Introduction
The term 'Dutch disease' was coined in 1977 by The Economist to describe how the discovery of natural gas in the Netherlands led to an influx of foreign currency, exchange rate appreciation, and the subsequent de-industrialisation of non-resource tradable sectors. In their work 'A Sixth of Humanity', economists Devesh Kapur and Arvind Subramanian apply this concept to India's unique economic trajectory, arguing that India suffers from a structural 'Double Dutch Disease' that impeded broad-based manufacturing-led transformation.
The Mechanism of Dutch Disease
In traditional macroeconomics, Dutch disease occurs when a resource windfall causes real currency appreciation and reallocates capital and labor toward the booming sector and non-tradable goods, pricing out traditional labor-intensive tradables like manufacturing.
Application to India: The 'Double Dutch Disease'
In 'A Sixth of Humanity', the authors argue that India experienced two parallel distortions rather than a classic natural resource shock:
- Services-Led Squeeze: India's premature and skill-intensive boom in services (such as Information Technology, software, and finance) generated massive foreign currency inflows and elevated real exchange rates. Because this growth absorbed only high-skilled workers, it created deep labor market segmentation while pricing out lower-skilled tradable manufacturing.
- Public Sector Wage Distortions and 'Exam Mania': Lower-tier public sector jobs (such as clerks and peons) historically offered compensation well above market-clearing levels for comparable private-sector manual labor. This established an artificially high reservation wage, pricing labor-intensive manufacturers out of competitive wage setting. Simultaneously, it triggered an endemic 'exam mania,' where millions of prime-working-age youth spend years preparing for scarce public exams rather than participating in the productive labor force.
Policy Measures to Correct Structural Distortions
- Rationalising Public Compensation: Aligning entry-level government compensation with market realities can curb artificial reservation wages and reduce structural misallocation of labor.
- Targeted Manufacturing Support: Channeling Production-Linked Incentive (PLI) resources explicitly into employment-heavy, low-margin sectors such as textiles, apparel, leather, and footwear.
- Enhancing Factor Cost Competitiveness: Lowering logistics and supply chain costs to bolster global export competitiveness through integrated infrastructure initiatives like PM GatiShakti.
Conclusion
India's structural development path bypassed conventional labor-absorbing industrialisation, leaving a major portion of the workforce in low-productivity agriculture. Rectifying this Double Dutch Disease requires balancing the services advantage with targeted policy corrections that enable competitive, low-barrier manufacturing at scale.