India needs a big jobs miracle
3 min read 27 Aug 2015, 09:32 PM ISTNarendra Modi has a number of possibilities to unleash the manufacturing sector's potential, but none are easy
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Prime Minister Narendra Modi’s heroic image has suffered some setbacks, and his Independence Day speech shows he is struggling to find his way back onto his pedestal. He must avoid indulging in populism and return to making job creation the focus. A jobs focus resonates with the youth and “aspirational India" that elected him.
Of course, the key to generating new jobs is pro-business reform that ushers in more growth. Modi should apply his formidable communication skills to selling the aam admi on the hard steps needed to achieve more jobs—real jobs, sustainable jobs.
A jobs agenda should focus on facilitating high-productivity sectors to accelerate wage growth and raise the standard of living. Looking broadly across sectors for maximum impact, the two best candidates are formal manufacturing and modern services. The former is distinguished from the informal sector, and the latter means tradable information technology enabled services like financial intermediation and communications. Both have much higher productivity levels than other industries.
Political capital, bureaucratic capacity and the public’s bandwidth to support initiatives are all scarce resources. A jobs agenda would benefit from focusing exclusively on formal manufacturing.
The reasons for preferring formal manufacturing to modern services are threefold. First, formal-sector manufacturing requires the low-skilled workers that India has in abundance. Its expansion therefore solves many social and economic problems at once.
The many workers in the informal manufacturing sector would much rather be employed by a formal company (i.e., one that incorporates, pays taxes and tries to comply with the regulatory structure). While 81% of manufacturing workers toil in the informal sector, it is mostly just disguised unemployment with super low productivity.
Second, formal manufacturing exhibits a higher employment elasticity of growth—the rate of employment generation as it grows. If both grow at the same rate, the formal manufacturing sector will create jobs at a faster pace than modern services.
Third, policy barriers do not significantly hold back the potential for modern services to unleash a wave of new growth. Services has already blossomed despite the inhospitable Indian business climate, so it bears less potential to benefit from further liberalization. Manufacturing, on the other hand, is clearly constrained by factors that policy changes could rectify.
The downside to trying to grow through manufacturing is that it is highly competitive and hard to break into. Further, the global industry is shifting to automation at lower and lower wage levels. Yet India is luring major companies such as Foxconn, the world’s largest electronics contractor manufacturer, and Indian labour is still cheap enough to compete with robots. The country may not be able to ride manufacturing all the way up to Korean—or even Chinese—levels of income, but its workers still stand to become much better off by leaving farms even for bottom-rung factory jobs.
We used a simulation to estimate the impact on the Indian economy if the Modi government (with lots of help from state governments) pushed hard to create a formal manufacturing-friendly environment. Formal manufacturing’s currently limited size means that it has a lot of room to break out and grow rapidly. If a policy change occurs, our estimated growth rate of 14% for the sector puts it right up there with East Asian countries during their booms.
The simulation found that 58 million new jobs could be created in the formal manufacturing sector in the next 20 years above what we would have with status quo policies. This scenario would produce corollary benefits for the construction and utilities, modern services and traditional service sectors as well, creating a further 84 million new jobs in those sectors by 2035. Altogether, India would finally meet the oft-repeated need for 10 million new jobs each year.
These simulations should be taken as rough guesses. Yet even a rough guess suggests that a major push to facilitate growth in formal manufacturing would be worthwhile.
How to start a new boom in formal manufacturing? Modi has a number of possibilities to unleash the sector’s potential, but as seen with the Land Acquisition Amendment and Goods and Services Tax, few are easy. The question therefore is not what to do, but how.
The solution lies in better articulating his end-goal and outlining the steps needed to get there. A clearer picture would undercut his opposition, and a heightened focus on job creation would make it harder to be branded anti-poor. In fact, there is probably nothing Modi could do more effectively to regain momentum and restore his image than return to the dream of better jobs that he promised in his campaign.
Russell Green and Gavin Martin are, respectively, the Will Clayton Fellow in International Economics at Rice University’s Baker Institute for Public Policy and a student at the University of Texas, Austin.
Comments are welcome at theirview@livemint.com
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