Solving India’s Income Problem (Part 7)

Commentary – 4

Devashish Mitra writes on Ideas for India (October 2022):

With India’s overall per capita income 2.5 to 3 times the average income in its agricultural sector, we can expect the expansion of this sector to create only low-productivity and low-wage jobs in the absence of significant technological breakthroughs. Turning to the service sector: with only 12% of India’s population holding bachelors’ degrees or higher, and with 59% in the primary-school, middle-school and illiterate categories combined, only a small proportion of the population has any chance of qualifying for good service-sector jobs.

Thus, India must focus on manufacturing to make any significant dent in the jobs problem. As documented by NITI Aayog (2017), small firms (those with less than 20 workers) employ 75% of all manufacturing workers, but produce slightly over 10% of all manufacturing output. This implies several-fold higher labour productivity in larger firms. Besides, the average wage of a formal-sector manufacturing worker is six times the average wage in informal-sector enterprises, which are generally small, low-productivity,  unregistered, and exempt from most labour regulations (NITI Aayog, 2017). Thus, good jobs will mainly have to be created in relatively large firms, and mainly those in labour-intensive industries, since that is where output growth is bound to be accompanied by employment growth. The large scale of production is expected to reap economies of scale, leading to higher productivity and wages.

… Agriculture and services cannot be engines of job creation and growth. Therefore, giving up on manufactures and their exports is equivalent to giving up on growth and forsaking the creation of good jobs.

As the introduction to the essay states: “He posits that four factors can help the export-oriented manufacturing model succeed – further labour reforms; the signing and implementation of free trade agreements and establishing special economic zones; and participation in global supply chains. This will allow India to leverage its labour, along with advanced-country technology, to create productive jobs.”

Pankaj Chandra writes on Ideas for India: “Most small firms remain small all their life. In emerging markets, they face three key challenges: capital, relationships, and reach. Small firms compete on variety and small volumes, while a large firm competes on volumes and cost. The former has to innovate at a lower cost, while the latter owns channels of distribution and hence has a better reach in the market. The big question of our times is then: how should small firms compete and especially against large ones? Is there a model of technological development that would allow a small firm to have all its natural advantages as well as those of a large firm (that is, produce variety in small volumes and still be competitive on costs)? I argue that the challenge in India has been our inability to organise small firms as part of a network…This thereby deprives them of the ability to invest scarce capital in building distinctive capabilities; find a mechanism to form ties with competitors on shared services; and of course, be able to become part of large and distributed supply chains. Those that have managed to do so have grown out of their ‘tininess’, provided valuable products and services to their customers and have grown their endowment.”

A New York Times article in June 2022 wrote:

Even as India is projected to have the fastest growth of any major economy this year, the rosy headline figures do not reflect reality for hundreds of millions of Indians. The growth is still not translating into enough jobs for the waves of educated young people who enter the labor force each year. A far larger number of Indians eke out a living in the informal sector, and they have been battered in recent months by high inflation, especially in food prices.

The disconnect is a result of India’s uneven growth, which is powered by the voracious consumption of the country’s upper strata but whose benefits often do not extend beyond the urban middle class.

…“There is a historical disconnect in the Indian growth story, where growth essentially happens without a corresponding increase in employment,” said Mahesh Vyas, the chief executive of the Center for Monitoring Indian Economy, a data research firm.

…For Indian politicians, a high unemployment rate “is not a showstopper,” said Mr. Vyas, the economist, adding that they were far more concerned with inflation, which affects all voters.

…Analysts say [that] greater efforts [are needed] to build up India’s underdeveloped manufacturing sector. They also say that India should ease regulations that often make it difficult to do business, as well as reducing tariffs so manufacturers have an easier time securing components not made in India.

There have been many books in the past few years which discuss India’s past and future roadmap. Here is a sampling:

  • The Struggle and the Promise by Naushad Forbes
  • Unshackling India by Ajay Chhibber and Salman Anees Soz
  • Countdown by Anshuman Tiwari and Anindya Sengupta
  • India 2030 edited by Gautam Chikermane
  • Jobs Crisis in India by R. Jagannathan
  • Reviving Jobs edited by Santosh Mehrotra

So, what does tomorrow hold for India?

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.