Column: Reviving job growth

Written by Nirvikar Singh | Updated: Jun 18 2014, 06:31am hrs
On June 2-3, the Stanford Center for International Development held its 15th annual conference on the Indian economy. Unsurprisingly, the theme was what the new government needs to do to get the economy moving again. Arvind Panagariya laid out a reform agenda for the new government, and highlighted the failure to create enough jobs, due to the lack of sufficient growth in labour-intensive manufacturing. He emphasised the need to create a better environment for business, including the vexed problem of labour regulations. Rana Hasan, presenting work that I have discussed earlier (What to vote for, FE, April 14,, buttressed Panagariyas argument, giving evidence that indicators of financial development, business regulations that promote competition and flexible labour regulations have all been associated in India with larger reallocations of labour from lower to higher productivity sectors.

But these pointers on what India should do were tempered by the presentation for which I served as a discussant. Arvind Subramanian presented work with co-author Amrit Amirapu that called into question what India can actually accomplish. Building on the work of Dani Rodrik, they argued that within Indian manufacturing, there is evidence of catching up of less productive units to more productive units, but there is much weaker evidence of catch up to the global productivity standards. Furthermore, they argued that Indias manufacturing sector is shrinking, despite rising profits. These authors, similarly to Panagariya and Hasan, hypothesised that barriers to competition and inefficiencies in the markets for labour and for land contribute to this paradoxical situation. Rising wage premiums for skilled labour and insufficiently dynamic exports were also adduced as possible contributing factors.

This is all very worrisome, because labour-intensive, low-skilled manufacturing is the classic first step toward broad-based economic development. Indeed, inclusive growth arguably should be built around this process of manufacturing growth. Furthermore, Rodrik has argued that the scope for export-led growth is lower than it was in recent decades, and that manufacturing, too, is becoming more skill-intensive and capital-intensive. Then where will the jobs that India desperately needs come from

In seeking an answer, I went back to some of my own earlier work, revisited a case study from four years ago, and consulted Indias foremost academic expert on manufacturing. Pankaj Chandras earlier work highlighted factors such as lack of competitive pressure and insufficient managerial quality (a theme in the work of academics like Nicholas Bloom as well), as well as a poor business environment, and he now noted the lack of adequate connections to global production networks that have blossomed especially in East and Southeast Asia.

The case study was an interview I had watched online, featuring Vinod Sharma, a successful electronics manufacturer who was expanding in China rather than at home. Sharma had noted the high transaction costs of the tax regime and legislative frameworks for doing business, as well as the lack of an ecosystem for manufacturing, in addition to the usual culprits of costly and unreliable electric power and inefficient labour and land markets. When I asked Sharma how things are now, he noted the positives of a more competitive exchange rate and the rising costs in

China, but also the negatives of dented confidence among domestic entrepreneurs and multinationals, due to

poor governance, and poor policy choices at the Central and state levels, including capricious approaches to taxation and even outright extortion. As a successful entrepreneur, however, he seemed determined to work for improvement in the business environment for his industry, including the elusive manufacturing ecosystem.

Naushad Forbes, head of Forbes-Marshall, a large and successful Indian engineering firm, in his own comments on the puzzle of Indian manufacturing, noted that his firm had become accustomed to minimising labour use. He also echoed a finding in several academic studies, that Indian industry, after a burst of dynamism in the 1990s, has seen a slowdown in new entry. This is consistent with the lack of competitiveness and industrial dynamism one observes. It is also consistent with the persistence of poor management and lack of investment in productivity enhancing features such as the use of information technology (a finding of my own work with Shruti Sharma).

So, the solution to Indias lack of growth in the number of good jobs that it needs for its growing population of working age is not necessarily a simple one. The evidence suggests that the new government has to combine several different policy reforms in a coordinated manner. This would also have to be done quickly and decisively, to send clear signals to entrepreneurs and foreign investors, since there are lags in bringing new capacity into play, or in innovating in existing units.

My sense of the last government was that it sometimes seemed to have no idea how business actually works for most entrepreneurs (excluding the tycoons with political connections). Listening to smart and dedicated manufacturers such as Sharma would be one way to fix the problem of incomprehension, and create a manufacturing ecosystem that supports efficient and innovative firms, not just those that are politically connected.

The author is professor of Economics, University of California, Santa Cruz