9.14 — Why India Did Not: The Honest Comparison

Srinivasa Ramanujan sent a letter from a clerk's job in Madras to a Cambridge professor in 1913, containing theorems nobody had seen before, several of which took the twentieth century to prove. Satyendra Nath Bose sent a paper to Einstein in 1924 that founded a branch of quantum statistics; the boson is named for him. C. V. Raman won a Nobel Prize in 1930 for work done in Calcutta with equipment costing a few hundred rupees. Meghnad Saha's equation is the foundation of stellar astrophysics.

All of that was done under colonial rule, in a country with 12 percent literacy, by people with almost no institutional support.

So the question this chapter has to answer is not whether Indians are capable. The question is why a country that produces such people at that rate has an income per person roughly a tenth of South Korea's, when the two were comparable in 1960.

The answer is a sequence of policy choices, and this chapter goes through them against the six-point recipe of Chapter 9.13.

1. Land reform: attempted and largely failed

India tried. The attempt is instructive.

What was legislated: abolition of the zamindari intermediaries, ceilings on landholding, and tenancy protection.

What actually happened. Zamindari abolition largely succeeded — the intermediary revenue collectors created by colonial settlements were removed, which was a real achievement affecting tens of millions.

Ceilings and tenancy reform largely failed. Land is a state subject under the Constitution, so implementation depended on state governments, which were dominated by landowning castes. Ceilings were evaded by transferring land to relatives, to servants and to deities. Tenants were evicted before they could register claims. Enforcement machinery was weak, land records were inaccurate and are still inaccurate, and litigation ran for decades.

Two states are the exceptions and they prove the mechanism. Kerala's land reforms from 1957 onward, under a Communist state government with a mobilised peasant base, were among the most thorough in the developing world. West Bengal's Operation Barga from 1978 registered sharecroppers and gave them security of tenure and a guaranteed share. Both produced measurable increases in agricultural productivity and both required a political base that most states did not have.

The consequence. India entered industrialisation with a landed elite intact and politically powerful. Chapter 9.13 listed the four mechanisms by which that matters: lower agricultural investment, weaker rural demand, higher initial inequality, and — the largest — a political class with an interest in blocking land taxation, rural education and anything that raises rural wages.

And it explains why Indian agriculture is still dominated by holdings too small to be viable — average operational holding size is now around one hectare and falling, because inheritance fragments plots each generation and consolidation never happened.

2. Education: the largest single failure

This is where the comparison is most damning and where the counterfactual is clearest.

India's literacy at independence was around 12 percent (Chapter 6.17). Japan's had been above 90 percent for primary enrolment since 1900.

And the choice made was to prioritise higher education. The IITs from 1951, the IIMs, the national laboratories, AIIMS — world-class institutions producing world-class graduates (Chapter 6.24).

Primary education was not funded to anything like the same standard. Literacy reached only about 28 percent by 1961 and about 52 percent by 1991. Universal free and compulsory education for children aged 6 to 14 became a fundamental right only with the 86th constitutional amendment in 2002, implemented by the Right to Education Act in 2009 — sixty-two years after independence.

The defence offered at the time was that a poor country must concentrate scarce resources where they yield most, and that trained engineers and scientists were the binding constraint.

The evidence does not support it. Every successful late developer educated broadly first. A country with a small elite of superbly trained engineers and a mass of illiterate workers cannot run factories at scale, because factory work requires the workforce to read instructions, follow procedures, and be trained on new equipment.

And the failure was compounded, because enrolment was eventually solved and learning was not. Chapter 6.28 gave the ASER findings: a large share of rural children in Class 5 cannot read a Class 2 text. India now has near-universal enrolment and a learning crisis, which is a different and harder problem than the one it started with.

The IIT phenomenon has a specific consequence worth stating. The institutions were excellent and the domestic economy could not absorb their graduates, because there was no industrial base demanding them. So a large proportion emigrated. That has produced an extraordinarily successful Indian diaspora, substantial remittances, and — from the 1990s — the professional networks that built the Indian IT industry. It is a genuine long-run benefit obtained by an inefficient route, and it does not offset the cost of not educating everyone else.

3. No export discipline

Chapter 9.13's decisive variable, and India got it exactly backwards.

India protected extensively and made the protection unconditional and permanent.

Licences were granted for the domestic market with no requirement to compete abroad. There was no test. A firm could produce a poor product at a high price indefinitely, because it faced no domestic competitor and was never required to sell to a foreign buyer.

And exports were actively discouraged by the policy framework — an overvalued exchange rate made exports expensive and imports cheap, import licensing made it hard to obtain the inputs an exporter needs, and the entire orientation was toward substituting imports rather than earning foreign exchange.

The result is measurable. India's share of world merchandise exports fell from around 2 percent at independence to well under 1 percent by 1990.

And there is no shortage of Indian evidence that the capability existed. Once the constraints were relaxed after 1991, Indian firms competed internationally in pharmaceuticals, software services, automotive components, refining and steel within a decade. The capability had been there and the incentive had not.

4. Low investment, and where the savings went

Indian investment ran at roughly 20 percent of GDP during the planning decades, against 30 to 40 percent in East Asia.

And a large share of public investment went into public sector enterprises with poor returns. The heavy industry emphasis produced steel plants, machine tool factories and heavy engineering, and their capital productivity was low and their losses were absorbed by the budget.

Meanwhile the private sector was starved. Credit was directed by nationalised banks according to priority sector rules and political direction rather than by return. Foreign investment was restricted to near zero from the 1970s.

