The Telegraph
Wednesday , June 11 , 2014
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- Rousing the sleeping elephant of the Indian economy

According to the common voter, the economic causes of the United Progressive Alliance’s electoral debacle are two — inflation and unemployment, especially among the educated. In an earlier article, I had suggested that the main source of inflationary pressure was the UPA’s subsidy regime: subsidies not only inflate deficits and demand, they also distort the incentives to work and produce and thereby reduce output. The roots of unemployment are more complex: they lie in our so-called demographic dividend, which has been transformed into a potential demographic disaster by the UPA’s limited understanding of the world economy and of our place in it.

Over the last 50 years, the world has evolved towards a new international division of labour, driven by the wage differentials between the rich and the poor countries. The central feature of this has been the migration of all labour-intensive economic activities from the West and Japan to the low-wage economies of Asia and the specialization of the West in research-intensive high technology. This began with the rise of the Gang of Four, Korea, Taiwan, Hong Kong and Singapore. But as the rapid expansion of labour-intensive manufacturing and exports in these pioneers raised wages there, the impulse was transmitted to Thailand, Malaysia and Indonesia and eventually to China and Vietnam, while the pioneers graduated to more capital-intensive products but with a standardized technology — products like cars and steel. By the 1990s, the process had percolated down from the East Asian Pacific Rim to South Asia. Its corollary was the rapid growth of labour demand, industrial employment, wages and income in Asia and their stagnation in the West.

Meanwhile, the West sustained its rate of profit on capital in the face of domestic stagnation partly through its investments in low-wage economies abroad and partly through the returns to high-end technology and research at home. So, it happened that in the age of mankind’s greatest scientific and technological achievements, while the laboratories of the West cracked the atom and explored the depths of space, while they unlocked the secrets of life and the mysteries of information transmission, their factories deserted them. Despite the dazzling successes of Western science — or perhaps because of them — Western industry (except for a few whose goods must be produced where they are consumed) has been in desperate flight to the technologically backward shores of Asia.

India was a partial beneficiary of this process. But unlike China, the world’s other great reservoir of surplus labour, it never committed itself whole-heartedly to it. Rapid growth of labour-intensive manufacturing and export required an infrastructure of power and transport, which our decrepit public sector was incapable of providing, but which we were as yet reluctant to entrust to the private sector. It also required a flexible and mobile labour force and the unrestricted flow of capital away from failed experiments and into promising new investments. None of this was possible, given our antiquated labour laws, and the political and judicial structures that sustained them. All this was no secret to the expert economists in the Congress government, but the pressures of organized labour, of the Left, which supported UPA I, and of the extra-constitutional authority at 10 Janpath and its advisers, ensured that nothing was done about it. In an earlier era, India had sacrificed its enormous potential in the textile industry to the myth of reservations for the small-scale sector, sentencing the textile mills — which everywhere else in the developing world have been the spearheads of industrialization — to premature debility. Over the last two decades, we have chosen to vacate our rightful place as potentially one of the world’s greatest mass manufacturers not only for China or for the early pioneers of East Asian industrialization but also for interlopers like Vietnam, Myanmar and Bangladesh. In fact, since 2008, when the share of formal manufacturing in GDP peaked at 10.5 per cent, India has been de-industrializing rapidly. States like West Bengal have been de-industrializing for the last 30 years — and far more rapidly than the West.

Instead of making garments for the world, we have carved out for ourselves a niche market in low-end designer clothing and handicrafts, in boutique products and exotica rather than mass manufactures. Instead of building factories, we have focused on software and generic pharmaceuticals to exploit our twin advantages of a knowledge of basic English and some — if low-quality — university education. None of these options can generate mass employment on the scale that our booming population requires. Most of them exclude the unskilled.

The UPA compounded this basic error in strategy by a set of policies that seem in retrospect to be almost artfully designed to impede industrialization. These included environmental regulations and restrictions on the acquisition and use of land, all enforced through administrative controls that could be, and were, manipulated by bureaucrats and politicians as levers for extortion as the price for avoidance of interminable — and often terminal — delay. The restrictions culminated in the egregious Land Acquisition Act proudly piloted by Rahul Gandhi through the last session of the previous Parliament, but, for years before this denouement, and even in their earlier and milder avatars, they constituted an almost insuperable barrier to extensive industrialization. It was inevitable that this control regime would spawn astronomical corruption and that the exposure of these scandals would force complete administrative paralysis in the last years of UPA II.

While the government was busily enmeshing industrialization in a tangle of red tape reminiscent of the pre- reform era, a new generation of Indians was entering the job market. This consisted of the hundred million or more born during the Narasimha Rao regime, an aspirational generation that grew up amidst rapid urbanization and an expanding demand for (and supply — largely from private sources — of) basic education. It was not a generation that could be happily lured back into “disguised unemployment” in the villages by the handouts of the NREGA. It wanted real work at good wages — failing which it lurked on the shadowy periphery of urban and small-town India as a disenchanted proletariat still living on dreams but all too ready, if these dreams are not fulfilled, to turn to a life of crime.

Here lay the roots of the UPA’s failure. In its paternalistic determination to give the people what its chairperson (and her advisers) had decided they ought to have, it forgot what they really wanted. Narendra Modi tapped into their aspirations and promised to make their dreams come true. In so doing, he has assumed a terrifying responsibility, a burden of expectations that, one can only hope, will drive his government to discover new and innovative ways to rouse the sleeping elephant that is the Indian economy.