Modinomics, meet the industrial slowdown!

narendra modi

The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.

The index of industrial production (IIP) figures declared earlier this week, portray a worrying picture of the overall Indian economy. The IIP is a measure of industrial activity in the country.

For the month of July 2017, the IIP grew by 1.2 per cent in comparison to July 2016. In June 2017, it had contracted by 0.2 per cent. While, there has been some improvement month on month, the overall trend of the IIP growth has been down for a while. Take a look at Figure 1, which basically plots the IIP growth (or contraction for that matter) over the last four years.

Figure 1:


As is clear from Figure 1, for more than a year now, the overall trend of IIP growth in the country has been downward. This is a clear indication of a slowdown in the growth of industrial activity.

One of the ways through which IIP is measured is referred as economic activity based classification. As per this method, manufacturing accounts for 77.6 per cent of the IIP. And if things for overall IIP have been bad, they have been worse for manufacturing. Take a look at Figure 2, which basically plots the growth (and contraction) in manufacturing over the last four years.

Figure 2:

modinomics
Source:  Ministry of Statistics and Programme Implementation.

What does Figure 2 tell us? The manufacturing scene in the country doesn’t look great. In July 2017, manufacturing grew by just 0.1 per cent, after having contracted by 0.5 per cent in June 2017. This is a trend that was also visible in the gross domestic product (GDP) data released in late August 2017. Let’s take a look at Figure 3, which plots the growth rates of industry and manufacturing using GDP data, over the last four years.

Figure 3:

Figure 3 clearly tells us that the growth in industry and manufacturing as per the GDP data is at a four-year low. For the period April to June 2017, industry and manufacturing grew at 1.6 per cent and 1.2 per respectively, in comparison to the same period last year.

What does this mean for the overall economy? Industry has formed around 29-31 per cent of the GDP over the years. The fact nearly one-third of the economy is barely growing should be a big reason for worry. This will impact economic growth in both direct and indirect ways. If one-third of the economy barely grows, overall economic growth is bound to slowdown. That is the direct impact.

What about the indirect impact? In order to understand this, we need to figure out how many people actually work for industry. In 2009-2010, the industry as a whole employed around 9.9 crore individuals. Analysts, Nikhil Gupta and Madhurima Chowdhury, who work for stock brokerage Motillal Oswal, in a recent research note using data from the 2014-2015 Annual Survey of Industries, state: “Over the past 35 years, employment in Indian industrial sector has grown at an average of ~2%.” The actual figure is 1.9 per cent per year.

Hence, employment in the industrial sector tends to rise at the rate of 1.9 per year on an average. Using this, we can conclude that by March 2017, the total number of people working in industry would stand at around 11.3 crore. Further, the average Indian family has 5 people. Given this, around 55 crore individuals in a population of 130 crore or around 42 per cent of the population depend on income from industry, in one way or another. An if the industry is barely growing, these people will go slow on their consumption and other expenditure, and in the process slowdown overall economic growth. This is the indirect impact.

Why is this happening? The economic slowdown initiated by demonetisation is basically continuing. It is worth remembering that first and foremost is a medium of exchange. It is a token to carry out economic transactions. When you take 86.4 per cent of the currency in circulation out of an economy, where 80 to 98 per cent of the consumer transactions (in volume, and depending on which data source you take) is carried out in cash, economic transactions are bound to slowdown. And ultimately this is reflecting in the manufacturing data.

If there is slowdown in consumption, there is a bound to be a slowdown in manufacturing. If people are not buying stuff at the same pace as they were in the past, there is no point in companies increasing production like they were in the past.

The irony is that this crisis the Modi government brought upon us. Indeed, this is very worrying in a country where one million individuals are entering the workforce every month. That makes it 1.2 crore, a year. If the growth in industrial sector slows down to the level that it currently has, how will any jobs be created for these youth.

And that is a question worth asking.

The column originally appeared in Newslaundry on September 14, 2017.

 

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New IIP Shows Demonetisation Slowed Down Indian Manufacturing Growth Big Time

India_textile_fashion_industry_workers

India has a new Index of Industrial Production (IIP). It is bigger and according to economists who track such things, it is better than the previous one. The IIP basically gives growth estimates of three sectors-manufacturing, mining and electricity. The manufacturing sector forms more than three-fourths of the IIP.

