June 9, 2019The Intersectioneconomics

India must get over its defeatism on manufacturing

We have trapped ourselves in a self-created "big is bad" and "small is good" narrative that is the root cause of low employment growth.

Mint This is from The Intersection column that appears every other Monday in Mint.

It is heartening to note that one of the first things Prime Minister Narendra Modi did after returning to power is to set up a new cabinet committee for promoting employment and skill development. It has been tasked with overseeing skill development aimed at increasing the employability of the workforce for effectively meeting the emerging requirements of the rapidly growing economy and mapping the benefits of demographic dividend”.

This acknowledgement that India needs to create millions of jobs for its youthful population, and the fact that this is one of the government’s top policy priorities, should bring an end to the partisan polemical debate of the past few years on whether or not enough jobs were being created.

The government has published the latest Periodic Labour Force Survey (PLFS), whose findings and delay in releasing had added to the controversy over the scale of unemployment in India. Together these measures should, hopefully, steer the public discourse to an honest reckoning of the problem and meaningful ways to meet the challenge.

At first glance, the PLFS report confirms the leaked findings that India’s unemployment rate is the highest in three decades. Digging deeper, we find young people in urban areas and women in rural areas have particularly been affected, while fewer women across the board are participating in the workforce. However, as the social scientist Sonalde Desai pointed out in The Hindu last week, a dispassionate analysis of the data reveals that the roots of India’s present day unemployment challenges lie in its very success”. She argues that India does have an unemployment problem, but it’s one that is caused by a more educated population seeking better jobs, and a more prosperous population that can afford to wait until the desired job comes along. This general conclusion masks local variations, but clearly points to the direction in which India is moving.

As The Intersection has argued in previous columns, building new cities is among the best ways to create millions of jobs every year across skill levels. From absorbing the surplus rural workforce into the construction sector to providing aspirational jobs in the services sector for the educated, new cities will be veritable dynamos powering employment growth. The new cabinet committee only needs to look at Modi’s 2014 manifesto to make the connection between building new cities and massive job growth. What about manufacturing though?

The conventional wisdom, in both the Bharatiya Janata Party and the Congress, is that micro, small and medium enterprises (MSMEs) are the main answer to the manufacturing challenge. For decades, India’s Union and state governments have worshipped at the altar of MSME-led manufacturing growth. Even among most politicians, bureaucrats and policy analysts for whom MSME is not an article of faith, there is either an aversion to large-scale manufacturing or a resignation that it’s just not possible in a country where land acquisition is a headache and labour laws are a chronic migraine. After the post-liberalization boom in the IT sector, it became fashionable to argue that the Indian economy will leapfrog industrialization and jump directly into services. The newest argument that is gaining traction is that even if we attract big manufacturing plants, advances in artificial intelligence and automation will massively reduce the number of people employed, so why bother.

In other words, we have told ourselves that India cannot do big manufacturing. Therefore, our public policies do not even seriously try to attract investments in large scale manufacturing. Few states have coherent policies to allocate large plots of land for industrialization. Few states use the constitutional leeway they have to reform their labour laws to permit mass employment. For their part, Union governments have been uninterested in exploiting geopolitical and geoeconomic opportunities to attract big manufacturing investments to India. By 2011, it was clear that China’s productivity growth had raised real wages to levels where foreign manufacturers, even in the high technology sector, were looking for cheaper options elsewhere. More recently, amid growing trade tensions between the US and China, the world’s manufacturing industry has been looking for risk-mitigation strategies.

While some South East Asian economies can take up the slack, India is the only economy that has the potential to match China’s scale. If only we try.

If the Cabinet Committee on Employment and Skills Development wants to distinguish itself by doing something new, it should look again at the manufacturing defeatism that we have trapped ourselves in. Despite its name, the committee should avoid overly focussing on skills development. The Information Technology industry in India didn’t take off because the government ran successful IT skills development initiatives. The causality is the other way around. Indians acquired increasingly sophisticated IT skills on their own because they were in demand.

There are many more The Intersection columns here

The new Modi government should not allow itself to be persuaded that doing the same old things more efficiently will be sufficient to create 20 millions jobs per year—10 times the current run rate—on a sustained basis. Now that the BJP controls most state governments, it should be easier to achieve the cooperative federalism required to clear the decks for large scale manufacturing.

It would be a shame if we don’t try now.

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