Opinion How infrastructure investments may be slowing job creation

India needs good infrastructure, both physical and human, to create more jobs. The country has made huge progress in improving its physical infrastructure but has fallen behind on human infrastructure like education and skills. Physical infrastructure in the absence of good human infrastructure has slowed the pace of job growth. Physical infrastructure investments are also focused on urban areas, but the manufacturing sector is migrating away from urban to rural areas to remain cost-competitive. However, poor physical and human infrastructure in rural areas has constrained the growth drivers and limited the size of the manufacturing sector in India.

India has the largest concentration of illiterate people in the world. More than one-third of India’s adult population remains illiterate, and less than 20 per cent have completed secondary education. There are well-understood limits to the pace with which India can accumulate physical infrastructure. But there are no limits to the pace at which India can accelerate human capital.

Returns to investment in education are much higher than the returns to investment in physical investment. The average social rate of returns to primary education is nearly 20 per cent and returns to higher education are increasing rapidly. The World Bank, which for a very long time just focused on basic education, and ignored higher education, has come around.

What can India do to scale up investments in human infrastructure, particularly education? The challenges are enormous in rural areas. They are also multidimensional — access, quality, relevance, finance and governance. Despite a few excellent public and private universities in India, concerns have been raised about the quality of education due to a huge variation in the quality of graduates from both the public and private systems. Effective systems of quality assurance do not exist, either for the public or the private sector. Compounding this problem is a shortage of qualified faculty due to poor compensation, rigidities in the number of places allocated to different disciplines in the public system, outdated curricula and pedagogical methods that still rely too much on rote learning rather than creative thinking and problem-solving and teamwork that is needed by the market.

As the education system becomes more complex with multiple players and multiple pathways, the governance of the education system needs to be improved, and new and better systems must be established. It needs better incentives, monitoring, performance assessment, and accountability both for the internal processes of the education process as well as for students. A key challenge is to scale up tertiary education. This will increase the cadres of professionals who can create new enterprises and maximise job creation. Tertiary education increases the dissemination of knowledge beyond universities, through interactions between firms and the rest of society.

Policymakers need to recognise that investments in education will accelerate the pace of job creation. Most of the jobs are created by new enterprises, and enterprises, both domestic and foreign, look for both skilled workers and a good physical infrastructure. Given India’s large youth bulge, the potential to benefit from education is huge. Education and skills are becoming more important as new enterprises make their location decisions based on the education and skills of the local workforce.

India’s infrastructure investments, which are largely focused on the urban areas, have resulted in lopsided spatial development that has slowed the pace of job creation. India’s manufacturing sector is rapidly de-urbanising and moving from urban to rural areas to remain competitive. However, the manufacturing sector is not able to grow fast, as rural areas lack adequate physical and human infrastructure.

In the early 1990s, India’s manufacturing sector walked hand in hand with urbanisation. This process has reversed from 2000 onwards, with the pace of de-urbanisation of manufacturing gathering momentum. Industrial firms are choosing to locate in rural areas due to a combination of cheaper land prices, lower pollution restrictions, weaker congestion and other spatial factors. India’s urbanisation and industrialisation paths have diverged. India’s pre-mature de-industrialisation, or the secular slow-down in the manufacturing trend, is due to the divergence in the paths of urbanisation and industrialisation.

The future of economic growth will not be in tier I cities, which are already dense with India’s best and brightest, but in tier II cities. New cities have the potential to generate 70 per cent of the country’s new jobs and GDP over the next 20 years — a process that could drive a four-fold increase in per capita incomes. In China and the USA, intermediate cities have become the new drivers of growth and job creation. Globally, manufacturing has been dispersing from high-density clusters to less dense areas.

The divergence in the paths of urbanisation and industrialisation raises big policy questions for policymakers. Is rural development just about raising agriculture productivity or should it also include the manufacturing sector? India needs a broader focus on rural structural transformation to accelerate job creation. This can be achieved if policymakers can scale up physical and human infrastructure investments to build the missing links between urban and rural India. The de-urbanisation of the manufacturing sector has scaled up the importance of rural development and job creation agenda.

The writer is a Senior Fellow at Pune International Development Centre and has worked at the World Bank