The base year for the new IIP has been changed to 2011-2012 from the earlier 2004-2005. This has been done to capture the changes in the industrial sector that have happened over a period of time and “to also align it with the base year of other macroeconomic indicators like the Gross Domestic Product (GDP), Wholesale Price Index (WPI)”.

Like any other index, the IIP tracks various items that make for the manufacturing, mining and electricity sectors. These items need to be changed or relooked at from time to time in order to ensure that the IIP continues to maintain a representativeness of the manufacturing, mining and electricity sectors in particular and the industry as a whole in general.

The new IIP has a total of 809 items in the manufacturing sector. The earlier one had 620. While, the number of items which constitute the manufacturing part of IIP have gone up, 124 items have been removed as well. These include items like gutka, calculators and colour TV picture tubes. Items like cement clinkers, medical and surgical accessories, refined palm oil etc., have been added. Along similar lines, the electricity sector now includes data from the renewable energy sector as well.

Over and above this, there has been an increase in number of factories in panel for reporting data and closed ones have been removed. All in all, these steps have been taken in order to ensure that the new IIP is a better representation of industry than the old one was.

Given that, items that constitute IIP have change majorly, it is not surprising that the growth figures of IIP have changed as well. Take a look at Figure 1. It plots both the new IIP and the old IIP growth rates over the last half decade, April 2012 onwards.

Figure 1: 

One look at Figure 1 is enough to tell us that the old IIP and new IIP are different beasts altogether, though both are very volatile. Now take at data from March 2013. As per the old IIP series, the growth was at 3.5 per cent. The new IIP series puts the growth at 15.1 per cent. That’s how different the old and the new IIP are.

In fact, as per the new IIP, the industrial growth stood at 3.3 per cent in 2014-2015, the last year of the Congress led UPA government. As per the old IIP the growth had stood at – 0.1 per cent. Hence, we can conclude that the state of the industry in the last year of the Congress government wasn’t as bad as it seemed at that point of time. It’s just that the old IIP may have no longer remained a good representation of the Indian industry.

In fact, the new IIP shows that industrial growth picked up in 2016-2017, the last financial year. The growth stood at 5.1 per cent. As per the old IIP the industrial growth was at 0.6 per cent, during the course of the year. What this also tells us is that the two IIPs are as different as chalk and cheese.

There is an interesting trend that the new IIP catches on to in the manufacturing sector. Manufacturing makes up for 77.6 per cent of the new IIP as against the 75.5 per cent in the old one. Take a look at Table 1.

Table 1: Manufacturing Growth

Period Manufacturing Growth(in %)
Dec 2012 to Mar 2013 9.4
Dec 2013 to Mar 2014 3.7
Dec 2014 to Mar 2015 3.2
Dec 2015 to Mar 2016 4.9
Dec 2016 to Mar 2017 1.6

Source: Centre for Monitoring Indian Economy.

The manufacturing growth between December 2016 and March 2017 stood at 1.6 per cent. This has been the slowest in comparison to the same period in previous years. Why is this the case? The one word answer to this is demonetisation. The Modi government announced demonetisation of Rs 500 and Rs 1,000 notes on November 8, 2016, and sent the economy into a tailspin. The interesting thing is that the average manufacturing growth between April 2016 and October 2016 had stood at 6.9 per cent. This signalled the revival of the manufacturing sector after having grown by around 3 per cent in 2015-2016 and 3.8 per cent in 2013-2014.

Demonetisation managed to scuttle that revival in this growth. Also, it is worth pointing out here that the IIP data is collected from “entities in the organised sector units registered under the Factories Act, 1948”. This means that the unorganised sector is not covered. And as I have often written in the past, the impact of demonetisation on the unorganised sector has been far greater.

Up until now, the government has refused to admit that demonetisation has had a negative impact on the economy (Subscription Required). I guess it’s time it looked at the new IIP numbers to realise the obvious.

