India’s takeoff has to start on the factory floor

Modi’s biggest promise to India’s young and restless voters when he first ran for nationwide office, 10 years ago, was to vastly expand employment opportunities. Job growth hasn’t even come close to keeping up with population growth during his decade in office.

By Mihir Sharma

India’s election campaign has officially begun. Few expect Prime Minister Narendra Modi to be unseated by the time it concludes. Yet, objectively, he should be in a lot more trouble electorally than he is.

India’s working-age population swells by perhaps eight million a month. Modi’s biggest promise to India’s young and restless voters when he first ran for nationwide office, 10 years ago, was to vastly expand employment opportunities.

Instead, job growth hasn’t even come close to keeping up with population growth during his decade in office. The most respected independent survey of India’s workforce concluded last year that youth unemployment topped 45 per cent.

The problem goes beyond India, of course. A report released by the World Bank last week worried that South Asia only created about 10 million a jobs a year over recent decades, even as the number of potential workers was growing by 19 million a year. The proportion of the working-age population in the region who are employed has declined since 2000 — the only slice of the developing world where that happened.

Still, India’s problems are particularly acute. Last week, a major new study from the International Labor Organization pointed out that the standard structural transition seen in most developing economies, in which agriculture slowly loses workers to more productive sectors such as manufacturing and services, “reversed after 2019, with a substantial rise in agricultural employment.” The report added, dryly, that this trend was “rather unique” for lower-middle-income countries.

What could Modi conceivably do in a third term to fix this? The advice is coming in thick and fast. Some argue that a completely new growth model is required, since neither factories — which increasingly require fewer workers to run —nor slowing exports can be counted on to generate employment at the scale they have in the past. One economist told the New York Times this week that the typical path which leads countries “from the farm to the factory and from the factory to offices,” was “wrong.”

In fact, India is proof that no other model exists. Its services sector has boomed, including both low-end services, such as unorganized retail, and high-end work at infotech behemoths such as Infosys Ltd. This has earned India foreign exchange and global respect. What it hasn’t done is create enough jobs. The rise in artificial intelligence is likely to shrink services jobs even further.

The ILO report agrees. “There is no alternative,” its authors say, “but to engage in some form of structural transformation, where manufacturing would have a crucial role, as seen in other countries.” Without more factories, India’s demographic dividend will become a curse.

Modi insists that his government’s efforts — to invest in infrastructure, for example — have made it easier for companies to set up those factories. And the World Bank report agrees that “large public investment projects, the easing of labor regulations after 2014, and increased use of contract labor have supported industrial employment growth.” HSBC India reported this week that manufacturing activity encouragingly surged to a 16-year high in March.

At the same time, India’s government has been almost tentative in the reforms that everyone agrees are most needed. While Modi focused on manufacturing in the first months of his tenure, his energy seemed to dissipate after a bill intended to make it easier for companies to acquire scarce land for factories proved unpopular. The legislation was withdrawn. India’s land market remains capricious and opaque.

Nor has Modi strengthened the independence of regulators, which might give manufacturers confidence that they won’t be bullied by local politicians. And he has not touched the sclerotic judicial system, which might otherwise allow those investors to fight off administrative interference. A schizophrenic tariff policy has discouraged multinationals from integrating India into their global supply chains.

And then there’s the quality of India’s workforce. Governments more than a decade ago worked hard to get India’s children into school and largely succeeded. Modi’s task was to improve the quality of those schools and to make sure school-leavers had the skills they needed for the shop floor.

That didn’t get done. In 2022, a survey of 700,000 rural students in India found that 42 per cent of fifth-graders in India could not read at a second-grade level. Over 70 per cent of them couldn’t solve a simple division problem.

India’s growth performance has been better than most of its developing-world peers. But jobless growth won’t transform the country. Nor will clever new ideas adopted from the West, such as throwing subsidies at favored industries and national champions.

There’s only one way for a developing country such as India to build a true middle class: Create more manufacturing jobs. Unless tens of thousands of new factories bloom across India in the next five years, Modi will have failed the young people who have been his strongest supporters.