India’s Pattern of Development: What Happened, What Follows

India seems to have followed an idiosyncratic pattern of development, certainly compared to other fast-growing Asian economies. While the emphasis on services rather than manufacturing has been widely noted, within manufacturing India has emphasized skillintensive rather than labor-intensive manufacturing, and industries with typically higher average scale rather than small-scale industries. We argue that recent trends reflect a continuation of the patterns that existed prior to the beginning of economic reforms in the 1980s, and attempt to link those patterns to the nature of the policies adopted soon after India’s independence. We then look ahead, using the growth of fast-moving Indian states as a guide. Despite recent reforms that have removed some of the policy impediments that might have sent India down its idiosyncratic path, it appears unlikely that India will revert to the pattern followed by other countries. The unique capabilities it acquired during the era of policy distortions might well create hysteresis in its growth patterns. In turn, this will result in unique challenges, especially those of employing a growing unskilled labor force, and of managing an increasing divergence of incomes between states. Ironically, policies to boost the supply of skilled labor could prove essential if the lagging states are to attract investment in labor-intensive activities in order to “catch-up.”