(The column was originally published in Equitymaster on May 16, 2017)

Problem with Robots is…

Sony_Qrio_RobototIn the recent past, there have been a spate of news-reports talking about robots taking over manufacturing. A recent news-report talked about the German shoemaker Adidas manufacturing shoes in its home country after more than two decades.

But instead of using human beings it has decided to use robots. Another news-report points out that Foxconn, a company which manufactures mobile phones for both Samsung and Apple, is replacing 60,000 workers with robots. Closer to home, information technology companies have also talked about robots taking over low-end activities.

On the face of it, it makes immense sense for a company to replace a human being with a robot. Robots can work all the time. They don’t sleep. They are not moody and there are no days when they don’t feel like working. They don’t need lunch and dinner breaks. They don’t need to go to the loo. And they don’t need to be paid every month or given an increment every year, either.

As Rutger Bergman writes in Utopia for Realists: “Scholars at Oxford University estimate that no less than 47% of all American jobs and 54% of those in Europe are at the high risk of being usurped by machines. And not in a hundred years or so, but in next twenty years.”

He then quotes a New York university professor as saying: “The only real difference between enthusiasts and skeptics is a time frame.”

The idea that machines will take over human jobs is nothing new. It has been around for the past two centuries. But nothing of that sort has happened as productivity levels (or output for every unit of input) have gone up. Nevertheless, it takes fewer and fewer employees now to create a successful business than it did in the past.

Take the case of the Indian manufacturing sector and the share of population it employs in various states. As Amit Amirapu and Arvind Subramanian write in a 2015 research paper titled Manufacturing or Services? An Indian Illustration of a Development Dilemma: “No major India state has achieved more than 6.2% of employment from registered manufacturing in the last 30 years, and many major states peaked at less than half that… most states have not been experiencing secular growth in employment shares over time (the only exceptions are Himachal Pradesh, Tamil Nadu, Haryana and – possibly – Karnataka).”

What this basically means is that even though the absolute size of the manufacturing sector in India has gone up over the years, the proportion of the population working for it, hasn’t. This is primarily because more and more manufacturing now is carried out by machines rather than human beings. In the Indian case, one of the major reasons are the hare-brained labour laws that companies need to follow.

But globally the basic reason is different. As Bergman writes: “The reality is that it takes fewer and fewer people to create successful businesses, meaning when a business succeeds, fewer and fewer people benefit.”

Take the case of Kodak, the company that invented the digital camera. In the 1980s, it employed 1.45 lakh people. It filed for bankruptcy in 2012. On the other hand, Instagram, the Kodak of this era, had just thirteen employees on its rolls, and was sold to Facebook for a billion dollars.

Nevertheless, there is a basic problem with all this, best explained through this example. As Bergman writes: “When Henry Ford’s grandson gave labour union leader Walter Reuther a tour of the company’s new, automated factory, he jokingly asked, “Walter, how are you going to get those robots to pay your union dues?” Without missing a beat, Reuther answered, “Henry, how are you going to get them to buy your cars?”

The point being if people don’t have a job, they don’t have any income or not much income. And in that situation they are going to buy only the most basic stuff that they require for survival. They will not have money to spend on all the goods being manufactured by companies which use robots.

And therein lies the basic problem with robots.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at vivek.kaul@gmail.com)

The column originally appeared in the Bangalore Mirror on June 1, 2016

The success of Make in India will lead to more jobs in services and not manufacturing

make in india
This column is essentially an extension of the column Devanshu Sampat wrote for The 5 Minute Wrapup on November 13, 2015. In this column Sampat talks about the challenge automation will create for the Make in India programme.

As he writes: “The costs of robots fall every year. At the same time, their complexity is on the rise. It won’t be long before cheap robots will be catering to the needs of a wide range of manufacturing firms.”

This Sampat believes “will prove to be major challenge to the government.” “Will ‘Make in India’ be successful if a large number of people remain unemployed despite a manufacturing revolution?” he asks.

As I have said in several previous columns, nearly 13 million Indians are expected to join the workforce every year. This trend will continue up to 2030. Given this, the government needs to create an environment in which jobs are created, in order to accommodate this workforce at a fast speed.

With automation and robots taking over manufacturing the number of new jobs being created will come down. And this will mean trouble for the Make in India programme given that ultimately it’s a job creation programme.

