<p>This year’s Nobel Prize in Economics may help us in India resolve a long-standing paradox: how can a country be a global growth leader and yet remain a manufacturing underachiever? India is indisputably one of the world’s fastest-growing economies. Our services sector is booming. Digital platforms are thriving. Financial and real estate markets are vibrant. And yet, in manufacturing – the job-rich, export-driven engine of transformation that most countries prize – we continue to punch much below our weight.</p>.<p>The 2025 Nobel, awarded to Philippe Aghion, Peter Howitt, and Joel Mokyr, celebrates the disruptive force of “creative destruction” – the process by which innovation topples old industries and clears the way for new ones. It’s messy. It’s painful. It destroys before it creates. But it is essential for progress. It also forces us to ponder why the continual churn of creative destruction fuels manufacturing growth. What kind of environment allows it to flourish? And why hasn’t India built one?</p>.<p>Joseph Schumpeter famously described creative destruction as capitalism’s secret weapon. But capitalism, as Adam Smith warned, is not always benign. In The Wealth of Nations, he observed: “People of the same trade seldom meet together... but the conversation ends in a conspiracy against the public.” Entrepreneurs thrive when they are close to power – not always with an intent to corrupt, but close enough to whisper. Also, in small countries like Japan or South Korea, a few national champions may suffice for manufacturing success. But in vast nations like China or India, success demands creating many more champions. But then arises the risk that these cronies may exploit, conspire, or even harm.</p>.<p>The irony is striking, as creative destruction itself needs cronyism to thrive. Deng Xiaoping understood this paradox. He saw that entrepreneurial energy could be harnessed – even within a socialist system – if competition was encouraged and economic power was decentralised. The trick is to make cronyism competitive, not corrupt. Thus, Deng retooled socialism after Mao. By giving China’s 600+ cities control over land, investment, and industrial policy, he created a competitive ecosystem where local governments backed their own champions. Over half of China’s public spending is managed locally, in a system of “competitive cronyism”, where multiple local governments, competing with each other, can nurture their own industrial adventurers. It thus needs understanding that it is the economic structure, not ideology, that determines success. Centralised control stifles innovation and creative destruction. Decentralised competition fuels it.</p>.<p>The results are staggering. China has overwhelming global manufacturing dominance and a near choke-hold over a variety of new-age high-tech sectors, including chips, EVs, robotics, battery manufacturing, and AI, many backed by the local/provincial government. We, on the other hand, are not able to reduce our import dependence on them despite the uncomfortable diplomatic relations.</p>.<p>Deng’s genius was to create multiple centres of power. Each city has its own industrial ambitions, champions, and incentives. This fragmented patronage system has accelerated innovation. Cronyism became a tool for experimentation, not stagnation or exploitation.</p>.<p>India has a federal structure, but not the locally available fiscal muscle. While state governments do control around 30-40% of public expenditure, most, if not all, of them are giant-sized themselves, far larger in population and geographical size than most peer countries. We have only a small number of urban bodies, and most are financially dependent on state capitals, with limited authority to shape industrial ecosystems. The result is that while the services and construction/real estate sectors do undoubtedly flourish, as also do low-risk manufacturing like paints/wires and cables, the higher-risk, longer-gestation technological manufacturing does not.</p>.<p>Industrial R&D and resultant experimentation are low. And then, there’s the matter of dealing with business failure. If creative destruction is the engine of innovation, insolvency law is the shock absorber. Here, India and the US are opposites. In the US, bankruptcy is a second chance. Entrepreneurs who fail aren’t criminalised; they’re often celebrated. In India, default can trigger liquidation and criminal liability. The stigma of failure lingers long after the books are closed. This matters. Entrepreneurs take risks. They cut corners. Sometimes, they fail. If the system punishes failure too harshly, it stifles the very spirit of creative destruction this year’s Nobel celebrates.</p>.<p>We have the ingredients: a federal structure, entrepreneurial energy, and a hunger for growth. What we lack is the enabling architecture – fiscal decentralisation, empowered cities, and performance-linked incentives for local officials and leeway to handle business failure.</p>.<p>If we want our own gale of creative destruction, we must build the wind tunnels. Adam Smith warned us that businessmen conspire. Schumpeter told us capitalism survives by destroying itself. Deng showed us socialism can do the same, if it decentralises wisely. We must now reflect: do we continue to fear the gale, or now start learning how to ride it?</p>.<p><em>(The writer is the former chairman of the Export Import Bank of India is a banker with a theory of everything.)</em></p> <p><em>Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.</em></p>
