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The answer for India’s economic recovery: Labour-intensive manufacturing

Rakesh Mohan writes: High under-employment and poor-quality employment have hampered a much-needed move away from agriculture. A focus on labour-intensive formal manufacturing is the need of the hour

India has not generated enough good jobs to match the scale at which the economy has grown. (Illustration: CR Sasikumar))
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Several agencies, including the IMF and the World Bank have projected lower growth rates for the Indian economy in FY23, than the 7.2 per cent estimated by the RBI in April. The Central bank has now lowered its forecast to 6.8 per cent. Given the current situation, with the Q2 FY 2023 GDP growth clocking in at 6.3 per cent, the economy is likely to grow at 6.5-7.0 per cent in this fiscal year. It is difficult to arrive at a precise estimate for growth this year with unprecedented economic uncertainty worldwide, including high global inflation, synchronised monetary tightening, and the impact of the Ukraine war.

On medium-term growth prospects, there are some positive signs in the Indian economy. Company and bank balance sheets are healthier, credit growth is rising, and capacity utilisation has increased, all of which augur well for investment activity. The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.

I expect a higher growth rate from FY24 onward for India. But such a recovery would also require us to tackle many of our economy’s pressing problems — some of which are a hangover from the past and some that have been exacerbated by Covid. Our biggest concern relates to employment, an issue that has persisted over the last two decades. In brief, we have not generated enough good jobs to match the scale at which the economy has grown, especially in the organised sector. As a result, we have very high under-employment and poor-quality employment, which have hampered a much-needed move away from agriculture.

Job growth is crucial if we are to reduce the still high levels of poverty in the country. We do not have a precise estimate of the current levels of poverty, as there has been no household consumption survey since 2011-12, and the 2017-18 survey was abandoned due to technical issues. But there is reasonable consensus that poverty could be around 10 per cent of the country’s population: A low number compared to the past, but as many as 140 million people could still be living in poverty. The rising demand for the MGNREGA, and the importance of food distribution schemes and other welfare programmes for the poor are indicators of the lack of non-agriculture jobs being generated.

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With the 1991 reforms, the expectation was that, as the economy opened up to global competition, India’s low wage levels would attract private investment into labour-intensive manufacturing, thus generating jobs. This was the path followed by the East Asian economies that experienced high growth and rapid development. But for India this remains an untapped opportunity. Even with rising wage levels in China, manufacturing is shifting to countries other than India. The PLI (production-linked incentives) scheme has been rolled out to encourage manufacturing. It may need some tweaking to be biased towards labour-intensive manufacturing as China vacates space in this area. This may seem at odds with the more popular view that it is small and medium enterprises which promote employment. But a boost to exports and employment can only be provided by large companies as they have far higher productivity levels and are hence more competitive. A very high proportion of global manufacturing exports are done by large companies.

An alarming aspect of the employment problem in India is the low participation rate of women in the labour force, which is among the lowest in the world. This loops back to the importance of labour-intensive manufacturing. For example, much of Bangladesh’s success, and that of Southeast Asian countries, in exports and manufacturing stems from the large number of women working in their factories. A positive trend in India has been the growing trend in girls attending schools and college in the last 20 years, but this also means that an increasing number of educated women are not working.

Closely linked to the issue of employment is the country’s real exchange rate: The rupee has been overvalued for long and needs to be allowed to depreciate, though in a calibrated way, ensuring external and financial stability. An overvalued rupee has discouraged the export of labour-intensive manufacturing goods, which are very price-sensitive in global markets. It has also had a dampening effect on domestic production as our currency has depreciated at a lower rate than other emerging economies like China and Indonesia. Domestic producers of goods that compete with imports into our markets have been impacted by the inflow of cheaper imports. This has disincentivised them from expanding production – and generating employment.

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Problems that have come to the fore post-pandemic include the health of micro, small and medium enterprises (MSMEs). Accurate information on this is somewhat scarce but anecdotal evidence suggests that they have been more severely hit than the formal sector. However, the continued recovery of the formal sector, as indicated by various metrics, in terms of the improved health of corporates and banks should effectively pull up the MSMEs through supply chains linkages, among others.

On the inflation front, India is doing better than many advanced economies and emerging markets. But, we still have a negative real interest rate (that is, the difference between the RBI’s policy rate and inflation). Hence, the policy rate needs to rise further, providing a push to financial savings, which are needed to generate higher investment for growth. Inflation does, of course, need to be contained through supply-side measures as well, such as an improvement in the supply of food products.

The writer is president, CSEP and part-time member, PM’s economic advisory council

First published on: 08-12-2022 at 07:19 IST
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