Author : Soumya Bhowmick

Expert Speak India Matters
Published on Sep 15, 2020
Towards a more ‘sophisticated’ Indian economy

Economic ‘Sophistication’ and 4IR

The Fourth Industrial Revolution (4IR) has been exponentially gaining momentum due to the rapidly developing capabilities of humans and machines. It is characterised by the emergence of ‘cyber-physical systems’ and is representative of the manner in which technology is becoming intrinsic to society. In fact, the coronavirus pandemic has further hastened the progress into a technology intensive economy and has ushered in a ‘new normal’ for work and businesses across the world, including India.

The Indian Prime Minister Narendra Modi’s clarion call of making India ‘atmanirbhar’ (self-reliant) and being ‘vocal for local’ has its foundations in increasing the efficiency of domestic production and consumption processes. At a time where there are too many uncertainties and one cannot rely on the vagaries of global trade and finance, it is imperative that India creates a very robust domestic economic system through a closer look at the digitalisation processes and its export basket.

Over the years, the development of new technologies has also resulted in the increase of innovations in the spheres of artificial intelligence, additive manufacturing (3D printing), and the Internet of Things (IoT). These advancements have the potential to increase productive efficiency and trade manifold, which could lead towards increasing India’s economic complexity – ensuing in robust economic growth and improved quality of life.

The complexity or economic sophistication of a product is determined by analyzing the capabilities required (which are a combination of human & physical capital, institutions and systems needed) in producing units of a particular commodity. As a result, the rate of economic progress is dependent on the fact whether the productive structures are aimed towards high-productivity and knowledge-intensive activities (higher economic complexity). In fact, studies across European regions suggest that disparities in the levels of economic complexity deter economic convergence across nations. The economic complexity of the country (EXPY) is therefore directly linked with the sophistication in the productivity levels and the associated technology quotient embedded in a country’s product and export baskets.

India’s Economic Complexity Landscape

The Economic Complexity Index (ECI) is a measure of the productive knowledge and capabilities of different countries. Countries like Japan and Germany (ranked 1 and 3 respectively) which have a high ECI, produce diverse and complex goods which countries with low ECI are unlikely to produce. The following graph highlights India’s ECI ranks over the past two decades.

Figure 1: ECI Ranks by Country

Source: Observatory of Economic Complexity

The above trend lines indicate that even though India ranks better in economic complexity as compared to its immediate South Asian neighbours, its ECI growth has been stagnant over the years. Contrastingly, China and Thailand ranked below India till about 2006, after which they overtook India and ranked 20 and 24 respectively in 2018, whereas India ranked 45 (out of 142 countries). The primary reason behind India’s low economic complexity is that a majority of India’s exports are categorized in the low-income generating products. The following table represents India’s top exports in different sectors as per latest available statistics in 2018 and 2019.

Table 1:  India’s Exports and Product Complexity 

S. No. Products Exported Percentage of Exports Value (in Billion US$) Rank as per Product Complexity Index (out of 1018 products)
2018 2019 2018 2019
1. Refined Petroleum 12.7 13.00 41.5 40.73 812
2. Diamond 8.08 6.31 26.3 19.78 854
3. Packaged medicaments 4.3 4.66 14.0 14.61 270
4. Jewellery 3.81 4.37 12.4 13.68 728
5. Rice 2.29 2.04 7.47 6.39 956

Source: Observatory of Economic Complexity and Ministry of Commerce & Industry

Major exports from India are in refined petroleum, diamonds, packaged medicaments, jewellery and rice (based on HS classifications). All the product classifications, except for packaged medicaments, are ranked very low in the Product Complexity Index 2018. Technology based classifications of these products reveals that packaged medicaments belong to the high-tech manufactured products category, refined petroleum to medium-tech and jewellery to low-tech manufactured products, whereas rice is a primary product and diamond a resource based one.

India’s service sector has grown phenomenally over the last few years (and fares better than many upper-middle income economies such as China, Brazil, Russia and advanced economies like the US and EU). A part of India’s manufacturing sector has gradually moved from primary resource based commodities to low and medium level technologically manufactured goods and eventually towards sophisticated manufacturing products. The export of manufacturing goods has reduced to 67 percent from the 80 percent during 1990-2013 – however, the majority of the manufacturing sector still belongs to low-tech category. Hence, India still needs to go a long way before being categorized as a country with high economic sophistication. 

What is India doing?

Technology has an enormous role to play in increasing the total production of a country, as it enhances efficiency and adds a layer of complexity to goods and services – that lays the development trajectory for developing nations such as India. A greater focus towards the export of such commodities holds much potential for India, especially, for a stable long-term recovery in the post-pandemic global economy.

India for its part is taking positive steps to rapidly transform itself into a digital economy and thereby increase its economic complexity. The ‘Make in India’ initiative intends to create manufacturing abilities thereby facilitating the production of better quality and sophisticated goods. Further, ‘Make in India’, aims towards increasing innovation, foreign investment and creating a digitally advanced economy. To achieve the same, steps have been taken to expand the internet base in the country that has made India the second-fastest growing digital economy. India, for its part has fared continuously well in the Global Innovation Index and is the major exporter in information and communication technology services. Additionally, despite possessing a high number of graduates in the field of engineering and science, the approaches in India still seems to be piecemeal.

Fortunately, FDI inflow in India has shown a 14% increase in the financial year 2019-2020. This increase may be attributed to companies looking for alternatives to China for investment - firstly, due to increased tariffs owing to the US-China trade war; and secondly, because of strained economic diplomacy with China and disruption of supply chains during the pandemic. The increase in FDI inflow might prove to be an excellent opportunity for India to accelerate its transition into an economically sophisticated state – where the FDI inflow facilitates scale economies for the production of complex goods.

The complexity argument is also important in the context of economic convergence between the developed and the developing world. Hence concerted policy efforts at different levels (and across sectors) are required, that could make the Indian economy more sophisticated, paving the way for its economic convergence with the advanced nations in the longer horizon.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Soumya Bhowmick

Soumya Bhowmick

Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...

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Vani Kaushik

Vani Kaushik

Vani Kaushik is a law student at the West Bengal National University of Juridical Sciences Kolkata

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