since gaining independence in 1947, India has set out on an ambitious path of economic growth, transitioning through distinct phases of industrial policy and economic paradigms. Initially, the nation emphasised self-reliance and protectionism, only to later embrace liberalisation, aligning with the forces of globalisation.

From the early years of independence, India adopted a strategy focused on shielding its economy from foreign influence, prioritising self-sufficiency through import substitution. This approach, deeply rooted in Nehruvian socialism, fostered the establishment of state-led industries within a regulatory framework commonly known as the “Licence Raj.” While this structure did lay the groundwork for India’s industrial base, it also constrained growth by imposing excessive state control and limiting competition. Through a retrospective lens, one could argue that such a rigid, insular approach to industrial policy hindered India’s ability to reach a dynamic “take-off” stage of economic development. By adopting a model that constrained innovation, the country’s potential to foster a competitive and adaptable industrial ecosystem was significantly stifled. Thus, India’s experience during this period is a testament to the pitfalls of an inward-looking strategy, revealing the limitations of industrial policy that lacks openness to competition and innovation.

The turning point arrived in 1991 when a severe fiscal and balance of payments crisis necessitated sweeping economic reforms. Under the leadership of Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, India adopted a market-driven approach, moving decisively towards liberalisation. The economic restructuring agenda included a strong focus on deregulation, privatisation, and trade liberalisation, marking a shift towards embracing globalisation. This new economic orientation reflected a commitment to unlocking India’s comparative advantage, especially in sectors such as information technology (IT) and software services. Leveraging a well-educated, English-speaking workforce, India positioned itself as a global leader in IT outsourcing, which became a catalyst for export growth and job creation, fostering a remarkable economic transformation.

The liberalisation reforms of 1991 not only reoriented India’s economic framework but also showed the practical value of harnessing comparative advantages in a globalised world. By concentrating on sectors of inherent strength, India integrated more deeply into the global economy, attracting significant foreign investment and accelerating its technological advancement. Through this approach, India effectively positioned itself as a critical player on the global stage, aligning its growth trajectory with the demands and opportunities of an increasingly interconnected world.

In recent years, India has placed renewed emphasis on its manufacturing sector, aiming to elevate its contribution to the gross domestic product (GDP) and generate mass employment opportunities. Launched in 2014, the “Make in India” initiative seeks to attract both domestic and foreign investment across a diverse range of sectors, especially in high-tech industries such as electronics, automotive, and pharmaceuticals. This initiative is complemented by the “Skill India” mission, which aims to address the skill gap by training millions in various technical and vocational skills needed for a competitive industrial workforce. Together, these initiatives signal a dual focus on strengthening manufacturing capabilities and equipping the labour force with requisite skills, both critical components for India’s integration into global value chains (GVCs). For these efforts to bear fruit, however, improvements in infrastructure, business-friendly regulatory reforms, and streamlined administrative processes are necessary to create an enabling environment for manufacturing growth.

Simultaneously, India has shown a willingness to embrace Industry 4.0 technologies, marking a strategic shift towards advanced manufacturing practices. The incorporation of artificial intelligence (AI), the Internet of Things (IoT), and robotics reflects India’s ambition to align its industrial sector with the tenets of the Fourth Industrial Revolution. This transition signifies an intention to not only expand manufacturing but to foster an innovation-driven ecosystem capable of adapting to the evolving demands of the global market.

India’s approach to industrial strategy resonates with certain established economic theories and models. The “flying geese” model, which depicts economic development as a progression from basic to sophisticated production, captures India’s ongoing efforts to upgrade its industrial capabilities and climb the global value chain. Furthermore, the country’s emphasis on technological and skill development aligns with the idea that competitiveness requires a foundation built on skilled labour and innovation. As India pushes forward with Industry 4.0 initiatives and manufacturing policies, it effectively adopts a strategy that aims to nurture these essential components, positioning itself to compete in a globalised economy where technological capability is paramount.

The current industrial trajectory, shaped by both policy interventions and global economic forces, presents India with significant opportunities. State intervention plays a crucial role in nurturing key sectors necessary for national development, as evidenced by the “Make in India” initiative and the Production Linked Incentive (PLI) schemes. Such strategic interventions are intended to position India as a prominent manufacturing hub, underscoring the government’s commitment to steering the nation’s industrial growth. Additionally, innovation remains a linchpin of India’s industrial strategy. With the promotion of initiatives like “Digital India” and “Startup India,” the government encourages the adoption of advanced technologies, enabling India to modernise its manufacturing processes and improve global competitiveness.

Deepening integration into global value chains provides another critical avenue for India’s industrial sector. As India gains access to international markets, it enhances its capacity to learn from global best practices, adopt cutting-edge technology, and climb the value chain. With a burgeoning digital infrastructure and a skilled workforce, India is strategically positioned to benefit from knowledge transfer and technological advancements, allowing it to advance within the global economic landscape.

Nonetheless, India’s industrial development faces substantial challenges that require measured and strategic responses. The liberalisation reforms of 1991, while transformative, exposed India to intense global competition. This situation demands a delicate balance between integrating the economy with global markets and providing support to domestic industries. Ensuring that domestic sectors can compete on a level footing is essential for cultivating a diversified and resilient economy. Furthermore, skill development emerges as a pivotal challenge. As the industrial landscape shifts towards technologically advanced processes, India must upskill its workforce to meet the evolving demands. This effort necessitates a comprehensive overhaul of the educational and vocational training systems, equipping individuals with the skills necessary to thrive in a digitally-driven industrial environment.

India’s industrial ascent is also shaped by the challenge of overcoming the so-called “middle-income trap,” a phenomenon where countries struggle to sustain high growth after reaching middle-income status. For India, escaping this trap requires concerted efforts to foster innovation, upgrade infrastructure, and implement effective governance reforms. Tailored economic policies are needed that resonate with India’s unique socio-economic landscape, ensuring that the benefits of industrial growth are equitably distributed across the population. Addressing wealth inequality is equally imperative, as data reveals that industrial growth has not been uniformly distributed, highlighting the need for an inclusive approach to economic development.

To navigate these challenges, India must synthesise economic theory with its practical development experience. A strategic blend of state intervention, innovation, skill development, and deeper integration into global value chains provides a robust framework for sustainable industrial growth. Policymakers should continue to leverage strategic state intervention to create an enabling environment for competitiveness and growth, guided by sector-specific policies that address both regional and sectoral needs. Emphasising research and development, fostering public-private partnerships, and nurturing a vibrant start-up ecosystem are key measures to stimulate innovation across sectors.

Addressing the skills gap is imperative for India’s industrial sector to thrive in the age of Industry 4.0. By partnering with academia, strengthening vocational training, and promoting lifelong learning initiatives, India can prepare its workforce for the challenges posed by advanced manufacturing technologies. Moreover, as India integrates more deeply into global value chains, it must remain cognisant of environmental sustainability. A balanced approach that aligns industrial ambitions with ecological responsibility will be critical for ensuring long-term economic resilience.

In summary, India’s industrial journey, marked by an evolving blend of strategic openness, innovation, and skill-building, offers a distinct roadmap for middle income economies seeking to thrive in the contemporary global economic landscape. By building on its unique assets and addressing its challenges with a focused approach, forward-looking policies, India can continue to carve out its place as a formidable industrial force in the world economy.

Maahir Sachdeva

Economics Scholar and Economics Advisor

BA International Development

King’s College, London

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