So what is the way out? The socialist mind-set of India’s politicians will look at it in a way where they may want to make it mandatory for businesses to hire and employ a certain number of people depending on the size of a firm.

To be honest I haven’t heard of such suggestions being made up until now but I won’t be surprised if such suggestions are made in the years to come, if the Make in India programme starts to fail due to automation and various other reasons.

Also, it is worth remembering here that any businessmen will automate if he can. A businessman is a capitalist and he works for ‘more’ profit and if there is an opportunity to make more profit he will try to cash in on it. And stopping that behaviour isn’t the best possible way to operate.

Further, given India’s surfeit of labour laws which make the business environment even more challenging, automation may be the best way out for any businessman.

Having said this, the question that arises here is that why should we expect the manufacturing industry to solve India’s employment problem? This is a fair question to ask. A straightforward answer for this lies in the fact that every country that has gone from being a developing country to becoming a developed one, has gone through a manufacturing revolution. India is possibly an exception to this, given that we have had a services revolution before a manufacturing one.

Nevertheless, even with automation we should not be so worried. TN Ninan in his book The Turn of the Tortoise—The Challenge and Promise of India’s Future offers a very interesting perspective on the basis of his interactions with some leading industrialists.

Take the case of RC Bhargava, the chairman of Maruti Suzuki, India’s leading car maker. As Ninan writes: “The chairman of Maruti Suzuki says, in response to a question on the greater automation that exists in newer car plants, that car factories should not be expected to solve India’s employment problem.”

So what about job growth? “If job growth is to come, according to Bhargava, it will have to be in associated areas—manning petrol pumps or maintaining and repairing vehicles, which are service sector jobs and don’t compare with high paying factory jobs.”

Bhargava also points out that every third car bought in India is not driven by the owner but a hired driver. Data from the Society of Indian Automobile Manufacturers (SIAM) points out that 2.6 million cars were sold in India in 2014-2015. If every third car is being driven by a driver as Bhargava talks about, then that means 8.5 lakh new jobs for drivers were created just in 2014-2015. And that is a substantial number.

The broader point is that even though manufacturing jobs may not grow, the setting up of new factories will lead to an increase in jobs in services. As Ninan writes: “The ratio of non-factory to factory jobs in the car industry is said to be 7:1. The head of another car company puts the figure at 16:1. Other manufacturers of engineering goods endorse the view that shop-floor employment in the engineering goods sector is unlikely to grow rapidly because of steadily increasing automation as well as gains in productivity.”

Ninan also recounts an interaction with Jamshyd Godrej, chairman and managing director of Godrej & Boyce, the diversified engineering company. Godrej “recalls a time early on when the majority of his company’s employees worked in the factory.” Now, the number of employees working outside the factory are four to five time the number of employees working in the factory.

The moral of the story, as Ninan puts it is “Success in quite a lot of manufacturing sectors, therefore, leads to employment growth in services, not manufacturing. Not that it should matter, since incomes will be better in both than in agriculture.”

In this scenario, it is important that the government realises that the success of Make in India, should not depend on the number of manufacturing jobs it ends up creating. Even if it does not create manufacturing jobs, it will create jobs in services.

Hence, the government should keep working towards a better ease of doing business environment. The labour laws need to be simplified. The physical infrastructure needs to improve. The roads, railways and ports need to improve. The contracts need to be honoured. A bankruptcy law needs to be in place. The courts need to function well.

The simple things need to be done well.

(The column originally appeared on The Daily Reckoning on November 17, 2015)

The shift from agriculture to manufacturing will not be easy

make in india
One of the points that I have often made in The Daily Reckoning is about close to 50% of Indians being engaged in agriculture generating around 18% of the Indian gross domestic product (GDP). What this clearly tells us is that agriculture is a low-income earning activity.  It also tells us is that there are many more Indians employed in agriculture than there should be. And this can be made out from the fact that only 17% of Indians employed in agriculture, survive on money they make from it. The rest, have to do some other work along with working on the farm, in order to add to their meager income.

