Positive feel missing

An interesting disconnect has once again appeared in the economy. The reports from the stock/bond markets, startups and e-commerce, GDP numbers, are all undoubtedly very cheerful. The ‘real indices’ are whether air travel/freight movements, sale of cars or tax collections support these ‘feel good’ assessments while going up by healthy double digits. Exports are still down, but the fall has been arrested.

However, this feeling of good cheer does not seem to permeate the labour markets. Organised sector employment still stagnates--bulk of new employment is not so much by way of ‘dignified‘ jobs but by way of casual contracts in the informal sector. 

It would be recalled that a similar disconnect had been experienced 7-8 years ago. An inconclusive debate on jobless growth, short circuited by growth colla-pse, had resulted then. This time around, a difference exists in that the government has shown that it is conscious that triggering manufacturing revival is the key to creating an environment where a large number of jobs get generated. It is also welcomingly vocal in accepting that it is the ‘ease of doing business’ that has a major say in creating a manufacturing-oriented economic environment.

A number of initiatives in eliminating hitherto existing barriers in ‘ease of doing business’ parameters have already been taken, or are under serious consideration. Several initiatives for attracting investments in electronic, defence and other technological sectors have been announced. Media announcement of technology tie-ups of well established companies with known overseas names are now often seen. Equally commendable are the recent initiatives to benchmark Indian quality standards with the rest of the world and to bring about transparency and objective auditability of the same, by external institutions and agencies. 

Despite all this, a positive feel in the job market is missing. Concurrently, an impressive line-up of erudite commentators has already started voicing apprehensions whether focussing on manufacturing is the correct way to go in today’s times, when there is so much excess capacity in the world economy. They caution that following the China path will lead us nowhere and we should adapt an ‘India way’.

In any debate, ideology plays an important role but often, the din hides the elephant in the room. In India’s case, it is the demographics. When we gained Independence, India’s population was 361 million. Now, it is over 1,200 million which is stated to be our demographic dividend. The literacy level in 1947 was 12% and sustained effort has brought this up to 74%, though far below world average of 85%. 

The question which emerges is, if you add these two facts (of a non-stop population boom and increasingly successful focus to educate the masses), what do you do with an ever increasing and somewhat better educated population? What happens to them post-school/college?

Can our much vaunted services sector accommodate all? It is often forgotten that while there is excess capacity in manufacturing, there is equal excess capacity in services. And when the world economy itself is not doing well, there is increasing resistance, if not hostility, to nationals of other countries taking over jobs from their own citizens. Brexit happened because of this!

A cursory look at trade data will indicate that India, despite being similar to China in population numbers, is a miniscule player in world manufacturing exports – China has a 11%+ share; we have less than a tenth of that! Manufacturing exports of UK are 40% higher than total Indian exports. Ditto other Organisation for Economic Co-operation and Development countries. Even if we double our share, we would still be a minuscule player. The question which could be asked is, why is India so low in world tables?

The unintended effects of liberalisation have not been adequately analysed. What happened is that post liberalisation, substantial growth opportunities appeared in various parts of the economy. However, real sector reforms did not happen. Concurrently, the non-modernisation of Micro, Small and Medium Ent-erprises norms and closure of credit gua-rantee schemes for medium scale manufacturing negatively impacted the risk-reward paradigm which existed earlier.

Capital costs/risks of technology-orien-ted production continued to rise sharply. The relative importance/glamour of hardcore technology manufacturing disappeared. Consequently, Indian entrepreneurial interest shifted elsewhere. 

Real estate sectorAnother impact was over-enthusiastic investment focus on real estate, commodity-oriented manufacturing and infrastructure. This can be seen in terms of bank credit growth data. Average bank credit growth was about 15% till 2013-14 but credit to manufacturing industry grew at less than 10% and was near zero growth for medium scale industry, though micro/small industries grew in line with the large.

The bedrock of most, if not all, advanced economies is the very significant presence of technological manufacturing-focused companies run by entrepreneurs. India also had witnessed a rapid proliferation of such units in the 1960s and 70s after the launch of priority sector norms and credit guarantee schemes. 

A very large number of currently well regarded groups came up in this fashion. But no longer. Companies with size of up to 50 million euros/dollars are currently called SMEs in EU/USA. In India, such companies are neither the protected micro/small nor the clout-wielding crony capitalists. This also means they were neither here nor there. So also are the formal manufacturing jobs.

If we want to create a dignified job-focused economy, we need to recreate an environment where the middle-sized technology manufacturing is welcome. The basic deterrent to enthusing technical entrepreneurs to take up medium scale manufacturing are the opaque bureaucratic red tapes of the most well-intentioned state government.

There are over 600 notified industrial estates and 300 SEZs. Maybe, pending completion of reform enactments, fully empowering the CEOs (of the best managed 10-15% of these having space to grow) with all powers, including closure permission from the state government, could help in creating an attractive environment. It could be tried out.

(The writer is former chairman, Exim Bank of India)