In their book, Breaking the Mould: Reimagining India’s Economic Future, Raghuram Rajan and Rohit Lamba recommend that India give up its policies to build its manufacturing sector and jump straight to export more high-end services. This is surprising because this is what India has been trying to do in the last 30 years, with very poor outcomes. Insufficient jobs and incomes are the Achilles heel of India’s economy.
The signs are visible outside economists’ datasets, in the social and political arenas. Farmers are demanding better prices and informal sector workers and contract workers, fair wages and social security. The economy cannot be in good shape when 60% of Indians, cutting across castes and religions, are classified as “economically weaker sections” entitled to job reservations.
A growth-affecting mismatch
The obstacle tripping India’s growth is the mismatch between skills, jobs, and incomes. Twenty years ago when, supposedly, “India was Shining”, economists thought India had leapfrogged manufacturing in the development ladder, in which, traditionally, masses first transition from agriculture to manufacturing and then to services. China lifted its masses from poverty by moving them up the ladder into a large manufacturing sector, becoming the factory of the world. Now, China is producing world-beating technology champions.
India invested in world-class institutions of science and engineering 70 years ago. The Indian Institutes of Technology enabled India’s software industry to become a globally competitive force. They also produced CEOs for U.S. multinational companies. India’s space programme is delivering results at a fraction of the National Aeronautics and Space Administration’s costs. However, India’s pattern of growth, with investments in high-end skills, has not generated enough decent jobs for India’s masses.
Delivering the 2010 Lionel Robbins Memorial Lectures, British economist Adair Turner pointed out that too much reality was being left out of economists’ models for them to explain the world. With a twist of Keynes’ statement that “practical men …are usually the slaves of some defunct economist”, he warned that the “great danger lies (now) with reasonably intellectual men and women employed in the policy-making departments of central banks and governments who tend to gravitate to simplified versions of the dominant beliefs of economists who are still very much alive.”
The realities are being missed
Economic theories developed by analysing numbers miss realities. Most economists do not understand the process of “learning” (which is the essence of “development”) whereby citizens learn new skills and increase their incomes, and nations acquire capabilities they did not have before. An agricultural worker is willing to apply his intelligence and labour to a new job; but cannot take much time off from working and earning to learn new skills. Therefore, his next job, though different in content, must be close enough to his capabilities for him to take the leap from one to the other and then continue to increase his skills on the job. If the next job is near his present habitation, he will save living costs too. Therefore, “adjacencies” in work and location in rural areas are the best steps for climbing the skill-income ladder. They also create dense webs of economic activity.
Manufacturing is performed not only in large, capital-intensive smart-phone factories, and value-adding services not only in large software factories. Manufacturing and value-added services can be carried out in rural areas and around farms, in small, labour-intensive, and low-capital, enterprises, for processing agricultural produce and transporting and selling it in nearby markets. Such enterprises add value to agricultural commodities locally, without requiring their transportation to more distant, large-scale processing centres.
Targets of trillions of dollars of GDP will not be achieved if economic growth does not become inclusive and sustainable very soon. The pattern of economic growth must be changed. More Indians must be employed so that they can earn and learn and, by earning more, increase the market for more producers. India cannot afford to neglect its small-scale and informal manufacturing sector any longer. While India has abundant resources of willing human beings, large, capital-intensive, factories require more land and financial capital to operate on scale — resources which are relatively scarce in India.
Make more for India, in India
Investing in education and skills for “high end” manufacturing and services will not benefit the masses if they cannot be employed. Richness of economic activity within local webs will create more sustainable growth than policies to participate in long, international supply chains when barriers are rising. The Indian state has limited financial capacity. It cannot afford to misspend it, by reducing taxes and duties and giving incentives to investors, with the expectation that benefits will gush down to the masses. More imports will not increase the well-being of Indian citizens if they do not have more incomes to buy. Foreign direct investment will not boost growth if it does not increase employment soon.
The mould in which economics was cast in the later part of the 20th century must be broken. Policymakers must reimagine the path for India’s growth. They must get down to the basics of inclusive economic growth. There are no shortcuts.
The global economy is not growing like it was when China became the factory for the world. Producers everywhere are looking for new markets. India, with its unmet needs is very attractive for them. India’s policies must take advantage of this opportunity and make more for India in India, thus growing both jobs and incomes for India’s masses.