The Hindu Business Line : `Economy on a roll, but common man's concerns remain'

The paradox of Indian manufacturing industry in the early 1980s was that of a labour-rich, capital-poor economy using too little of the former and using the latter very inefficiently.

New Delhi , Feb. 8

THE "heady mix" of Sensex hitting the 10K and the gross domestic product growth for 2005-06 being pegged at 8.1 per cent notwithstanding, the country must brace itself for hard tasks ahead in terms of devising development strategies that could deliver tangible results to aam admi (common man) over the long haul.

The latest IMF working paper on "India's Pattern of Development: What happened, What follows?" by the IMF Director, Research Department, Mr Raghuram Rajan, and four senior economists has drawn attention to the relatively jobless growth in unemployment in the last 15 years, particularly when an average 13 million people are likely to enter India's labour force each year for the next four decades.

They said that to many, India's emergence as a world-class services hub offers scant comfort because of the relatively limited prospects of such skill-based development for employment growth. Worries are also mounting about the uneven distribution of opportunities across States. They particularly refer to these concerns as the fast-growing peninsula versus the slow-moving hinterland, services versus manufacturing or agriculture and call centres versus cowherds.

The paradox of Indian manufacturing industry in the early 1980s was that of a labour-rich, capital-poor economy using too little of the former and using the latter very inefficiently.

The greater diversification of Indian manufacturing could be explained as a result of all policy distortions, they said adding that the import substitution strategy, the skewed pattern of education favouring tertiary education, as well as the fillip given to the public sector to invest in areas that are typically not a poor country's comparative advantage, might well have driven India into industries that other countries at comparable incomes levels shy away from.

Analysing the performance of the Indian States since 1980 and despite the liberalisation policies, they said India is actually veering further away from labour-intensive industries. Besides, there is no clear pattern of movement among fast-growing States towards these industries — instead, they seem to be moving into skill-intensive services.

Economic reforms combined with growing decentralisation of policymaking appear to have let States use the capabilities built up over the period of heavy policy intervention— in other words, freed them to grow at a pace consistent with their built-up skill base and institutional, as well as infrastructural capability.

On the one hand, this freedom has increased India's overall growth rate. On the other, it has resulted in considerable divergence between States in growth and incomes and in the pattern of specialisation.

"A unitary India, centralised politically and uniformly mediocre in economic performance has given way to multiple Indias with performance more related to the capabilities of individual States and the opportunities they create" they said adding that the fast-growing States have fallen into patterns of production that are more similar to the industrial countries than to the fast growing East Asian economies.

They said ideally, the laggard States would reform on their own — push for scrapping archaic labour laws (few realise how pernicious these are because their effects, in terms of the labour-intensive firms that are unborn, cannot easily be seen), improve infrastructure and the business climate and utilise their vast pools of underemployed low-cost labour to attract investment in labour-intensive manufacturing and agri-business.

They would thereby catch up with the leading States in India.

Citing a precedent in Europe which had similar disparities, they said that through various spurs, prosperous Western Europe dangled numerous carrots for laggard European countries to reform. The external pull set reforms in motion, so much so that some of the former laggards like Ireland and Spain are now Europe's locomotives.

"If a loosely knit community of nations could do it, why can't a unified nation of States," they asked.