India’s inability to take advantage of its talented young population and low wages in labour intensive manufacturing is unusual. Understanding the reasons for this is essential for a breakthrough in job creation.
In the era before economic reforms, India tried to have broad-based industrial job creation by promoting small-scale industries, while also attempting to create a capital goods industry. It took this approach further over time by reserving over 800 industrial goods, ranging from TV sets to toys, for small-scale industries only. Large firms were not free to invest in these.
The small firms could not grow and become large. Jobs in khadi, handlooms and handicrafts were protected and promoted. All this worked to an extent as in the then closed Indian economy growing demand had to be met by domestic production only.
With the benefit of hindsight, one can say that one of the grave errors in the mid-1990s was the opening up of the Indian economy suddenly by a sharp lowering of import duties, well below the bound rates committed in the WTO, without first removing small-scale reservations in industry. Reservations should have gone first.
This would have given time for manufacturing to modernise and acquire economies of scale to survive competition from imports.
The removal of small-scale reservation, thereafter, was a slow incremental process which went on till the first decade of this century. What followed was the gradual hollowing out of manufacturing in India of these reserved items and the loss of jobs, actual as well as potential, in the most labour-intensive sectors.
This process gained pace as the consumer’s purchasing power increased and the penetration of better and cheaper imported goods into smaller towns and rural areas rose.
A telling example of this is the trade with China. A broadly balanced trade of $3.6 billion in 2001 is now over $80 billion with a trade deficit of over $60 billion, with imports of manufactured goods from China having grown exponentially. All these imported goods were being made in India.
In the post-reform period since 1991, India has broadly followed the ‘Washington Consensus’. Its key elements were opening up of the economy to trade and investment, maintaining sound macroeconomic fundamentals in terms of lower fiscal deficits and inflation, and having a market determined exchange rate.
The state should give a free play to market forces with light-handed independent regulation. It should focus on improving provision of public goods; better infrastructure, education and health. This has been at the core of ‘economic reforms’ since.
Commitment to fiscal consolidation, successful inflation targeting, GST, Bankruptcy Code, increasing foreign investment, improved ranking in World Bank’s ‘ease of doing business’, are all seen as major achievements.
Infrastructure has been improving. Power shortages are no longer there. Roads, ports and airports are better. Digital connectivity has moved to new levels. GDP growth rates have been high. Yet, job creation remains a matter of serious concern. It is a major challenge.
In labour-intensive sectors, such as electronics, toys, or shipbuilding, India remains a consumer. Its becoming a producer in these is nowhere in sight.
In labour-intensive areas jobs have historically moved from high wage locations to lower wage destinations. Low-wage jobs have recently been moving out of China. They are going to many countries but not to India.
Clearly, there is need to go beyond business as usual to succeed in labour-intensive sectors. The focus of discussion should, therefore, be on what can be done which would make the difference.
What would get private investment into labour intensive manufacturing for the domestic as well as global markets?
In an open economy, success in the domestic market vis-a-vis imports is usually the starting point for success in global markets. If global brands get significant value addition done in India, then they would like to use this in regional as well as global markets.
This is seen in the case of small cars where India is a globally competitive manufacturing hub. But initially the small car industry and its supply chain were created by the state through Maruti.
Once the supply side capability in auto components had been created, global majors have found it worthwhile to source from within India. The business case for final assembly has also remained strong due to the higher duties on the imports of cars.
It is noteworthy that in the post-reform period, state policy has not been successfully used to create competitive capacity in any particular industrial segment.
This was implicit in the policy paradigm of the ‘Washington Consensus’. The state should not try to pick ‘ winners’ and ‘ losers’ as it is inherently incapable of having the information and the capacity to judge what would succeed in the market. It would end up wasting money and create avoidable distortions.
The major task of reforms was to actually reduce the maze of distortions inherited from the earlier period of trying to micro manage the economy. The free market would deliver optimal outcomes.
East Asian experience
However, the success of the East Asian economies — Japan, Korea, and, more recently, China — in creating globally competitive industrial capacity through state action has not been sufficiently understood and appreciated.
The state in these countries has worked with firms to create and increase competitiveness in select sectors.
There is much that is of relevance in the experience of these countries. Seeing China’s extraordinary success only through the binary of its authoritarian regime vis-a-vis India’s democracy is far too simplistic.
Macro as well as sector-specific interventions, for making a compelling business case for investment in labour intensive manufacturing are overdue.
Sectors with the highest employment potential should naturally be taken up first. Discussion with potential investors would help. Crafting interventions which would work is not going to be easy. But doing nothing is not an option.
The writer is Distinguished Fellow, TERI, and former Secretary, DIPP.
via A strategy for creating more jobs – The Hindu BusinessLine