To create jobs, an industrial policy focused on labour-intensive industries is key
These sectors deserve consistent support over time to compete internationally since India is lagging behindUpdated: May 27, 2019 19:37 IST
Manufacturing contributed in 2017 only about 16% to India’s GDP, stagnating since economic reforms began in 1991. By contrast, in east and south-east Asia, the industry share has exceeded 30-40% while manufacturing is 20-30%. India’s manufacturing share of GDP has not moved up at all, though between 2004-05 and 2011-12 manufacturing employment growth was reasonable (grew by 6 million, using NSS). However, total manufacturing employment has fallen significantly between 2011-12 and 2015-16 by 10 million in just four years (Annual Survey Labour Bureau data, with a sample size same as NSS), especially in labour-intensive manufactures.
This is the opposite of what was achieved in Japan, Korea, Taiwan and China. All these countries restructured agriculture after the Second World War, focused their modernisation efforts on manufacturing, and made their financial systems slaves to these two objectives. The result was rapid absorption of surplus agri-labour in labour-intensive manufacturing first, which then enabled them to move up the manufacturing value chain to more capital-intensive manufacturing, making them the factory of the world.
By contrast, in India the labour intensive manufacturing sectors like food processing, tobacco, textiles, apparel, leather, wood and furniture have seen a decline since 2012. The tobacco and textiles sub-sectors within manufacturing have seen a fall in their share of total manufacturing employment in India (though total jobs grew slightly). The fall in the textiles’ share requires policy attention, while the fall in tobacco is consistent with government policy to reduce tobacco consumption.
Packages for Specific Industries (not enterprises): The most labour-intensive manufactures are food processing, leather and footwear, wood manufactures and furniture, and apparel and garments. These product groups account for 50% of manufacturing employment in India (total manufacturing is 60 million of the total employment in India of 475 million in 2011-12). Unfortunately, however, it is the unorganised segment of these labour-intensive manufacturing firms that employ most workers, not the organised segment. Perhaps this could be one reason for their relative policy neglect. Another could be the rise in rural share observed in manufacturing. Between 1970-71 and 2011-12, the rural share in output of manufacturing doubled (from 25% in 1970-71 to 51.3% of manufactured output) and exceeded the manufacturing production in urban areas.
In addition to the usual problems that beset all manufacturing (e.g. poor infrastructure, uncertain electricity, the poor record on ease of doing business), each of these sectors have special problems and each deserve individual attention through a government package of policies in specific states where these activities are concentrated. Thus drawing upon World Bank employment elasticities, rapid export growth in garments sector could generate about half a million additional direct jobs every year. Nearly every successful economic growth take-off in post-war history in East Asia was associated with rapid expansion in apparel exports in the early stages. The ratio of jobs to investment is as follows: in apparel 31.1, in autos only 2.6, and in steel 1.0 (based on Annual Survey of Industries, 2013-14). India could take a part oof the market share that China is losing in international markets due to rising Chinese wages. But India is losing to Bangladesh, Vietnam, and even Myanmar and Ethiopia. Why?
The former chief economic adviser, Arvind Subramanian, suggests the following. First, logistics. The cost and time involved in getting goods from factory to destination is higher than in other countries. Second, labour costs could be an advantage, but not really for several reasons: a) regulations on minimum overtime pay; b) onerous contributions that become de facto taxes for low paid workers; c) lack of flexibility in part time work; and d) high minimum wages in some cases. One indicator is Indian apparel firms are smaller compared to firms in China, and even Bangladesh. Some 78% of firms in India employ fewer than 50 workers with 10% employing more than 500 workers. Contrast China, where the comparable numbers are 15% and 28%. Third, world demand is shifting towards clothing using man-made fibres while Indian domestic tax policy favours cotton-based production, and tariff policy protects an inefficient man-made fibre sector. Finally, India faces higher tariffs in the US and EU, unlike its competitors, which India can do little about, but about the rest it can.
Garments and apparel in 2016 received a package, as did the leather sector in 2017. However, close on the heels of these packages came demonetisation of high denomination currency notes (in November 2017). Then the cow slaughter ban disrupted the cattle trade in the country, and leather production collapsed (just as beef exports, in which India was the world’s largest exporter, fell). All unorganised sector producers suffered, including these sectors. The government policy packages for these sectors came to nought as a result. Hence, these and other labour-intensive sectors (wood and furniture, food processing) deserve consistent support over long periods of time, for them to compete internationally, as jobs in these sectors are vacated by China.
High-end, technology- and skill-intensive large-scale manufacturing will also need greater attention of industrial strategy. Our argument is that policy must go beyond the traditional labour intensive sectors. Electronics are not very labour intensive as final products. But in terms of the components and supply chain, it is a sector that creates many jobs.
However, All India Manufacturers Association, in a survey over Oct-Dec 2018, found that MSMEs (that predominate in these sectors) had lost jobs massively over the last four years. The survey found that in 2014-15, if firms had 100 employees then by 2018-19, they were down among traders to 57 workers in 4.5 years; to 68 among micro enterprises; to 65 in small enterprises; and to 76 in the medium segment.
The new government will need to respond rapidly if labour-intensive manufacturing jobs among MSMEs are to grow.
Santosh Mehrotra is professor of economics, JNU, and editor of What’s the Plan? India’s Planning Commission – its Past and Future (Cambridge University Press, forthcoming)
The views expressed are personal