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Use this slowdown to quicken reforms in manufacturing

Whether it is arrogance or incompetence, we'll never know. But a GDP growth for the quarter ended December 2011 at 6.1%, after touching 9%-plus only a few years ago, is something this government will find hard to brush away.

india Updated: Feb 29, 2012 22:17 IST

Whether it is arrogance or incompetence, we'll never know. But a GDP growth for the quarter ended December 2011 at 6.1%, after touching 9%-plus only a few years ago, is something this government will find hard to brush away. And while the immediate problem before us is one where job opportunities will slowdown, investors will not get the returns they should get from an economy like ours and consumers may spend lesser than they did, there are two bigger problems ahead.

The first is the complexity of manufacturing, whose growth rate has crashed to 0.4% for the quarter ended December 2011 from 7.8% in December 2010. This is a sector that provides employment and livelihoods and is expected to create 220 million jobs by 2025. But over the past four decades we have systematically turned this sector into one that those with money do not want to be in. The problems are many - a huge pipeline of processes that slow down investment, regulations that give bureaucrats and officials unimaginable discretionary powers, clearances of all sorts that have subjectivity embedded into them, the politicisation of land acquisition, corruption by businessmen as they try to get that little extra. These are aside from the recent financial carnage - the wildly-fluctuating rupee and the high interest rates that have killed investment.

Instead of encouraging minds and money to converge on this sector and create the holy troika of jobs for workers, wealth for investors and politics for leaders (more jobs mean good politics), what's happening instead is the opposite. "Why should I invest in manufacturing," the head of a large business group asked me recently. "It's just too much trouble. And if things don't work out, I can't just get up one day, sell my business and walk away. For me, the future is in services."

Harvard professor Dani Rodrik looks further on the impact of such exits. "India's high-productivity service industries employ workers who are at the very top end," he wrote recently. "Ultimately, the Indian economy will have to generate productive jobs for the low-skilled workers. Much of that employment will need to come from manufacturing." At a time when global capital is itching to find ways to multiply and is looking at China, India and Southeast Asia as opportunities of the future, our leaders are frittering this economic goodwill away.

The second problem with a slowing growth rate is the impact it has on India’s place the emerging geopolitical playground, where the glitz and dazzle of the past few years has already begun to wane. For a global engagement, notes Nonalignment 2.0: A Foreign and Strategic Policy for India in the 21st Century, a document prepared by an independent group of eight analysts and policy makers, including Nandan Nilekani, Pratap Bhanu Mehta and Shyam Saran, manufacturing is essential.

"India has to take advantage of its human capital and become a hub for low cost manufacturing and services," the report says. "There is every reason to believe that with modest reforms and political stability, India can be a very attractive destination for investors." Instead of being apologetic about it, we need to be aggressive here. Our trade with

China, for instance, is skewed against us in terms of value — we export commodities like iron ore and import high-end power equipment.

Apart from power, India will be investing billions of dollars in telecom equipment — another huge opportunity that our service providers have to import from China or Europe. If in an atmosphere of global slowdown India is offering a ‘market’, what is stopping us from marrying strategy with economics and catalyzing manufacturing — and thereby increasing jobs — by, for instance, insisting on technology transfer?

The strategic window will not be open forever. Already, we are seeing the world’s largest economy, the US, beginning to come out of recession into positive territory. The EU is still reeling but minus PIGS (Portugal, Italy, Greece and Spain), it is unlikely to implode in a hurry, though it won’t touch the highs of the past. On the growth and investment front, India competes with China, Southeast Asia and Brazil. Beyond the BRICS (Brazil, Russia, India, China and South Africa) lies Africa, a continent that’s reforming into opportunity for early money.

In relative terms, therefore, India’s economic-strategic advantage is lesser than what it was between September 2008 and December 2009, when the world was in the worst recession since the Great Depression. India did show intellectual leadership at the G20 then. But today, the legitimacy and relevance of this informal grouping of the world’s largest economies is under threat — the top job at IMF has gone to a French, while that at World Bank will go to an American.

To increase our strategic clout, we need to strengthen India’s manufacturing. This will not only help us create low-end jobs domestically to supplement the high-end employment in services, it will also secure our strategic future as it leads GDP growth, takes that growth down to the masses and reverts to a 25% GDP share. But for that to happen, the government needs to wake up from its slumber and take it up as a national priority. Can this slowdown be that critical wake up call?

First Published: Feb 29, 2012 22:10 IST