Premature deindustrialisation

Topic: Sectors of the Indian Economy · NCERT: Beyond NCERT

Meaning

Premature deindustrialisation means that manufacturing's shares of employment and output peak and then start to fall at much lower income levels than in today's advanced economies. The result is that factories stop taking in workers before the country becomes rich.

• It matters because in a poor country, factories are the usual route that lifts farm workers into better-paid jobs. When that route closes early, workers stay stuck in agriculture or move into low-productivity services such as street vending and petty trade [6].
• The idea is linked with Dani Rodrik (2016).

Explanation

Normal vs premature deindustrialisation

• Classic path of structural change (the shift of workers and output between sectors as a country develops): workers move from the primary sector (farming) to the secondary sector (factories), and then to the tertiary sector (services).
• Deindustrialisation: manufacturing's share of a country's employment and output falls over time.

• In rich countries this happened after they became rich, for example the US and UK after the 1970s. That is normal.

• Premature deindustrialisation: the same fall happens early, while incomes are still low.

• IMF evidence: in countries that began deindustrialising only after 1990, manufacturing's employment share peaked at just 18.9%, at a per capita income of about $4,273 (constant 1990 dollars). Developed countries peaked at far higher income levels [6].
• By contrast, manufacturing shares in East Asia (South Korea, Taiwan, China) peaked at 25-30%.

Why it happens

• Technology changes what factories need
• To win in global markets, factories now need machines and skilled workers.
• Modern production is capital-intensive and skill-intensive: it uses more machines and trained staff, and fewer ordinary workers [6].

• So each new factory creates fewer jobs than factories did in the past.

• Competition: China and East Asia already hold the low-cost factory space. Late developers find it hard to break in.

• Cheaper imports
• After trade liberalisation (cutting import duties and barriers), imported goods become cheaper.
• These imports squeeze domestic factories in late-developing countries.

Why losing manufacturing early hurts

• It takes in low-skill workers in large numbers. Garment, footwear and assembly lines can train a farm worker in weeks.

• Disguised unemployment (more people work on a farm than are needed, so removing some would not cut output) means many farm workers could leave without farm output falling.

• Productivity convergence (poor countries' productivity catching up with rich countries' levels): factory methods and machines can be copied, and exporting forces firms to meet world standards.

• Tradable: factory goods can be sold anywhere, so growth is not limited by demand at home. A haircut must be sold locally, but a phone can be sold anywhere.
• Linkages: factories buy from and sell to many other sectors. This creates extra jobs in transport, trade and finance.

Worked example: the reallocation gain that is lost

• Relative labour productivity of a sector = (sector's share of output) ÷ (sector's share of workers).

• A value above 1 means a worker in that sector produces more than the average worker.

• Manufacturing (India): 17.5% of GVA ÷ 11.4% of workers ≈ 1.5.

• Farm (illustrative): about 18% of GVA ÷ 46% of workers ≈ 0.4.
• Moving one worker from farm to factory raises that worker's output about 3.75 times (1.5 ÷ 0.4).
• This reallocation gain (growth that comes only from moving workers to more productive work) is what premature deindustrialisation gives up.

In India

• India's "missing middle": workers and output moved from farming straight into services. The factory stage in the middle stayed thin.

• Starting point: in 1972-73 about three out of every four workers were in the primary sector. Five decades later, farming still employs the largest group.

• Output share (flat): manufacturing has stayed at about 15-17% of GVA since the 1990s.

• GVA (Gross Value Added) = value of output − value of intermediate inputs. It measures what a sector itself adds.
• Manufacturing's share was 17.2% (2013-14) and 17.5% (2023-24) [1][2].

• Real manufacturing GVA still grew from ₹15.60 lakh crore to ₹28.25 lakh crore over the same period [1][2]. Output rose fast, but its share did not, because services grew just as fast.

• Employment share (falling): the PLFS (Periodic Labour Force Survey, MoSPI's/NSO's main jobs survey, started in 2017-18) shows manufacturing's share of workers fell from 12.1% (2017-18) to 11.4% (2023-24) [5].

