The rise of India has reshaped regional and global landscapes over the past decade. Since Narendra Modi stormed to power in 2014, India’s economy has advanced from tenth to a remarkable fifth place, with some analysts predicting that it will overtake Japan and Germany to become number three by 2027. The country is filled with a sense of optimism. The fruitful infrastructure achievements, soaring stock market, and growing mobile manufacturing are all testament to the dynamic transformation taking place within the economy. No wonder Modi is keen to trumpet the “China plus one” strategy to encourage countries to minimize their investments in China (and maximize their investments in India).

But does India wield the strength and influence that it claims to possess? Before this year’s election, Modi’s Bharatiya Janata Party (BJP) effectively marketed itself to the globe as destined for a resounding win. The outcome, a significant decline in support for the BJP, came as a rude awakening.

Given how much Modi has equated the BJP’s success with India’s, has he unwittingly set himself and his country up to fail?

India’s Modest Rise

A decade since the inception of the “Make in India” initiative, the country languishes at a modest 2-3 percent of the global industrial output, almost static since the dawn of the 1980s. Given the gloomy prospect of economic reforms after the election, India’s aspiration of replacing China as the world’s factory is hardly convincing

Raghuram G. Rajan, a former governor of the Reserve Bank of India, explicitly  expressed concerns over the government’s obsession with the expansion of manufacturing at the cost of its services sector, warning that this will deprive job opportunities needed by Indian workers and undermine economic growth in the long run. Rajan’s pessimism about India’s manufacturing sector is valid: internationally, imbalances between supply and demand, coupled with overcapacity, limit global demand, leaving little space for India to expand its manufacturing footprint. Meanwhile, other emerging economies, like Indonesia, Vietnam, and Bangladesh, are also busy attracting foreign direct investment (FDI) specifically for their manufacturing sectors, intensifying competition with India.

According to Rajan, the manufacturing ladder has become harder to climb, both politically and economically. The shortage of a skilled labor force, a crucial element in manufacturing, continues to plague India. This shortage affects multiple sectors, with the construction industry experiencing the most severe deficit in 2022, estimated at approximately 85 percent. The IT, technology, and manufacturing sectors each face skill shortages of around 84 percent. According to a report published by India Business and Trade, an initiative under the Trade Promotion Council of India, the average Indian worker has fewer than eight years of education, compared to 14 years for Chinese workers. Additionally, while 80 percent of Japan’s workforce and 96 percent of South Korea’s workforce have formal skill training, only 5 percent of Indian workers do.

In the mobile phone manufacturing industry, India faces significant difficulties in moving upstream due to a lack of component manufacturers that meet Apple’s quality control standards. According to a report by the Financial Times, a 50 percent rejection rate was observed for iPhone casings made in Tata’s Hosur factory, which falls short of Apple’s zero-defect expectation.

Land and labor restrictions also hinder India’s industrialization. After coming to power in 2014, the Modi government tried to make land acquisition easier for industrial and infrastructure projects. But the attempt to amend the land acquisition law faced intense opposition from political parties, farmer organizations, and civil society groups. Due to the widespread protests and lack of political consensus, the government backed off.

Because of the failure of the BJP to secure a majority in the National Assembly in the recent elections, the Modi government will have to rely on its allies to form a government, thus weakening its power to carry out any reforms, including land acquisition.  Acquiring land is indeed difficult and time-consuming in India. The average acquisition of around 50 acres may take from 10 months to two years. It’s not just political and social protests that impede the process. Ignorance about land laws and opaque pricing also complicate the situation.

Where Is India Heading?

The “Make in India” campaign, though well-intentioned, has yet to achieve the transformative impact envisioned. The ongoing struggle to implement land reforms and the slow pace of upgrading the workforce’s skills indicate that India might be running into a dead end in manufacturing. Without addressing these fundamental issues, India risks being left behind in the race for global manufacturing dominance.

India’s economic landscape presents a stark dichotomy. On the one hand, there’s a highly productive, globally integrated formal sector, employing merely 10 percent of the labor force. This sector thrives in services and capital-intensive manufacturing, with IT and pharmaceuticals standing out as international examples. These industries, predominantly urban, seek skilled workers, further exacerbating the divide. On the other hand, a staggering 90 percent of the labor force remains trapped in low-productivity sectors like agriculture and urban informal activities.

This polarization is a roadblock to India’s economic aspirations. The anticipated influx of low-skill manufacturing jobs, pivotal in uplifting millions in East Asia into the middle class, remains elusive. Infrastructure woes compound the problem. India’s deficient infrastructure fails to meet the demands of modern, just-in-time inventory management, deterring companies from integrating India into their global supply chains. More liberal labor laws face fierce political resistance, further delaying the transformation. The promise of a more inclusive economic future hinges on overcoming these systemic challenges.

India’s future prosperity depends on effectively harnessing its youthful talent and overcoming these systemic issues. The shift to populism, laced with authoritarian and majoritarian rhetoric, aimed to preempt economic discontent that could destabilize the ruling coalition. India’s economic growth, driven by high-skilled, capital-intensive service sectors rather than manufacturing, has created fewer jobs compared to other developing nations. Consequently, unemployment rates, particularly among the youth, remain high, with 42 percent of graduates under 25 unemployed. India’s inequality is stark. A report by Nitin Kumar Bharti, Lucas Chancel, Thomas Piketty, and Anmol Somanchi for the World Inequality Lab reveals that the top one percent of the population accounts for 23 percent of all income and 40 percent of wealth—the highest concentration since 1922. The authors question how long such disparity can persist without significant social and political upheaval.

Modi’s business-friendly economic strategy is designed to stimulate economic growth, create jobs, and enhance India’s position in global value chains. However, the social policies under Modi’s administration have been a point of contention. Critics argue that the government’s rhetoric and actions have marginalized Muslim communities, creating an atmosphere of fear and exclusion. For instance, policies like the Citizenship Amendment Act (CAA) and the National Register of Citizens (NRC) have been perceived as discriminatory against Muslims. Although the economic reforms aim to benefit all citizens, the social divisiveness can undermine these efforts by creating social unrest and alienating a significant portion of the population. Moreover, the marginalization of Muslims can lead to the under-utilization of a significant segment of the workforce. Economic growth is most sustainable when it is inclusive, ensuring that all communities have equal opportunities to contribute to and benefit from economic progress. Social policies that alienate any group can hinder this inclusivity.

India, home to the world’s largest population, faces a critical juncture. With 68 percent of its people aged 15 to 64 and one million turning 18 each month, the nation stands on the precipice of a demographic dividend—or disaster. The traditional path for emerging economies involves transitioning from agriculture to manufacturing, providing unskilled labor with more productive employment opportunities. The pervasive unemployment and growing inequality were pivotal in Modi’s electoral setback. The solution lies in a fundamental shift in India’s development model. To harness its abundant labor force, India must craft an economic agenda that prioritizes its main resource: its low-skilled labor. This focus could be India’s comparative advantage for the coming decades. For India’s political leadership, the challenge is clear: transform the economic landscape to create accessible, decent jobs and stave off a looming demographic disaster. A more inclusive growth model involves investing in education, healthcare, and social welfare programs to uplift disadvantaged groups. Additionally, policies like the Production Linked Incentive (PLI) scheme can be tailored to support small and medium enterprises, ensuring that growth is broad-based and inclusive.