Creating jobs for inclusive growth

Ajay Shankar, Jan 25, 2011, 02.50am IST

India's economic performance over the last decade has been phenomenal and has surprised the world. Inching back to 9% GDP growth rate after experiencing only a slowdown rather than a recession in the worst global economic crisis in decades, being recognised as an emerging player in the new knowledge economy, home to ambitious firms beginning to transform themselves into successful MNCs, there is even talk of India becoming an economic superpower.

But then comes the reality check. We have more absolutely poor people than the 20 poorest countries of Africa. We have more people without access to clean toilets than with access to mobile phones. We have more people without electricity than the whole of Africa. Malnutrition and hunger are harsh realities warranting the quest for food security measures. There is the uneasy apprehension that growth may not yet be inclusive enough.

In this context, it is necessary to have the conceptual clarity that anti-poverty welfare measures such as MGNREGA and food security do not in themselves take people into the trajectory out of poverty. They do not directly generate the economic activity that would push millions out of poverty. They only mitigate the condition of being 'poor' and make it a bit more bearable.

This recognition need not dilute the moral imperative for such programmes. The analytical challenge is one of understanding the nature of market, policy and regulatory 'failures' or 'distortions' that are coming in the way of genuinely inclusive growth and the faster movement of the millions out of poverty.

That there is a real problem is apparent to most students of the history of economic development. The normal pattern has been one of benefitting from globalisation through the advantage of cheaper labour by producing relatively simpler labour-intensive products for the global market; creating a competitive business ecosystem of entrepreneurs, managers and workers; and then gradually moving up the value chain. India presents the unusual picture of appearing to skip the first phase of being globally competitive in simpler labour-intensive production.

In Asia, Japan was the first country to successfully industrialise and as it moved up the value chain to the level of the US and western Europe at the end of the 1950s and during the 1960s and 1970s, labour-intensive manufacturing for global markets moved to the East Asian tiger economies of Taiwan, South Korea, Hong Kong and Singapore. India, then being at a similar stage of development, was completely bypassed.

In the next phase, China opened up its economy and over the last 30 years has become the factory of the world and has practically eliminated poverty as we in India understand it. India was then at a similar stage of development and was again completely bypassed. The other Asean countries also experienced the benefits of labour-intensive manufacturing.

Now that China has prospered and its wage costs are beginning to rise, the global supply chains for labour-intensive products such as garments, leather, toys, etc, are looking at new cheaper locations. A recent New York Times story reports that Vietnam, Cambodia and Bangladesh are emerging as the choices for relocation from China for the global garment supply chains. India was not even mentioned. It may, alas, be again being bypassed.

This, surely, should be a wakeup call. Where will the poor of India go, where and when will they get jobs that take them out of poverty? The Maoist problem illustrates the huge costs of the failure of inclusive growth. The question that we need to ask ourselves is why, after almost two decades of economic reforms and liberalisation, India is still not perceived by investors, domestic as well as foreign, as being attractive enough for labour-intensive manufacturing.

The answer, if we are to be candid, lies in the prevailing perceptions regarding the politico-economic realities on the ground. The onerous burden of the regulatory requirements of labour welfare legislation with the associated rent-seeking behaviour of the multiple faces of the inspector raj is difficult enough. When this is combined with the perception of risk of labour unrest increasing proportionately with the size of the labour force, then risk-averse capital prefers capital-intensive outlets like real estate, IT, BPO, entertainment, etc. to labour-intensive manufacturing.

There is consensus about the need for inclusive growth across the political spectrum. Yet, the champions of inclusive growth need to recognise the necessity of the environment appearing attractive enough to globally mobile capital for labour-intensive manufacturing. This means having the political motivation to seek pragmatic options of simplifying and rationalising the regulatory burden for 'labor welfare' without diluting the real objectives of existing legislation. This is doable.