India’s jobs problem is tied to its manufacturing stagnation—which in turn is tied to the lack of labour reforms.
There are 20 months till the next election. It is easy to believe that the outcome in 2019 is beyond doubt. But think again. Indira Gandhi had won two consecutive elections in 1967 and 1971 and had been in power for 10 years, including 21 months of the Emergency. She called an election she did not have to, confident that she would win. Faced with a motley collection of fractious and fractional groups of had-beens, she lost. In 2004, the first ever BJP/NDA government—having won two successive elections in 1998 and 1999, and after a string of outstanding GDP growth rates—called an election a few months in advance. India Shining was the message conveyed by the latest mobile phone technology. Yet again, there was a coalition of unlikely partners led by the Congress with Sonia Gandhi, foreign-born and still a relative amateur in politics as its leader. Again, the result was a shock.
The point is that elections cannot be taken for granted. The BJP/NDA government has won many state elections recently, the latest being UP. But the GDP growth rate has been on the slide for four years. India was the fastest-growing country in the G20 for the last couple of years. But now, that distinction is lost as China has revived. Inflation is down, but can’t be relied on to stay down. Onions or tomatoes can turn an election. Let me make a list of what needs to be done. Narendra Modi has been an energetic leader. He has reaped electoral dividend of his interventions. But he has been reluctant to reform or restructure the economy. Instead of grappling with the last 50 years of rigidities which are growth-destroying, he has launched new initiatives to compensate for the reforms not carried out. Thus, Make-in-India is an add-on to the manufacturing industry but it concerns foreign entrants. India has had a stagnant manufacturing sector for several years, a legacy of the Nehru-Indira Gandhi planning. It is top heavy in high- or medium-tech activities, which use skilled workers. The labour laws have throttled growth in low-tech products where South East Asian and East Asian economies have found significant growth opportunities. The government has avoided labour market reform like the plague. It can anticipate strong resistance from trade unions. It left the task to states, but that was just an excuse for doing nothing. Growth in manufacturing could generate jobs if only the sector could be revived.
The government inherited a broken banking system. The NPA of PSU banks was a deep structural sign of the old crony capitalism in partnership with Congress socialism. The government has taken too long to sort out the NPA problem. It has reformed insolvency laws which is a positive step. It has finally consolidated one bank—the State Bank. But the rest of the PSU banks need restructuring. The best solution would be to return them to the private sector. India does not need 25-odd state-owned banks. If that is too radical, at the very least, these banks must be consolidated. Indira Gandhi’s nationalisation was a deliberately political act with no economic logic. Nationalised banks have been useful to Congress over the years to sustain political corruption. Unless the PSU banks are tackled, the fight against corruption cannot be won.
The agricultural sector is broken. We can see it from the debt forgiveness orgy in which various states are indulging. Debt forgiveness does not solve problems; it only perpetuates them. The bulk of farms—80%—are no viable. They cannot even provide subsistence for the farmers who cultivate them. Ideally, the farmers would be moved to urban, manufacturing jobs if there were any. But that takes us back to reform of labour laws. Another approach would be to repeal the Land Acquisition Act of 2013 which could then make it easy for the government and the private sector to acquire land for infrastructure and/or industrial projects. If neither of these options is taken up, we will just see repetition of suicides and debt forgiveness. The prime minister’s promise of doubling farmers Incomes by 2022 is highly unlikely to be fulfilled unless drastic restructuring takes place.
Then, there is the issue of job creation. No doubt, people are finding ways of making a living though they may not call them jobs. But where can jobs come from ? India has only one growth sector—services. GST will definitely help. But the IT sector is unlikely to generate jobs as it is experiencing rapid productivity growth. That will mean other service sector activities will have to create the jobs. It could be hospitality, health care, retailing and logistics, tourism. But all these sectors require education-plus-skilling. May be the prime minister will win a majority, perhaps even a bigger one, in 2019. But the problems listed above will not go away.
Prominent economist and Labour peer