Hence, it’s a no-brainer to suggest that people need to be moved out from agriculture into other higher paying areas like industry and services. As TN Ninan writes in his new book The Turn of the Tortoise—The Challenge and the Promise of India’s Future: “Both productivity and incomes will go up substantially if more people can be moved from low-paying agriculture to higher-paying industry and services—a key transition the country has barely begun.”

The Make in India initiative of the Narendra Modi government should be seen in light of this. The programme envisages “an increase in the share of manufacturing in the country’s Gross Domestic Product from 16% to 25% by 2022” and “to create 100 million additional jobs by 2022 in manufacturing sector”.

One reason why this target at best remains a pipedream is because of the lack of education among Indians. The rate of literacy as per the 2011 Census stood at 74.04%. As this website points out: “Compared to the adult literacy rate here the youth literacy rate is about 9% higher. Though this seems like a very great accomplishment, it is still a matter of concern that still so many people in India cannot even read and write.”

The trouble with this literacy number is that it does not give you the whole picture. As per the Human Development Report 2014, the average Indian male has around 5.6 years of schooling and an average Indian female has around 3.2 years of schooling. Both Bangladesh and Pakistan are ahead of us. For Bangladesh, the numbers being 5.6 years and 4.6 years, respectively. For Pakistan, the numbers stand at 6.1 years and 3.3 years, respectively.

And this is where the plan to move people from agriculture to industry or services for that matter, starts to go haywire. As Ninan writes: “Acquiring job-related skills without the benefit of a basic education is a challenge—it is hard to be a fitter or an electrician at a construction site if you don’t know basic arithmetic and can’t read simple instructions on a product pack.”

What this means is that the Make in India plan cannot take-off beyond a point unless our primary education system starts to improve. Individuals need to spend more time in school receiving better quality education. As things stand currently not much is being learnt in schools.

In fact, surveys have pointed out that most children cannot read basic text. The Annual Status of Education Report facilitated by Pratham points out that only 48.1% of children enrolled in Class V could read standard II level text. This means more than half of children enrolled in standard V cannot read standard II level text. In fact, more than one-fourth of children enrolled in standard VIII could not read standard II level text. The report further points out: “The gap in reading levels between children enrolled in government schools and private schools seems to be growing over time.”

And this is a worrying factor. Further, moving people away from agriculture into other more productive domains is a time taking process. As Ninan writes: “Thailand, one of the most successful manufacturing countries, has those in agriculture continuing to account for 40 per cent of its workforce. China, despite its considerable success in building a factory sector, has 35 per cent of its workforce still engaged in agriculture, generating about 10 per cent of its GDP.”

The point being that “whether one likes it or not, the transition away from agriculture as the primary source of employment is going to be slow”.

So what is the way out? Ninan suggests that one way out is to increase productivity of Indian agriculture. “Paddy output per hectare [in India] at about 3.7 tonnes, is 20 per cent short of the global average and barely half of China’s. One reason is that Indian farmers are not using the latest strains of high-yield varieties (growing them is also more employment-intensive) or adopting new methods of cultivation that require less water. It’s the same with maize,” writes Ninan. If these numbers were increased India’s agricultural output would go up in the days to come, and so would the income of people dependent on agriculture for their living.

The problem here is that the size of farms over the decades has grown smaller. Take a look at the accompanying table from the annual report of Department of Agriculture and Cooperation 2013-2014.

What does the table tell us? It shows very clearly that most farms are small in size and less than two hectares in area. 85% of the farms are less than two hectares in size and 67% of the farms are less than one hectare in size. And this doesn’t help the productivity cause at all.

As Mihir Sharma writes in Restart—The Last Chance for the Indian Economy: “Indian farms are tiny. Over 80 per cent of them are smaller than 2 hectares…And they are getting even smaller. They are just over half as big today, on average, as they were in 1970. Everywhere else in the world, farms have gotten bigger in the same period…Many people have been convinced that if there was just some way to increase agriculture’s share of output, some way in which all of agriculture received ‘support’, things would be better.”

Only if it was as simple as that.

The column originally appeared on The Daily Reckoning on October 20, 2015

India’s Great Delay: From Son of India to Make in India

make in india

The great filmmaker Mehboob Khan’s last film release was Son of India. The movie released in 1962 and Khan died in 1964.

