The idea that labour-intensive industries will work without appropriate capital is misguided.
By Anjali Tandon
Job creation has been a preoccupation with policymakers for long. The lacklustre performance of Indian manufacturing has prevented the absorption of labour force displaced from agriculture.
Although some have found employment in services such as travel, tourism and hospitality, much of these are stopgap arrangements. Labour-intensive manufacturing could have been the most fitting option to absorb the mass labour force. But this did not happen. The most common argument for its failure to take off is the rigidities in labour laws preventing easy hire and fire of workers. Also associated are the entry and exit barriers for firms. However, one aspect has been completely ignored from consideration. It is the capital requirement of labour-intensive sector and refers to the relative significance of capital in their set-up and operations.
The idea that labour-intensive industries will work without appropriate capital is misguided. Even more erroneous is the concept of evaluating their relatively large proportion of labour use based on direct requirements only. It is necessary to work out labour and capital requirements after taking into account their respective use indirectly in activities of the supply chain of labour-intensive industries. Ignoring the indirect usage of capital in a labour-intensive industry amounts to underestimation of the capital proportion of labour-intensive manufacturing. For instance, despite its labour intensity, the food processing industry depends on capital equipment such as refrigerated vans. The omission tends to undervalue the proportion of capital. Therefore, it becomes fundamental to reassess the capital proportion of labour-intensive sectors so that appropriate finance policies can be designed for their revival and promotion.
A related attempt through an ongoing study under the IMPRESS (Impactful Policy Research in Social Science) scheme of the government finds that even the traditionally labour-intensive sectors have higher proportions of capital than normally recognised. For instance, labour-intensive manufacture of tobacco products and manufacture of macaroni, noodles, etc, enveloped under the broader food processing sector is noted to have capital proportions that are 18.4% more than normally assessed. An underestimation of that magnitude (of the order of one-fifth) for a labour-intensive sector, which is also largely unorganised and employs unskilled labour, suggests that employment generation in labour-intensive sectors demands more capital than estimated through measuring only their direct factor proportions.
Similar is the case of unskilled labour-intensive activities related to manufacture of textiles, handbags, footwear and ropes under the broader textile and leather sector, although the underestimation is of a smaller order. The capital proportion of yet another labour-intensive activity—manufacture of refractory and non-refractory clay and ceramic products—is likely to be underestimated by 10.8%. As a labour-intensive activity, manufacture of structural metal products, included in the basic metal products sector, is found to have the highest level of underestimated capital proportion. The capital proportion in relatively low-value transport equipment such as bicycles is also underestimated by almost 10%. At the same time, the high value added but skilled labour-intensive products such as gems and jewellery would fall short of capital by 6.9% as assessed from the proportions for miscellaneous manufacturing sector which is also inclusive of production of sports goods using unskilled labour.
These findings have relevance for the industrial policy which is round the corner. Indeed, ignoring the greater than understood capital proportions of labour-intensive activities only belittles their capital requirements dishonourably. Thus, infusing appropriate capital into labour-intensive sectors gains primacy for their success in employment creation.
Associate professor, Institute for Studies in Industrial Development, New Delhi. Views are personal