Solving India’s Income Problem (Part 6)

Commentary – 3

Praveen Chakravarty wrote in ThePrint (September 2022): “In the decade of the 1980s, every percentage point growth in India’s nominal GDP generated roughly two lakh new formal sector jobs. In the 1990s, every percentage point growth in GDP only generated one lakh jobs and in the 2000s, it fell to half a lakh jobs. To put another way, India’s GDP needs to grow four times as fast to produce the same number of jobs that it did in the 80s. The idea that, qualitatively speaking, GDP growth in the 80s may have been better for the average Indian family than today’s GDP growth, may sound incredulous and even facetious to the elite readers of this column, for who, life is vastly better today than four decades back. To be abundantly clear, I am not arguing for a reversal to the economic policies of the 1980s. But it is also important to be intellectually honest and acknowledge that contemporary economic models are not working for the vast majority of people in terms of improving their incomes and livelihoods. And to be sure, this is not just an India story or an indictment of one political party versus another but a global economic phenomenon, agnostic to political ideology or country.”

A Times of India editorial (October 2022) wrote, shortly after the Indian government had kicked off a recruitment drive for 1 million central government posts: “Unless manufacturing is able to absorb a far larger number of youth trying to get out of barely productive farm work, India will not escape the jobs crisis. Manufacturing’s share in employment has fluctuated around 12% in the last three decades, even though it’s the best phase of economic growth India experienced. Policy attention needs to focus on removing barriers to sectors such as textiles that have the potential to absorb a lot more young, especially women, coming off farms. When encouraging manufacturing, GoI must take employment intensity of the sector into account. In a fast-changing world, multiple reforms must operate simultaneously. Both GoI and states need to enhance the quality of their association with industries to enable quick skilling of young job seekers. Today’s jobs crisis is tomorrow’s social crisis.”

Swaminathan Aiyar wrote in Economic Times (October 2022): “The future lies in services, not manufacturing. This is good news since India has a greater comparative advantage in services than in manufacturing, and should be building on its strengths. Instead, the government seems obsessed with manufacturing and is pouring enormous subsidies into that sector. This is a mistaken priority. The services that require priority are not just high-profile sectors like IT but education and health, and both have been grossly underfunded for decades. Rising subsidies for manufacturing will cut into limited funds for human development… Some may argue that India desperately needs import substitution in manufacturing to reduce the imbalance. The right conclusion is that the trade deficit has worsened despite rising import duties for five years, plus Atmanirbhar and PLI. The approach is not working. The answer is not to pour evermore money into the wrong bucket. Economist Anne Krueger demonstrated decades ago that a dollar invested in export promotion yields more than a dollar invested in import substitution. Becker showed that investing in human capital was the best investment. Those are the right directions in which to go.”

Ajay Shah: “I’m sceptical of the state bureaucracy being able to understand and anticipate which sectors will do well and which sectors will do badly. It is very difficult to forecast the future. Only risk-taking entrepreneurs can take speculative bets, such as saying the computer hardware industry or automobile component manufacturing will do well in India. Who could have predicted that two-wheelers in India would fight off foreign competition pretty well while dozens of other manufacturing businesses would get butchered by foreign competition? It is not feasible for officials in bureaucracies to look at the industrial landscape and make speculative calls. That’s because they do not have the necessary information or the forecasting ability. Nor do they have the incentive, like private businesses do. Also, there is nobody to protect them if their speculation goes wrong; when their speculation goes wrong, they will be investigated by the Central Bureau of Investigation and the Enforcement Directorate. So, which official is ever going to take a risk? For all these reasons, the task of figuring out which sector to focus on is best left to the private sector. The job of the government is to create a broad enabling environment… The competitive advantage of operating in India is that labour is cheap. But it doesn’t mean everything has to be cheap. There will be a variety of inputs that goes into an industry and each firm has to figure out whether it is competitive to operate in India. What policymakers should focus on is just mistakes of public policy. We should focus on things like the way the Companies Act works, the way Indian capital controls work, the way income tax works, the way GST works, etc.”

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Rajesh Jain

An Entrepreneur based in Mumbai, India.