India’s comparative advantage in human capital endowment is pivotal for driving export-led industries in the process of economic development. In 2014, Indian Prime Minister Narendra Modi adopted a ‘Make in India’ strategy to encourage domestic entrepreneurship in industrial manufacturing, information technology and digitalisation.

The strategy was also designed to attract foreign direct investment (FDI) to assemble and manufacture high-tech goods in India. The goal was to promote an export-led growth strategy and enable India to integrate with global supply chains, create jobs and reduce reliance on high-tech imports. Despite also implementing the Atmanirbhar Bharat Abhiyaan self-reliance policy in 2020, in December 2023 India’s overall trade deficit was US$19.8 billion, with rising bilateral trade deficits with five countries.

In 2019, in a significant reversal of its trade policy direction, the Modi government withdrew from the Regional Comprehensive Economic Partnership. Yet India continues to emphasise regional trading agreements as a platform for liberalisation, maintaining commitments to the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, as well as the value of bilateral free trade agreements (FTAs) with various countries and the Comprehensive Economic Cooperation Agreement with Australia.

Since COVID-19 disrupted global supply chains, the Indian government has turned to self-reliance by restricting trade and adopting an inward-looking approach to economic growth strategy. By prioritising domestic consumer demand for capital-intensive manufacturing of smartphones, automobiles, pharmaceuticals and medical devices, India is reducing its role in the global value chain. As a result, India’s actual share of low-skilled, labour-intensive and competitive exports is actually 15 per cent less than what it could be. China, Bangladesh, Sri Lanka and Thailand are ahead of India in low-skilled labour-intensive manufacturing exports such as textiles, clothing, footwear and jewellery.

Many countries have justified a pivot to self-reliance in essential imported goods on the basis of pandemic-driven supply shocks. Given India’s large income and wealth inequality — with one per cent of the population holding 40.5 per cent of the nation’s wealth — neglecting comparative advantage in export-led growth and depending on domestic demand-led growth is not sustainable. High population growth, the COVID-19 pandemic, poverty, lack of access to vocational education and training, lack of non-farm employment opportunities and limited exports of low-skilled manufactured goods have resulted in high youth unemployment among India’s low-skilled workforce.

The ‘Make in India’ policy was designed to attract FDI inflows for domestic high-tech manufacturing and industrial assembly, but it has struggled to realise this objective. Democratic backsliding, growing divisions based on caste and faith, the farmers’ strike, brain drain and youth unemployment all negatively impact FDI inflows into job-creating low-skilled labour-intensive manufacturing technology, research and economic development. In 2023 net FDI steadily declined to US$13.54 billion, down from US$19.76 billion in 2022.

In 2022, increased imports of labour-intensive goods from China saw a bilateral trade deficit of US$100 billion. India needs to diversify its economic activities and import sources and leverage its FTAs with partners such as Australia, Japan, the United Arab Emirates, the United Kingdom and EU countries to increase FDI inflows.

With high unemployment, India’s demographic dividend in labour-intensive manufacturing is being wasted. Despite the overall formal unemployment rate falling from 8.6 per cent in December 2023 to 6.8 per cent in January 2024, youth unemployment increased among 15–29-year olds resulting in a labour market demand and supply gap and lower economic growth.

India’s current trade strategy and FTAs with developed countries are not utilised or suited to utilise India’s comparative advantage in labour-intensive production. Despite India’s bilateral FTAs, the export growth potential of labour-intensive manufactured goods such as textiles, garments, leather, apparel and jewellery has declined.

India’s 52 per cent youth unemployment and an excess of labour suited to low-skilled manufacturing and agricultural is undermining future growth. As China continues to reduce its low-skilled labour contributions to textiles, clothing and footwear and China-based firms relocate to cost-efficient manufacturing countries like Bangladesh, Sri Lanka, Thailand and Vietnam, India could fill this gap by leveraging its trade relationships. According to research for the Ashoka Centre for Economic Policy, India is losing US$140 billion (or around five per cent of GDP) by not utilising its competitive advantage in low-skilled, labour-intensive, export-led manufacturing activity.

Growth in labour-intensive manufacturing has been slow because India’s restrictive labour regulations promote corporate interests and investment in the high-skilled, capital-intensive information technology and manufacturing sectors. Restrictive labour regulations make it difficult for low-skilled workers and firms to expand labour-intensive manufacturing, create jobs, achieve higher productive efficiency and access gains from trade. This comes at a greater opportunity cost of abandoning an abundant demographic dividend and comparative advantage in the low-skilled labour-intensive textile, clothing, footwear, jewellery and leather goods.

A 2022–23 Economic Survey of India reveals the decline in labour-intensive, low-skill merchandise exports and its impact on employment opportunities. Indian trade policy should provide incentives to employ low-skilled labour and boost manufacturing exports of labour-intensive goods. It should also leverage bilateral FTAs with developed countries to unlock the potential of its comparative advantage.  This would attract FDI into export-led labour-intensive manufacturing and support inclusive, broad-based and sustainable economic development and growth.

Anita Medhekar is Senior Lecturer in Economics at Central Queensland University.