Context: India’s rapid economic growth has not been matched by adequate job creation, wage growth, private investment and productivity gains, raising concerns about a possible middle-income, low-productivity trap.
- The challenge extends beyond external shocks or artificial intelligence (AI)-driven automation to deeper weaknesses in institutions, skill formation, technology diffusion and social valuation of work.
Emerging Signs of Structural Stress
- Jobless growth: Manufacturing has not generated sufficient employment, while post-pandemic recovery has disproportionately benefited large corporations and the digital economy, leaving much of the informal sector relatively untouched.
- Low productivity: Productivity gains remain concentrated in capital- and skill-intensive enclaves that generate limited employment, creating a simultaneous problem of low productivity and rising inequality.
- Weak demand and investment: Sluggish private investment, stagnant wages and weak household consumption reinforce the employment and productivity problem.
The Supply–Demand Debate
- Market-oriented approach: Advocates emphasise labour-market flexibility, agricultural reforms, deregulation and infrastructure investment to improve productivity and competitiveness.
- Keynesian approach: Others stress weak aggregate demand and advocate higher public spending, redistribution and stronger social protection.
- Institutional perspective: Both approaches are incomplete because economic outcomes are also shaped by social norms and institutions that determine incentives, resource allocation and access to public goods.
Two Failing Engines: State and Market
- Private-sector limitations: Despite greater freedom from regulation, private capital has often pursued cost-cutting rather than innovation, with weak absorption of knowledge associated with foreign direct investment (FDI) and limited productivity gains from technological and inter-sectoral shifts.
- Capital–labour imbalance: Heavy subsidies to capital reduce its relative cost compared with labour despite India’s labour-surplus economy, encouraging capital-intensive production.
- Weak innovation ecosystem: Research and development (R&D) expenditure is only around 0.65% of Gross Domestic Product (GDP), while technology adoption remains limited.
- State capacity: Despite the expansion of government, institutional capacity to deliver basic services such as healthcare and schooling remains weak.
Social Norms and Unequal Resource Allocation
- India has historically underfunded mass education while subsidising higher education disproportionately, benefiting privileged groups.
- This educational inequality contributed to a service-sector-heavy post-reform growth model, with socially privileged groups gaining greater access to high-productivity occupations while disadvantaged groups remained concentrated in low-productivity work.
- Thus, social norms influence both who receives opportunities and which occupations are socially valued, reinforcing persistent inequality.
India’s Vocational Skills Deficit
- Low formal training: Fewer than 3% of India’s workforce has received formal vocational education.
- Underutilised Industrial Training Institutes (ITIs): Around 14,000 ITIs offer approximately 25 lakh seats, but actual intake is only about 48%.
- Weak employment outcomes: Only around 63% of ITI graduates obtain employment, compared with over 90% in many countries.
- The result is a paradoxical shortage of skilled manufacturing workers alongside unemployment and underemployment among educated youth.
The Social Devaluation of Skilled Work
- Indian society generally accords greater prestige to university degrees, professional careers and white-collar occupations than to technically skilled occupations such as welding, plumbing, machining and carpentry.
- This hierarchy is partly rooted in historical caste-based occupational stratification, which contributed to the systematic undervaluation of manual and artisanal work.
- Social perceptions, including those reflected in marriage preferences, influence educational choices and occupational aspirations, thereby affecting the allocation of labour.
- The Chief Economic Adviser, V. Anantha Nageswaran, has consequently urged young Indians to consider skilled trades such as welding and plumbing rather than pursuing only software careers or Master of Business Administration (MBA) degrees.
‘Useful Knowledge’ and Economic Growth
- Economist Joel Mokyr argues that sustained economic growth depends on the creation and diffusion of “useful knowledge” — practical knowledge and skills that enable societies to innovate, adapt technologies and raise productivity.
- Modern growth emerges from the co-evolution of science, technology and widespread dissemination of practical knowledge, rather than from technological invention alone.
- India has historically placed greater emphasis on abstract academic education than vocational and technical knowledge, weakening this process of knowledge diffusion.
Technology Diffusion and Labour Intensity
- Production technology has become progressively less labour-intensive across sectors, and artificial intelligence could accelerate this trend even in traditionally labour-intensive industries.
- India therefore needs to address not only how production and income are organised, but also how different forms of work and skills are socially valued.
- Without broader technological diffusion and productive employment, India risks becoming trapped in a low-productivity growth trajectory.
Lessons from Countries that Escaped the Middle-Income Trap
- South Korea and China developed institutions that created and disseminated useful knowledge across the economy rather than concentrating technology within elite sectors.
- China combined mass investments in education and healthcare, technical education, local manufacturing capabilities and technological learning with early State-led industrialisation.
- Countries such as Brazil, Argentina, Thailand and the Philippines struggled to build comparable productive institutions and remain vulnerable to middle-income stagnation and dependence on public transfers.
Productivism: An Alternative Approach
- Economist Dani Rodrik’s “productivism” emphasises creating productive employment and economic opportunities rather than relying primarily on redistribution after income has already been generated.
- It assigns the government an active role in shaping markets and spreading economic opportunities, while focusing on the real economy rather than financial activity.
- The approach prioritises jobs over redistribution and production over consumption, while seeking dignity and social recognition for people as productive members of society.
Way Forward for India
- Industrial policy + vocational education: Align industrial strategy with large-scale technical and vocational skill development to create productive employment.
- Diffuse technology: Ensure that technology, knowledge and innovation reach smaller firms, informal enterprises and less-developed regions rather than remaining concentrated in elite enclaves.
- Revalue skilled work: Improve wages, career progression, social recognition and working conditions for technically skilled occupations.
- Strengthen public capabilities: Invest in mass education, healthcare and foundational capabilities that enable workers to participate productively in a technology-driven economy.
- Institutional transformation: Move beyond the simplistic State-versus-market binary and reform the institutions and social norms that determine how economic opportunities are created and distributed.
Conclusion
- India’s escape from the middle-income trap requires more than faster GDP growth; it demands productive employment, widespread skill formation, technological diffusion and social recognition of useful work.
- Transforming the institutions and norms governing skills, production and opportunity is essential for converting economic growth into broad-based productivity and high-income development