• Reverse structural change (the share of workers in farming going up instead of down):
• Agriculture's share of workers rose from 44.1% (2017-18) to 46.1% (2023-24) [5].

• The share of women workers in agriculture rose from 57.0% to 64.4% over the same period [5].

• Against the NCERT benchmark: Class 11 NCERT treats industry's share of GDP rising from 13% (1950-51) to 24.6% (1990-91) as "an important indicator of development". Since the 1990s this rise has stalled.

• Policy response:
• National Manufacturing Policy (2011): it aimed for 25% of GDP by 2022. The target was missed.
• Make in India (2014): it aims to attract investment and improve ease of doing business.
• PLI schemes (2020-21): 14 sectors, with an outlay of about ₹1.97 lakh crore [2]. By 31 March 2026 they had brought over ₹2.40 lakh crore of investment and over 14.15 lakh jobs [1].
• National Manufacturing Mission (Budget 2025-26): it covers small, medium and large industry, with a clean-tech focus [3]. Official material describes a target of 25% of GDP by 2035 (verify current) [4].

Don't confuse with

• Deindustrialisation (normal): manufacturing's share falls after a country is rich, as in the US and UK after the 1970s. Premature means the fall comes at low income, before factories have absorbed farm workers.
• Missing middle (firm size): this second meaning refers to India having many tiny informal firms and a few large ones, but few medium-sized firms. The structural missing middle means a thin factory stage between farming and services.
• Reindustrialisation: a policy-driven revival of factories after offshoring or deindustrialisation, such as the US CHIPS and Science Act and Inflation Reduction Act (2022). It is a response, not the problem.
• Reverse structural change: a symptom. Here the farm share of workers rises (44.1% → 46.1%, 2017-18 to 2023-24) [5]. Premature deindustrialisation describes the manufacturing share peaking early.

Prelims Hooks

• Premature deindustrialisation is linked with Dani Rodrik (2016). Manufacturing's shares of employment and output peak and decline at lower income levels than in advanced economies.
• In countries that deindustrialised after 1990, manufacturing's employment share peaked at about 18.9%, at around $4,273 (1990 dollars) per capita [6].
• Manufacturing's share of GVA was 17.2% (2013-14) and 17.5% (2023-24), nearly flat, even though real manufacturing GVA almost doubled [1][2].
• PLFS: manufacturing's share of workers went from 12.1% (2017-18) to 11.4% (2023-24). Agriculture's share went from 44.1% to 46.1% [5].
• Trap: a falling manufacturing share does not mean falling manufacturing output. India's real manufacturing GVA rose from ₹15.60 lakh crore to ₹28.25 lakh crore [1][2].
• Trap: the National Manufacturing Policy 2011 target was 25% of GDP by 2022, and it was missed. Budget 2025-26 set up the National Manufacturing Mission, not a new "policy" [3].

Mains Points

• Jobless growth: India's growth has been led by services, but skill-intensive services such as IT and finance cannot absorb the 46.1% of workers still in farming [5].
• Without labour-intensive manufacturing (textiles and apparel, leather and footwear, food processing, electronics assembly), farm incomes stay low.

• The demographic dividend is then wasted. This links to GS-III themes of inclusive growth and employment.

• Services escalator vs manufacturing revival: GCCs and digital exports show that services can be tradable and productive. But they need educated workers and create few low-skill jobs.

• The balanced answer is twin engines of growth: services for productivity and foreign exchange, manufacturing for mass jobs.

• Skilling is the bridge between the two.

• Is PLI enough? PLI has brought ₹2.40 lakh crore of investment and 14.15 lakh jobs [1]. That is small next to the crores of farm workers, because PLI sectors are mostly capital-intensive.

• A jobs-first strategy also needs reforms to labour rules, land, logistics, power and MSME credit.
• The global reindustrialisation race (CHIPS Act, IRA, EU subsidies, China+1) makes India's opening both larger and more contested.

Related concepts

• Twin engines of growth
• Reindustrialisation

Read more

• The missing middle: premature deindustrialisation, twin engines and reindustrialisation