The fiscal deficit financed consumption rather than investment, particularly from the 1980s, which is the proximate cause of 1991 (Chapter 6.28).

5. Manufacturing never happened

This is the largest structural difference and it defines India's present problem.

The normal development sequence is agriculture to manufacturing to services, and the manufacturing phase is what absorbs enormous numbers of workers with modest education and raises their productivity.

India went from agriculture to services, and manufacturing has been stuck at roughly 15 to 17 percent of GDP for decades against 25 to 30 percent in East Asia at comparable stages.

Why, and there are five reasons that compound.

Labour law. The Industrial Disputes Act required firms employing more than 100 workers to obtain government permission to retrench or close. The permission was rarely given. So a firm approaching that threshold faced a permanent, unremovable obligation, and the rational response was to stay below it, to use contract labour, or to substitute machinery for workers. Indian manufacturing is unusually capital-intensive for a labour-abundant country, which is the opposite of what its comparative advantage should produce. Research by Besley and Burgess found that Indian states with more pro-worker labour regulation had lower manufacturing output and employment. The 2020 labour codes consolidated the framework and raised the threshold, and their effects are not yet clear.

Small-scale reservation. From 1967, hundreds of products — including many labour-intensive consumer goods — were legally reserved for small-scale units. The intent was employment; the effect was to prevent any Indian firm in those product lines from reaching the scale at which it could export. Garments, toys, footwear and leather goods were on the list, which is precisely the category in which East Asia built its first export industries. The reservation was progressively dismantled from 1997 and fully ended in 2015 — decades after the window in which those industries were being allocated globally.

Land acquisition. Assembling a large site is extremely difficult, given fragmented holdings, poor records and the political sensitivity of displacement. Several large industrial projects have been abandoned over it.

Infrastructure. Unreliable power, poor roads and congested ports impose costs that a competitor in Vietnam or China does not face. This has improved substantially since 2000 and it was a binding constraint for decades.

And the skills. Point 2, arriving where it hurts most.

What India got right

A chapter this critical needs the other column, and it is not short.

Democracy, kept. Chapter 6.24 made this argument and it is not sentimental. India has had regular free elections with genuine transfers of power for seventy-five years, in the poorest large country in the world, with no coup. South Korea, Taiwan and China all achieved their growth under authoritarian rule with substantial repression. India's growth was slower and nobody was disappeared for objecting to it, and that is a real thing to have.

No famine since independence (Chapter 6.17), which is directly attributable to democracy plus a free press plus the buffer stock system.

A functioning federal structure that accommodated enormous linguistic and regional diversity without secession (Chapter 6.25).

Institutional depth in specific areas. The Election Commission, the Supreme Court, the space programme, the pharmaceutical industry, the software industry, and a private corporate sector with genuinely world-class firms.

And services worked. India's IT services industry is a real achievement — it grew because it needed no land, no power-hungry factories, no licences, and no logistics, which is to say it grew in the gaps the state had not got around to regulating. That is a backhanded compliment to Indian policy and a genuine compliment to Indian firms.

Where India actually is

The measurable position, stated without spin.

Income per person is roughly a tenth of South Korea's and a fifth of China's in nominal terms, and higher on purchasing power parity measures.

Extreme poverty has fallen enormously — several hundred million people since 1991 (Chapter 6.28).

Human development indicators lag income. Stunting at around a third of children, female labour force participation under 30 percent, and learning outcomes well below enrolment.

Inequality has risen sharply since liberalisation.

And the demographic window is open now and closing. India has the largest working-age population in the world and the ratio of workers to dependants is favourable for perhaps another two decades. East Asia converted that window into growth by employing the workers. Whether India does is the question its next twenty years answer, and the arithmetic is unforgiving: 8 to 10 million non-farm jobs a year are needed and fewer are being created.

What would have to change

Stated as the chapter's argument rather than as a programme.

Learning, not enrolment. Teacher accountability, early-grade reading and numeracy, and measurement of outcomes rather than inputs.

Manufacturing conditions: stable and simple labour rules, land assembly that compensates properly and moves quickly, reliable power and logistics, and support conditional on export performance — which is what the production-linked incentive schemes attempt and whose results will be judged on exactly that test.

Female participation, which is the single largest untapped economic resource in the country and which is a function of safety, transport, childcare and social norms as much as of jobs.

State capacity. India has fewer public servants per capita than most countries at its income level, judicial pendency in the tens of millions, and police below UN-recommended ratios. A state that cannot enforce a contract quickly cannot support a manufacturing economy, and Chapter 9.4 identified this as the foundation.

And urbanisation done deliberately, since the transition is happening whether or not it is planned.

Where this shows up in your life

If you are Indian, this chapter is your salary, your commute, your school and your parents' pension.

And the closing observation is the one this Part exists for. Ramanujan, Bose, Raman and Saha did their work in a country with 12 percent literacy and almost no research funding. The constraint on India has never been the top of the distribution.

It has been everyone else — the hundreds of millions who were never taught to read properly, never had a factory job to move into, and never had a state capable of enforcing their contracts or their rights. Chapter 9.4's finding is that this is what determines whether a country is rich, and Chapter 16.3 states it as the volume's central conclusion.

What the next page covers

Chapter 9.15 closes this Part with money as it exists now — how a card payment actually works and who takes what cut, what UPI did and why it is genuinely unusual, what cryptocurrency is and what problem it does and does not solve, what a central bank digital currency would be, and the honest assessment of an industry that has promised to bank the unbanked for fifteen years.