The movie is now more or less forgotten except for the song: “nanha munna rahi hoon desh ka sipahi hoon”. The song was a regular feature during the propaganda driven days when Doordarshan was the only TV channel in town and Chitrahaar one of the few entertaining shows that one could watch during the course of a week.

The song was shown regularly on Chitrahaar and given that, perhaps a whole generation grew up listening to it. One of the lines in the song is: “naya hai zamana nayi hai dagar, desh ko banaoonga machino ka nagar”. Loosely translated this means that “in this new world we will make India a nation of machines and factories”.

Fifty two years after the 1962 release of Son of India, Narendra Modi was elected as the prime minister of India in May 2014. Modi gave the call of Make in India in August 2014, echoing sentiments of the nanha munna rahi hoon The Make in India website when it was first launched defined it as “a major new national program designed to transform Indiainto a global manufacturing hub.” (I can’t find this line on the website anymore).

The question to ask here is what went wrong during the intervening period between 1962 and 2014? Why are we still talking about aiming to build factories and a vibrant manufacturing sector more than half a century later?

TN Ninan has an answer in his excellent new book The Turn of the TortoiseThe Challenge and Promise of India’s Future. As he writes: “Size helps preserve India as a democracy—it is too big and too complex for any person to so dominate the whole land as to render the law and institutions ineffective, or at least to do so for any length of time.”
Son_of_India_film_poster

While size has helped Indian democracy it has also led to policy errors, which shouldn’t have been made. As Ninan points out: “Successful small countries find it easy, indeed necessary, to focus on export markets because their internal markets are too small to support scale production. But India is big enough to offer the potential of a large domestic market; inevitably, that became the focus of policy.”

The countries of South East Asia also started with import substitution (or producing only for the domestic market) but quickly moved their focus towards exports.

India continued to favour import substitution for much longer and this had its repercussions. “The difference between exporting units and those with a domestic market orientation is that the former have to be competitive, the latter not necessarily so. In India’s case, the inward focus became so pronounced that the country became an economic prison, functioning behind high protective walls. It is therefore evolved into a market for mostly shoddy, usually overpriced goods that would not sell anywhere except countries that were similarly starved of quality goods, such as the Soviet Union, which at one stage was India’s largest trading partner,” writes Ninan.

This put us back in the manufacturing race. And we are still trying to get the manufacturing revolution going. In fact, one of the visions of the Make in India programme is “enhancing the global competitiveness of the Indian manufacturing sector.”

What this tells us is that India is trying to come to the manufacturing party a little too late in the day. Nevertheless, this perhaps remains the only formula for pulling out India’s poor from poverty. And this is only going to happen if the ease of doing business is improved and the inspector raj is done away with, in the days to come.

As Mihir Sharma writes in Restart—The Last Chance for the Indian Economy: “The Indian state is run for its nice, kindly Inspectors, and not for workers or entrepreneurs”. And this needs to be corrected.

The rules and regulations that any manufacturer needs to follow are simply humongous. As Ninan writes: “A policy statement issued in 2011(two full decades after 1991) recognized that the average manufacturing company has to comply with seventy laws, face multiple inspections and file as many as 100 returns in a year. Bear in mind that these returns were being filed (or not filed) by small and medium enterprises that accounted for 45 per cent of manufacturing output and 40 per cent of merchandize exports.”

This is something that the Modi government has improved on after coming to power last year, by introducing self-certification, nonetheless a lot remains to be done on this front.

To conclude, the ball is now in Modi’s court. It took India nearly 70 years to decisively vote for a non-Congress party to power. Modi has the majority to get things done. If he doesn’t, chances are the Congress might be voted back to power. And there can be no bigger tragedy than that.

