India falls between two stools

Ironical as it may sound, no country in the developing world has quite lived up to the standard prescriptions of economic growth apotheosised by the industrial revolution in England and its variants in the US and Europe.

The model by which developing countries have been judged assumes certain structural transformations, namely the relationship between agriculture and industry, with farm labour rendered surplus by productivity migrating to the nascent industrial sector.

Over time, productivity in industry repeats the migration of labour to the services sector; theoretically, at least, that is the logic of historical sequencing. First the rural-urban migration, then the intra-urban migration to the financial sector or, as has been the case with America, the migration of manufacturing jobs overseas.

It’s not England but America that is the exemplar of the western growth model that has now acquired canonical status. Productivity drives structural transformation, first in agriculture, then in industry and financial services, each stage measuring a nation’s movement along the advanced-nation path.

The concomitant displacement of labour through productivity has been accepted as inevitable milestones of a society’s journey to prosperity.

India’s ‘atypical’ growth

Measured by the criteria of the western model of growth, where do India and China stand? In the latest issue of the Economic and Political Weekly (June 27, 2013) Hans P. Binswanger-Mkhize suggests China has followed the trajectory of transformations noted in western societies more faithfully than India.

Whatever the impetus, as industry kick-started, it set into motion a series of changes that altered the character of the extant peasant society irrevocably. Perhaps China has not yet reached the status of industrialism that was evident in America till the late 1950s. But in China, manufacturing has replaced agriculture as the driver of growth. This has been preceded by rapid rural-urban migration, declines in population growth rates.

As a result, since 1991, industry accounts for 43 per cent. Comparable figures for India show industry to contribute just 28 per cent today, growing far too slowly since 1989 when it was around 25 per cent.

The relative performances are perhaps not strictly comparable, for China had a head-start: reforms there began in 1978, in India only since 1991. So perhaps India could catch up.

The problems Binswanger-Mkhize hint at suggest it may not. India’s structural transformation, he says, has been “stunted.” The author bestows a dubious distinction on us by calling India’s growth “atypical”: growth with a poor agriculture burdened by surplus labour and a manufacturing sector unable to provide enough employment opportunities for workers from rural areas; a tendency for the formal sector to engage informal or contract employment.

Urban areas, unlike the historical evidence from the west and China, remain “poles” attracting highly skilled workers.

The rural non-farm sector

And yet, the author finds rural poverty has declined. How? Between the two mutually exclusive worlds — a moribund agriculture and the restrictive industrial one — lies a vast territory of the rural non-farm sector that has emerged “as the largest source of jobs in the Indian economy.” This vast employment exchange has had its structural changes too. Till 1983 manufacturing accounted for the largest share of jobs. Since then services, transport and construction account for the lion’s share, with the last being the fastest growing, having doubled its share to 19 per cent today since 1980s.

The author tells us that “high level of rural construction has visually transformed villages all over India, with much better village infrastructure and housing.”

That sounds a bit apocryphal. To talk of a rural non-farm sector wedged between the two classical components of GDP, a vast buffer state that absorbs unemployed rural labour and contributes to relatively better nominal wages is one thing.

To use official poverty line, or in other words, the income criterion, to ascribe an upward mobility may mean little; Amartya Sen would describe capability-building as a more inclusionary idea, going beyond income.

Binswanger-Mkhize cites a study by Easwaran to suggest the limits of rural non-farm job growth in the national context but it would have been interesting to know some details of this vast twilight zone. But if rural construction is a dominant sector then would not employment be seasonal and informal?

In that sense such jobs may be no different from jobs on construction sites all over India, or now in contract employment in the formal sector: not only do they exclude women, but also, they provide no security health benefits or pension.

Tripping up on itself

So the elements of India’s growth are basically restrictive. Formal employment is a “distressingly small component of employment in India,” and a trend towards informal labour; this is not a novel conclusion, considering the evidence now available from diverse sources: the latest Economic Survey’s Chapter 3, the 66th NSS round and the 2010 study on factory compensation by the US Department of Labour’s Bureau of Labour Statistics.

What is not new either is the moribund state of agriculture or the potential it has for better wages given the right policy mix. What is new is the position of the rural non-farm sector as a buffer, a wedge between the two sectors, a site for alternative employment perhaps to the rural sector but not in terms of real wage growth.

The interstitial story is that jobs are as informal and perhaps seasonal in the rural non-farm sector as those in the formal manufacturing one; that the real growth hub in terms of incomes, social security and upward mobility is the site for Amartya Sen’s “capabilities” and it only attracts the highly skilled.

In a structural sense then, India’s economic transformation has been self-limiting; its potential trips up on itself, comes up short against the niggardly possibilities of every vector of growth.

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