Manufacturing

Historically, countries moved jobs from agriculture to manufacturing and then to services, writes Karthik Muralidharan in Accelerating India’s Development. The move from agriculture to manufacturing increased worker prosperity for 3 reasons: (1) Enabled specialization and economies of scale; (2) Goods could be exported to other countries, which meant production wasn’t limited by domestic demand; (3) Jobs became more reliable.

 

India’s trajectory has been different –Manufacturing never took off because of the kinds of government policies we had. India went directly into services (think IT, BPO, Uber/Ola, Swiggy/Zomato etc). One reason for going to services was timing. As India liberalized, the Internet started to take off transforming “many non-tradable services into IT-enabled tradable ones”. Another reason was India’s decision at independence to focus on high quality tertiary education in English. And lastly, many folks who worked for outsourcing arms of the best Western MNC’s learnt best practices, how systems worked and were designed, and went on to form their own service companies with a large employee base to tap from.

 

Skipping manufacturing is a problem though. Manufacturing employs lots of low-skilled employees, and those low-skilled folks couldn’t find jobs as India grew. So lot of people remain stuck in agriculture, which is a problem for them as well as the nation’s growth rate (since agriculture grows very slowly compared to manufacturing). Manufacturing jobs also leads to urbanization, which has second order benefits. Large concentrations of people in towns and cities creates demand for new services and thus creates the next tier of jobs.

 

So what can be done to improve manufacturing possibilities, esp. with the world trying to move some fraction of manufacturing out of China? Making the bankruptcy process faster, easier and transparent is one measure. It helps by allowing lenders recover at least a part of their loans when things go bad. As opposed to the large bad loans that become entirely unrecoverable. Partial losses are better than total losses for lenders – it reduces their losses and encourages them to lend a bit more easily, facilitating job creation.

 

Another measure would be to ease the process of transfer of land ownership, and make it faster, transparent and easy to resolve in case of disputes. Plus, the process of changing the intended use of land (farming, industries, construction etc) should be made easier and quicker.

 

We should check the overall cost v/s benefit to the country of well intended policies. Take railway fares being kept low. This makes travel affordable to the poor. But to recover their costs, freight rates are then increased which in turn increases the cost of goods and makes Indian goods more expensive and un-exportable. This impacts manufacturing as a whole.

 

Some of the above mentioned reforms need to be sync’ed – fixing one problem while leaving others unaddressed doesn’t help much. Inter-department coordination within the government has to be improved.

 

Improving primary and secondary education translates to a better workforce, which then feeds more manufacturing jobs with its attendant benefit. SEZ’s are another area – the ones we have done are service-oriented, but we need to look at China to learn how to build manufacturing friendly SEZ’s, perhaps by encouraging competition amongst states on that front. Another lesson from China is to incentivize the bureaucracy to care for economic growth e.g. bureaucratic promotions can be tied to policies and measures that translated into economic growth (measurable and concrete). In theory, economic growth benefits everyone and can help get re-elected, so many of these measures align with politicians’ interests too.