Solving India’s Income Problem (Part 3)

Arvind Panagariya

Prof. Arvind Panagariya, in his 2020 book, “India Unlimited”, writes:

If India is to follow the well-trodden and only known path to job creation at decent wages in the early stages of development, it must take steps that would enable manufacturing, especially of the labour-intensive variety, to grow significantly faster.

A minority of commentators in India argues, however, that India is different and that it should eschew manufacturing expansion and build on its successes in services alone. However, these manufacturing sceptics do not offer a roadmap for the creation of well-paid jobs for hundreds of millions of workers with limited or no skills. The workers are either employed in agriculture and informal-sector enterprises or are self-employed. Dynamic services sectors, such as software and finance, generate relatively fewer jobs for them. Tourism, transportation and construction hold greater promise but their potential itself greatly depends on the performance of manufacturing. For example, transportation flourishes when the manufacturing sector generates demands for its services. Likewise, tourism and construction are spurred by higher incomes generated by manufacturing. Therefore, if the creation of well-paid jobs for some of those currently employed in the agriculture and informal sectors is an important objective, reliance on services as the exclusive engine of growth will not do.

…If the creation of well-paid jobs for those with limited skills is an objective, accelerated growth in manufacturing with special attention paid to labour-intensive products remains an important component of the strategy for economic transformation of India in the forthcoming decades.

…As the Indian economy transforms, it must walk on two legs, manufacturing and services, with agriculture progressively modernizing and releasing workers. It must endeavour to create an ecosystem in which large-scale, high-productivity firms may emerge and capture the world markets in both manufacturing and services.

…If India progressively adopts policies that would improve its efficiency as measured by its ability to capture a larger and larger share of the world export markets in both goods and services, it will accomplish in the next twenty years what China did in the last twenty.

Prof. Pangariya has specific recommendations: “Policymakers must…recognize that the bulk of the current employment in industry and services is concentrated in micro and small enterprises. These enterprises are characterized by low productivity, high underemployment and barely subsistence-level wages. The prospect of employment in them is not enough of an attraction for most agricultural workers to migrate out of their current employment. Therefore, the key to pulling the economy out of the current equilibrium is a set of reforms that would help firms grow larger, especially in sectors with high employment per unit of investment such as apparel, footwear, furniture and other light manufactures. [In addition], export markets remain the key to bringing about the transformation India seeks and needs. Survival in the export market requires high productivity and steady increases in it. It also requires continuous product innovation to retain existing customers and win new ones. Enterprises that rely on export markets are typically large and therefore better able to exploit scale economies. The existence of these firms plays a critical role in creating a competitive ecosystem in which smaller firms also become more productive.”

Let us also consider opinions from others.