Top economists agree that India faces a chronic under-supply of government-supplied public goods. These include basic education, health, nutrition and infrastructure. Their supply is hamstrung by, among other things, grossly insufficient decentralisation of power to cities and villages; lack of quality administrative services and domain knowledge; lack of strong independent institutions; and a police-judicial system plagued by delays, callousness and political weaponisation.
Having agreed on these points, economists nevertheless differ radically on the path forward. Consider the sharp difference in employment emphasis between former RBI deputy governor Rakesh Mohan and former RBI governor Raghuram Rajan.
In his PR Brahmananda Memorial Lecture delivered in February this year, Mohan had discussed whether India would get into a lower-middle income trap. He highlighted the need for better public goods, which required far greater employment – and quality – in government services.
Mohan said India could not break out of lower-income levels without massive employment in low-wage manufacturing. Lack of ‘decent jobs’ was so acute that Uttar Pradesh had 4 mn applicants for 60,000 constable jobs. India’s labour force participation was barely 50% against 78% for Vietnam, 76% for China, and 65% for Indonesia. This underemployed mass could not be employed fully in services. So, it was essential to boost manufactured exports – that alone would produce enough ‘decent jobs’.
Rajan has long opposed this view. His latest book with Rohit Lamba, Breaking the Mould: India’s Untravelled Path to Prosperity, repeats his belief that India has missed the low-wage manufacturing bus, and mustn’t waste time and resources on this path. Instead, it should aim to harness its growing advantage in services requiring higher skills and paying higher wages.
Mohan disagrees, saying we can have both low-wage exports and higher-wage ones. Western demand may not grow fast. But Asia overall has a massive consumer class of 4 bn people with rising incomes requiring low-wage goods like textiles and footwear. So, there are plenty of buses to catch – provided India turns its attention from the West to the East.
Not so, argues Rajan. China has, through massive scale economies and export support, engaged in price-cutting that has removed the economic ‘rents’ that poor countries could once earn from exporting low-wage goods. So, India must focus on developing its human capital, which is very competitive in higher-skilled manufactures and services.
I agree with Rajan. As he says, China’s provision of public goods is excellent while India’s is poor. China’s good education, health, infrastructure and judicial speed – plus decentralisation of power and competition between provinces – have created cost advantages that India’s political system cannot match. No state government wants cities to become alternative power centres, and so thwart decentralisation.
So, India will not catch many buses that still run. Lower-wage countries like Bangladesh, Vietnam and Laos are beating us. Textile factories in Ethiopia owned by Indian companies claim local wages are one-fifth India’s. Low-wage manufacturing is already shifting from Asia to Africa.
Meanwhile, India inflates labour costs in the formal sector by making companies contribute heavily to employees’ provident fund, pension, health insurance and gratuity. Competing countries have far lower imposts. Hence, many Indian manufacturers prefer to stay small and informal, avoiding such costs. With subsidies and protection, labour-intensive sectors can improve somewhat. But not remotely fast enough to absorb the vast millions of educated unemployed.
Both Mohan and Rajan emphasise the need for better human capital development. But improving schools and state colleges is a long-term process that will be opposed by powerful teachers’ unions and other vested interests. State-level politicians don’t attach high priority to it.
What is moving forward much faster is the growth of private colleges and central institutions like IITs, IIM, medical colleges, Navodaya schools and Kendriya Vidyalayas. These, alas, cover only a tiny section of students. But the quality of private colleges and even state colleges has improved. India now produces an estimated 2.3 mn STEM graduates a year. Once of spotty quality, they are much improved.
They are the reason why some 2,000 MNCs have set up global capability centres (GCCs) in India. These started with simple back-office outsourcing, but now do sophisticated product development and R&D. They employ lakhs of scientists. In 2019-20, over 40% of GCC staff were in engineering R&D. Now their focus is on AI, RE and batteries.
Mohan complains that Indian companies do little R&D. He fails to even mention GCCs, about which Rajan is lyrical. GCCs are research powerhouses. Started by MNCs, their staff are now being hired by top Indian companies. Thus, high-quality brainpower developed in GCCs is percolating into Indian business, too. Happily, this globalisation of human capital needs no government help to surge ahead.
Will this solve the problem of the educated unemployed? No, not for two decades till state schools and colleges are upgraded. Alas, neither services nor manufacturing present a solution.
Rising trade barriers everywhere threaten manufactured exports. But protectionism is far lower in services. Tariffs are difficult on data, through which services are exported. Services exports generate secondary employment in transport, food delivery, construction and allied areas. They will not end unemployment but will have more potential than manufactured exports.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This article was originally published by The Economic Times on June 18 2024.
