Will manufacturing, infrastructure revive Indian economy?

I was intending to write an article on some manufacturing-related aspects this month. It is such a hot topic. Everyone likes to discuss how and why manufacturing is or is not doing well. Or, on some similarly stimulating topic such as jobless growth. Then Covid intervened. It has been around for over a year but had gone onto the backburner. Some had even declared that India had defeated it and had started celebrating “our unique ability” to beat the virus. Then, it came back and washed away the State. There is no need to describe the consequences further as we have all experienced what transpired thereafter.

The scale of damage has brought questions related to the country’s health infrastructure to the forefront. Experts had always said it was weak, but most of us earlier pooh-poohed the whole issue, feeling that while perhaps it may possibly be weak for ‘them’, it was not so for ‘us.’ After all, the country has almost 25,000 hospitals, 500 medical colleges, over 300 dental colleges, etc., apart from several super specialty/premium and super premium hospitals. Then, all of a sudden, it all looked so tiny, so insufficient, and people ‘we’ knew (not ‘them’) were suddenly dying because they could not get admitted to a hospital, or even if they did manage to get admitted, they could not get a basic thing like oxygen to breathe…even in the ICUs.

While the authorities responsible are busy making excuses and trying to shift responsibility, it turns out that with only five beds per 10,000 population, India ranks 155th in the world, with only 12 countries worse than us. This apparently is because we spend only about 1.5% of our GDP on public health while even our South Asian neighbors spend more than double this. Brazil and South Africa spend over 8% and the advanced economies are in the healthy double digits.

We also spend very little on education (less than 3% of GDP), but then, it was usually so far powerfully argued, we are a developing country and can ill-afford to spend more on health and education. It is more important, it is often said, to focus on economic growth, and that for this, we need to ‘invest’ in ‘manufacturing’ and ‘infrastructure’ rather than ‘spend’ on ‘health’ and ‘education.’

Surprisingly despite all this effort to ramp up ‘manufacturing’ and ‘infrastructure’, we have not really grown impressively in recent years. Admittedly, post the liberalisation of 1991, India’s GDP growth rate had zoomed, but that is now more a matter of historical record than current fact. What are we doing wrong?

We can get a clue from the differential growth performance of two large neighbouring states in western US in the past two decades. These are Arizona and Colorado. Historically, Arizona had been a more advanced state, bordering Mexico and its seaports, than Colorado, a landlocked desert state 800-km away from the nearest seaport. Their GDPs, at the turn of the century, were $170 billion and $132 billion, respectively. But then, they experienced a reversal in ranking in a little more than a decade, with Colorado’s GDP of $264 billion overtaking Arizona’s $258 billion. This turnaround happened as Colorado started investing hugely in medical and education infrastructure. A large number of high-tech industries and highly skilled and well-paid professionals poured into the state, sidestepping Arizona, which continued to grow in its traditional manner. Since then, Colorado has widened the gap with Arizona. In 2020, its GDP was over $390 billion, Arizona’s $320 billion.

Colorado’s is not a unique story. Sichuan, a landlocked province of China (again over 800-km away from the seaports) similarly invested hugely on its population’s health and education and again attracted a great number of high-tech professionals and industries to its Chengdu High-Tech Zone, overtaking Fujian and other similar South China Sea-proximate provinces which followed more traditional attitudes toward public health and education spending. The case studies of the previously unfashionable countries in Northern Europe are also now often current.

To understand why what’s happening is happening, you need to ask no one except yourself or your children, where would you prefer to work and stay? Will availability or lack of high-quality educational and health facilities be a factor? Entrepreneurs and captains of industry will similarly tell you, but only if asked pointedly, that the provision of such facilities by the State is actually what attracts them. Expenditures on citizens’ health and education are ‘investments’ and not ‘consumption expenditure’.

If we, as a country, want to develop and modernise, we must increase manifold our investment on health and education infrastructure. If the State currently has reduced capacity to invest, it must fiscally incentivise such investments through tax holidays/SEZ status, et al. Get these ‘pull’ factors going, and ‘manufacturing’ will troop in on its own.

This will also resolve automatically the current problem of ‘jobless’ growth, as health and education are more ‘labour-intensive’ sectors and providers of better-quality jobs than the shopfloor of any factory. Not for nothing do the advanced countries’ indicators reveal that health and educational services account for over 20% of all employment, while in India it is only around 5%. Those countries thus also benefit hugely from the $100-billion health tourism as well as the educational tourism industry, oftentimes at our cost. Also, because we have low job creation in these high-income fields, citizens’ tax-paying capacity remains low. We thus experience a double, even a triple, whammy because of misguided policies. We need to reflect. And change.