If chief economic advisor Arvind Subramanian’s talk of India’s premature deindustrialisation wasn’t enough, an additional fear is that of robots being another reason why India cannot create anywhere near the kind of jobs it needs to in manufacturing. Not surprisingly, this came up in the panel discussion at the launch of former RBI deputy governor Rakesh Mohan’s new book. Mohan was quick to dismiss the fear-mongering, however, and with good reason.
In line with other countries who are reaching their peak industrialisation faster compared to the early industrialisers, Subramanian pointed out—in the 2014-15 Economic Survey—that India’s manufacturing had peaked as early as 2008 when the share of registered manufacturing in the country’s value added was a mere 10.7%. The only state to reach a peak value-add-share of over 20% was Gujarat—its share was 22.7% in 2011, after which it has fallen. In terms of the employment, however, the peaking took place even earlier—in 1984, at the all-India level, when registered manufacturing’s share in India’s total employment was a mere 2.7%.
This early peaking, though part of a global trend, was made much worse by India’s unfriendly policies. Had India encouraged labour-intensive sectors like garments and leather & footwear which have a huge export potential—especially with China vacating this space—India wouldn’t have peaked so early. As opposed to automobiles which employ just 0.3 people per one lakh rupees of investment, apparel employs 23.9 people. Given the average annual growth of apparel exports for 20 years after its take-off was 30.4% for south Korea, 65.8% for Indonesia, 27.9% for Bangladesh and 17.8% for Vietnam versus a mere 12.7% for India, it is not surprising India reached peak-manufacturing so early and with such a low employment share. To put this in perspective, Bangladesh’s total exports grew by 82% in 2010-16 and Vietnam’s 145% versus a mere 17% for India.
But these are just tiny countries, goes the usual counter, with small export bases that get duty concessions for textile/apparel in the US and the EU. That’s true of Bangladesh but, at $176.8 bn, Vietnam’s exports are already two-thirds of India’s—in both 2000 and 2010, they were roughly a third of India’s and were less than a seventh in 1990! And unlike Bangladesh, Vietnam gets no duty concessions.
India’s lack of export competitiveness, it has been repeatedly said, is related to its internal policies that even a Narendra Modi has been unable to fix. While some like former Planning Commission member Arun Maira have argued the ‘inability to fire workers is highly exaggerated as a constraint on the growth of enterprises’ (goo.gl/SXYKKf), this is incorrect. As the 2015-16 Economic Survey points out, the share of contract workers rose from 12% of all registered manufacturing workers in 1999 to 25% in 2010, and more so in states that had more rigid labour laws—why would this happen unless industry found the laws irksome? While bigger industries found an end-around the labour problem, small entrepreneurs remain wary of doing so. So, in the case of the apparel sector, there are 2 million establishments that hire, on average, 1.5 persons as compared to 2,800 firms in the formal sector that hire 118 workers each—how can they possibly deliver quality?
Other laws reinforce this. Compulsory deductions such as EPFO/ESI reduce take-home pay of those earning a basic salary of Rs 5,000 per month by around 45% and this, in turn, makes workers prefer informal jobs. The government promised to fix this a couple of years ago but little has happened so far—indeed, with a uniform national minimum wage legislation being cleared by the Cabinet, this will further erode India’s competitiveness—if we’re lucky, Parliament won’t pass the Bill.
It gets worse. As urban-development-solutions firm Metro Valley points out, while firms in Bangalore pay over $5 per sq metre per month, industrial rents in Hanoi are less than a fifteenth of that. That is why, along with special rules to allow relaxed labour laws, Metro Valley proposed mid-sized urban/rural employment zones with rents as low as 69 cents per sq metre—this also has other benefits in terms of reducing urban pollution but few in government are interested in pushing this.
So, the next time you hear talk of premature deindustrialisation, jobless growth or the likely impact of robots, just remember it is more about the inability of the government to adopt the right industrial policies and the inability to rise to the challenge of fixing poor policies. Whether the dejection is justified or is premature, of course, depends upon your view of the government’s ability to really change things.