By Swaminathan S Anklesaria Aiyar
The government’s ‘Make in India’ drive is in trouble. It aims to increase the share of manufacturing from 16% of GDP to 25% by 2022, creating 100 million jobs. Alas, industrial growth has been weak in Modi’s three years in office, the investment rate has fallen, formal employment growth has been miserable, and exports have stagnated. What’s gone wrong? I have long held that government attempts to boost this or that sector is a mistake. Far better is simply to improve the ease of doing business, remove constraints in all sectors, and then leave entrepreneurs to decide which area should soar, which should plod along, and which should close. In this approach, services will probably do better than manufacturing, and brain-intensive sectors better than labour-intensive ones. GoI needs to build on these strengths rather than hanker for labour-intensive areas whose time has gone.
Encroachment on Policy
The big picture is that India has lost competitiveness thanks to new policies that no party is keen to reverse. The recent land acquisition law has made land much more costly than in Asean competitors. Wages have shot up since 2008, thanks in part to MGNREGA.
Creating an independent Monetary Policy Committee entrusted with a single-minded focus on inflation control is not going to bring down interest rates to Asean levels. Electricity for industry costs twice as much as in Asean, because high industrial tariffs are used to subsidise farm and domestic consumption.
In sum, many politically popular initiatives of recent years have raised the cost of all industrial inputs: land, labour, capital and electricity. No wonder industrial output and exports are struggling. Yet, no political party has an explicit plan to slash these costs. Now, Indian entrepreneurship and jugaad can overcome many cost hurdles.
But in low-tech industries, value addition is so low that it’s difficult to overcome cost hurdles. These can more easily be overcome where value addition is high, in hi-tech areas. They can also be more easily overcome in service industries, which require less land, electricity, water, capital investment or working capital than manufacturing.
This surely explains why India’s service exports have risen so much faster than manufacturing exports, and why hi-tech exports like auto and pharma have done much better than textiles and leather. Hi-tech areas do not require political tricky steps to cut land and labour costs.
Yet, many experts keep arguing that India is labour-abundant and capital-scarce, and so, must focus on labour-intensive sectors that have created millions of jobs and billions in exports for neighbouring Asian countries. One example is the chapter by C Veeramani and Garima Dhir, ‘Make What in India?’ in the latest India Development Report 2017.
They show that hi-tech auto exports grew by an amazing 34% a year during 2000-15, while labour-intensive apparel export growth was only 9%. They find India is locked out of global value chains (GVCs), in which products are assembled from components produced in a wide variety of locations. Many Asian countries are part of GVCs, which culminate in the assembly in China.
India is just not in the picture. How can it get in? By reducing its high input costs like land, labour capital and electricity. But will politics allow that?
Sci-Tech No Longer Sci-Fi
In another chapter in the report, ‘Services for Indian Manufacturing’, Rupa Chanda argues the case for emphasising more services embedded in manufacturing to improve competitiveness. This will include steps to slash India’s speed and costs of logistics: transport, warehousing, rail-road links, paperwork.
In another chapter, ‘One Size Does Not Fit All’, Sunil Mani argues the case for industrial policy, citing some successes and ignoring many failures. But his chapter is useful for emphasising the dynamism of hi-tech exports, which now include aircraft components and satellite launches.
Neither the report nor government experts are facing up to the threat of automation. Machines are being developed that can handle soft materials like cloth and leather. Once these machines are standardised, they will eliminate millions of jobs in apparel and leather goods. Should India make a huge, expensive effort to get into areas that had huge potential in the past but now face the risk of extinction?
Robots will take over brain-intensive areas too. But not to the same extent as labour-intensive ones. Broadly, the future of the world — and of India — lies more in services than in manufacturing, and more in brain-intensive than labour-intensive areas.
India is now a land of relatively expensive inputs like land, labour, capital and electricity. These cannot be offset by cheap manual labour, but can be by low-cost skills. This explains the runaway success of computer software and BPO, and of medical tourism. It explains the export success of autos and pharma.
The challenge of robotisation cannot be met through labour-intensive techniques. It means raising productivity fast enough to overcome cost disadvantages in land, labour and capital. It means improving efficiency of every sort; slashing corruption and waste; vastly improving government services; hugely enhancing skills. It means developing a workforce that is agile and can shift from one task to another depending on how the winds of technical change blow. That’s a big agenda.
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