(Vivek Kaul is the writer of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Oct 20, 2015

Jibe specialist Rahul Gandhi needs to understand why ‘Make in India’ matters

rahul gandhiVivek Kaul

In his new avatar, Rahul Gandhi, the current vice president of the Congress Party and successor to the throne that has been kept warm for him over the last ten years, has become a jibe specialist.
His latest jibe has been at the ‘Make in India’ programme. “The prime minister talks about ‘Make in India’. No one does more ‘Make in India’ than the farmers of Punjab. They have made this country stand (on food grains production),” the Gandhi family scion, who recently returned from a 57 day foreign sojourn,
told the media earlier in the day today (April 29, 2015).
This potshot was uncalled for, simply because no nation has gone from being a developing country to becoming a developed country without the support and the rapid expansion of its manufacturing sector, which is what the ‘Make in India’ programme is all about.
As Cambridge University economist Ha-Joon Chang writes in
Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”
India has failed to latch on to a manufacturing revolution. The services industry was India’s big hope. But services by their very design have certain limitations. As Chang writes: “There are certainly some services that have high productivity and considerable scope for further productivity growth—banking and other financial services, management consulting, technical consulting and IT support come to mind. But most other services have low productivity and, more importantly, have little scope for productivity growth due their very nature (how much more ‘efficient’ can a hairdresser, a nurse or a call centre telephonist become
without diluting the quality of their services?).”
Also, for the services sector to flourish a strong manufacturing sector is required because that is where the demand comes from. Hence, as Chang puts it: “This is why no country has become rich solely on the basis of its service sector.” This is something that Rahul needs to understand.
India needs a strong manufacturing sector which it currently lacks. The reason is simple. Only a vibrant manufacturing sector can create enough jobs for the 13 million Indians who enter the workforce every year. The ‘Make in India’ programme is a step in that direction.
In his interaction with the media Rahul further said: “When the poor do ‘Make in India’, is it not ‘Make in India’? Is it something else?” What does this statement even mean?
Rahul’s concern for agriculture may be genuine, but a simple point he needs to understand is that there way too many Indians dependent on farming. Agriculture forms around 18% of the gross domestic product and employs more than 50-60% of Indians, depending on which estimate you trust.
Only 17% of who work on farms survive only on money they make from their farm. Everyone else does some extra work. As Mihir Sharma writes in
Restart—The Last Chance For the Indian Economy: “Our agriculture simply does not earn enough; and it has too many people…We no longer need to ensure that enough food is grown; for decades, we have been growing enough food. The country that invented granaries cannot build enough to store its vast stockpiles of grain; and yet we plant and harvest more.”
A major reason for this has been a rapid increase in the minimum support price(MSP) of wheat and rice, during the Congress led UPA government. The MSP is the price at which the government buys rice and wheat from the farmers, through the Food Corporation of India(FCI) and other state government agencies. Rahul told a farmers’ rally in New Delhi earlier this month: “We increased the MSP of wheat from Rs 540 to Rs 1400…The MSP has not changed, no benefit to farmers.”
But what the Gandhi family scion does not realize is that this rapid increase in MSP has led to other major problems. As Sharma writes: “It distorts the choices that farmers make—those who should be finding ways to grow vegetables, which grow more expensive every year, are instead growing wheat we no longer need.”
It has also led to a situation where a state like Punjab which is essentially a semi-desert is growing a large amount of rice through the extensive use of underground water. This has led to water table falling rapidly over the years.
Given these reasons, Rahul Gandhi needs to get his economics right. The country has suffered enough over the decades for the
garibi hatao politics of the Congress party. Sadly, Rahul and Congress continue to practice the garibi hatao politics of doles. What we need now are jobs and more jobs. And those jobs can only be created through the rapid expansion of the manufacturing sector.
This bit of wisdom is nothing new. It was known nearly 300 years back as well. As Chang writes: “[Robert] Walpole [the first British prime minister] knew this nearly 300 years ago, when he asked George I[the British King at that point of time] to say in the British Parliament: ‘nothing so much contributes to promote the public well being as the exportation of manufactured goods and the importation of foreign raw material.’”
Being in the opposition, Rahul obviously needs to criticize the government. The ‘Make in India’ programme in its current form is a little more than a marketing slogan. If this slogan needs to be turned into a reality, there is a lot more that needs to be done—from improving the ease of doing business to labour sector reforms. Nothing much seems to be happening on these fronts.
Why can’t Rahul criticize this for a change? It might just turn out to be a real reinvention than the forced “angry young man” image that he seems to have adopted in the recent past.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Apr 29, 2015