By Nirvikar Singh
The latest numbers suggest that India’s economic growth is slowing down, though not by much. Some of this can be chalked up to a return to trend, after the Covid downturn and recovery. There are also clouds gathering with the continuation and escalation of conflict in West Asia and Ukraine, and these are affecting the entire global economy. Indian policymakers can only focus on what they control, however. One prominent argument has been that economic policy is not getting the basics right. The evidence for this includes less than robust private sector investment, and stagnant or even declining productivity and wages at the lower end of the labour market. The elite segment of the economy may be doing well, in this view, but the masses are falling behind. This is not a recipe for high rates of growth over an extended period.
The government has been trying hard to change this story, with financial support for manufacturing and new skilling and apprenticeship programmes. Increases in productivity and wages that come from investment in human capital are going to benefit a larger slice of the population than investment in physical capital that substitutes for workers, though both kinds of investment matter. In a nutshell, the core problem of Indian economic development remains, as has been the case for decades, the failure to generate anywhere enough new “good” jobs. Foreign direct investment and the associated entry of India into global production networks for manufactured goods as multinationals and governments diversify risks away from China are positive developments. The evolution of the goods and services tax, which has reduced internal trade barriers, reduced compliance costs and incentives for evasion, and buoyed government revenue, is another positive sign.
What else can policymakers do? Some research has suggested that gradual reductions in labour market rigidities have allowed firms to grow more than they might have in the past. Size brings economies of scale, and hopefully increases in labour productivity and employment. But a detailed new study by three economists, Abhishek Anand, Arvind Subramanian, and Naveen Thomas, identifies some causes for concern. Their detective work with the data from the Annual Survey of Industries (ASI), and other government sources, points to remaining challenges for “Make in India”.
Some economies of scale are associated with activities such as administrative functions, and in that case, the size of a manufacturing plant does not matter, only the size of the firm overall. But for many manufactures, plant size is all important for scale economies. The three economists find that a provision that allows respondents to amalgamate data for multiple plants when reporting to the ASI has resulted in a misleading picture. ASI data is supposed to be about manufacturing units, normally equated with plants or factories. But it seems that a considerable fraction of the growth in the size of firms is coming from adding plants rather than increasing plant size. In that case, economies of scale are lost, productivity gains are lost, and employment growth is hindered. In the apparel sector, where India has lagged badly behind Bangladesh, the observed ASI data suggests that plant sizes are not too different between the two countries. But once the data is corrected, the size distributions are very different. In Bangladesh, about 40% of employment is in plants with over 1,000 workers, versus something closer to 10% for India.
Why is this the case? Here one can quote the study, reporting on one CEO’s views: “it would be more competitive internationally if its plant sizes could be greater. But it chooses not to grow as a matter of diversifying policy and legal risks and because of onerous regulations. The risks are not the law, per se, but stem from the broader political environment in which the firm feels it would be disadvantaged relative to the central government, to state governments where the plants are located, and also to labour in the event of any kind of labour-related dispute”. Note that the risks are not “merely” associated with politics, but also the workings of the legal and judicial system.
The East Asian “miracle” is often a conceptual model for Indian policymakers, but it often relied on suppressing workers, within a broader political environment that was not very democratic. Cultural norms and education levels may also have been very different. While Bangladesh has not been a paragon of democracy, and workers’ health and safety has often been compromised, its apparel industry succeeded in a manner far beyond what India has managed. If we use the popular conceptual category of “ease of doing business”, then it is almost tautological that such ease matters, but what is being captured in indexes may be missing some aspects of business-government-societal relations that, under the right conditions, lead to the right kind of growth in size, and then to growth in productivity and “good” jobs.
Getting this right in India will require some reflection and actions at the state and local levels. The world of New Delhi and India’s industrial titans is far removed from the world in which many Indian businesspeople operate. India’s national policymakers have to understand this second world, and how to make it work better.
The author is professor of economics, University of California, Santa Cruz.
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