<p>This year’s Nobel Prize in Economics may help us in India resolve a long-standing paradox: how can a country be a global growth leader and yet remain a manufacturing underachiever? India is indisputably one of the world’s fastest-growing economies. Our services sector is booming. Digital platforms are thriving. Financial and real estate markets are vibrant. And yet, in manufacturing – the job-rich, export-driven engine of transformation that most countries prize – we continue to punch much below our weight.</p>.<p>The 2025 Nobel, awarded to Philippe Aghion, Peter Howitt, and Joel Mokyr, celebrates the disruptive force of “creative destruction” – the process by which innovation topples old industries and clears the way for new ones. It’s messy. It’s painful. It destroys before it creates. But it is essential for progress. It also forces us to ponder why the continual churn of creative destruction fuels manufacturing growth. What kind of environment allows it to flourish? And why hasn’t India built one?</p>.<p>Joseph Schumpeter famously described creative destruction as capitalism’s secret weapon. But capitalism, as Adam Smith warned, is not always benign. In The Wealth of Nations, he observed: “People of the same trade seldom meet together... but the conversation ends in a conspiracy against the public.” Entrepreneurs thrive when they are close to power – not always with an intent to corrupt, but close enough to whisper. Also, in small countries like Japan or South Korea, a few national champions may suffice for manufacturing success. But in vast nations like China or India, success demands creating many more champions. But then arises the risk that these cronies may exploit, conspire, or even harm.</p>.<p>The irony is striking, as creative destruction itself needs cronyism to thrive. Deng Xiaoping understood this paradox. He saw that entrepreneurial energy could be harnessed – even within a socialist system – if competition was encouraged and economic power was decentralised. The trick is to make cronyism competitive, not corrupt. Thus, Deng retooled socialism after Mao. By giving China’s 600+ cities control over land, investment, and industrial policy, he created a competitive ecosystem where local governments backed their own champions. Over half of China’s public spending is managed locally, in a system of “competitive cronyism”, where multiple local governments, competing with each other, can nurture their own industrial adventurers. It thus needs understanding that it is the economic structure, not ideology, that determines success. Centralised control stifles innovation and creative destruction. Decentralised competition fuels it.</p>.<p>The results are staggering. China has overwhelming global manufacturing dominance and a near choke-hold over a variety of new-age high-tech sectors, including chips, EVs, robotics, battery manufacturing, and AI, many backed by the local/provincial government. We, on the other hand, are not able to reduce our import dependence on them despite the uncomfortable diplomatic relations.</p>.<p>Deng’s genius was to create multiple centres of power. Each city has its own industrial ambitions, champions, and incentives. This fragmented patronage system has accelerated innovation. Cronyism became a tool for experimentation, not stagnation or exploitation.</p>.<p>India has a federal structure, but not the locally available fiscal muscle. While state governments do control around 30-40% of public expenditure, most, if not all, of them are giant-sized themselves, far larger in population and geographical size than most peer countries. We have only a small number of urban bodies, and most are financially dependent on state capitals, with limited authority to shape industrial ecosystems. The result is that while the services and construction/real estate sectors do undoubtedly flourish, as also do low-risk manufacturing like paints/wires and cables, the higher-risk, longer-gestation technological manufacturing does not.</p>.<p>Industrial R&D and resultant experimentation are low. And then, there’s the matter of dealing with business failure. If creative destruction is the engine of innovation, insolvency law is the shock absorber. Here, India and the US are opposites. In the US, bankruptcy is a second chance. Entrepreneurs who fail aren’t criminalised; they’re often celebrated. In India, default can trigger liquidation and criminal liability. The stigma of failure lingers long after the books are closed. This matters. Entrepreneurs take risks. They cut corners. Sometimes, they fail. If the system punishes failure too harshly, it stifles the very spirit of creative destruction this year’s Nobel celebrates.</p>.<p>We have the ingredients: a federal structure, entrepreneurial energy, and a hunger for growth. What we lack is the enabling architecture – fiscal decentralisation, empowered cities, and performance-linked incentives for local officials and leeway to handle business failure.</p>.<p>If we want our own gale of creative destruction, we must build the wind tunnels. Adam Smith warned us that businessmen conspire. Schumpeter told us capitalism survives by destroying itself. Deng showed us socialism can do the same, if it decentralises wisely. We must now reflect: do we continue to fear the gale, or now start learning how to ride it?</p>.<p><em>(The writer is the former chairman of the Export Import Bank of India is a banker with a theory of everything.)</em></p> <p><em>Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.</em></p>
