The recent Union budget was not a bad one, as I characterised it in my last column. It did no significant harm. But the real challenge for India is to turn around the economy to the point where it is creating good jobs at a pace that can keep up with demographic trends. This is not a problem of the current government. It has been a problem throughout the decades of the so-called reform period. Last year’s budget promised some labour law reform, but it has been slow in coming. And, labour law reform by itself is not enough. First, step back and consider the problem of job creation, which has been attracting increasing attention in the weeks before and since the budget. The issue is one of creating “good jobs,” those which provide improved levels (and possibly also reduced variability) of income. Higher income jobs come from increased labour productivity. One route to increased labour productivity is investment in human capital; namely, skills and education. But that is not enough either. A doctor is highly skilled and educated, and may do quite well operating out of a home office. But her productivity may also depend on having a suitable location for providing a range of examinations and treatments, and the staff and equipment that complement the doctor’s expertise and physical delivery site.
The basic economic insights are obvious, but tend to get lost in discussions of formal versus informal sector and self-employment versus employment by another person or organisation. The first economic insight is that complementarities matter for productivity—combining inputs optimally leads to higher aggregate productivity for potentially all the inputs. This includes not just inputs under the control of the provider, but also those that are provided publicly—the doctor’s skills, state-of-the-art facility and trained staff will be less productive if there are irregular power cuts, the water supply is erratic, and the access road is often flooded. The second economic insight is that economies of scale matter. The doctor may be more productive with a clinic than a single room, and operate at a level justifying full-time, dedicated office staff. Some investments in equipment may be justified only if enough patients are being seen. Externally provided inputs are even more subject to these economies of scale—electric power via a diesel generator at the clinic will be much more costly than that generated at a power plant, even with costs of transmission factored in.
India does have some large-scale providers of goods and services. But, sometimes, these are in industries that are inherently capital-intensive (and this can include human capital as well as physical capital), or units that are pushed in the direction of capital intensity by labour laws that raise labour costs. And overall, the Indian economy, despite having over a billion people to participate in it and to serve, fails to take advantage of economies of scale. Its manufacturing is inefficiently small scale, and constrained from growing. Those growth constraints are not just in the labour market, but in areas such as infrastructure and financing. These are cases of missing complementary inputs that prevent growth and realisation of economies of scale.
An old idea in economic development is that of the “big push.” Indian economic policy still lacks a big push that will change the rate of growth of “good jobs.” Pieces of the solution have come over the years, in greater power generation and more road building. But often other pieces are still missing—perhaps the last mile roads, or efficient distribution of electric power, or maybe access to working capital that is needed for growth.
Based on India’s experience over the past two decades, predictions of significantly higher job creation with a return to 7.5-8% growth have limited believability. Marginal increases in financing opportunities for smaller firms will have only marginal impacts. Creating numerous small export enclaves will move the dial, but only a little. The former vice-chairman of the NITI Aayog, Arvind Panagariya, had recommended a few, very large, coastal economic zones. If these can be created and ramped up quickly, with foreign investment, adequate infrastructure (both upstream and downstream), and some freedom from the corrupt and inefficient governance that is the norm in India, that could be the start of a major shift in the rate of creating “good” jobs. The point is that scale and complementarities matter, and have to be harnessed.
It is true that the world has changed since China and its East Asian predecessors undertook transformations of this nature. Global demand may not be as robust, and competition for other late developers is fierce. Services take up an increasing share of rich-world economies. The nature of jobs is also changing, with pressures for greater flexibility and more risk for workers. But these are just challenges that have to be accepted and overcome. There are always new opportunities, even in manufacturing. Modest, incremental steps will not be enough, as time runs out on India’s demographic bulge. Economic policy has to be about complementarities, scale, and a big push for job creation. And to succeed, it has to involve not just a policy document, but a detailed implementation plan—something India’s talent pool can surely produce.
Professor of Economics
University of California, Santa Cruz