Value Migration Key to Accelerated Growth
The reforms of the 1990s were truly transformational. The mobilisation and synthesis of resources like land, labour and capital worked in the early stage of our growth trajectory and pulled several millions out of abject poverty. The early, quick paced galloping growth rate propelled us to the cusp of the developed economies. However, India has flattered to deceive.
Impact has lagged potential. The present is gloomy and now we are competing with Bangladesh and its ilk.
India’s industrialisation peaked at lower productivity and needs an innovative yet robust model to escape the ‘premature’ industrialization phase.
‘Making & serving’ different and significant
In a developing economy the magnitude of elasticity of manufacturing and services sector is less than unity on both jobs and per capita income. However, the impact of each is different and significant. The service sector not only creates fewer jobs per unit of growth and decreases the growth rate of per capita income.
In contrast, manufacturing is a growth escalator.
Relationship between growth and jobs is nonlinear and accentuated in a service led economy. This explains jobless growth experienced by ‘serving’ India.
The collateral effect of a ‘manufacturing laggard’ economy is mushrooming of micro entrepreneurs, proliferation, even deepening of the informal sector. This manifest in low yielding, lower ‘value’ adds, acute ‘tax-GDP ratio’ and jobless growth.
Several other economic and social indicators suffer too.
Some of our erudite readers may argue (rightly) that knowledge driven economies can, and a few indeed have, bypassed the intermediate stage of manufacturing. India with its demography has the potential.
We will age before we get rich. If, at all
However, India will be the norm and not the exception.
If the experience of the last decade is anything to go by most Indians will never be rich. Not even well-to-do & comfortable. A majority will avail a life of dignity.
As we were beginning to ‘enjoy’ the middle-income status, we are straddled between the ‘agile and the endowed’. Pushed down and elbowed out by the emerging, hungrier, agile, and low-cost economies on one hand, and struggling to compete with the developed economies on the other.
Obdurate ecosystem, missing middle
We are squeezed out, unable to grasp the top, in danger of slipping and doomed to remain middle income economy. Our economy is not robust enough to overcome the inherent frailty. We are ceding and shedding ‘natural’ in-built advantages.
India lacks the human capital on one hand, value enhancing institutions on the other. We neither have adequate capital nor cutting-edge technology to carve a niche and migrate value.
Infrastructure is the big elephant in the room. The MSMEs lack the much-required support, inspector raj chokes even the most efficient ones. As a result, they fail to enhance value, reducing the efficiencies of the larger corporates. In addition, the corporate sector faces regulatory hurdles and policy upheavals.
Economy facing structural slowdown
Government’s response to economy is mostly inadequate, often timid. The FM’s response to the COVID-19 has its own faultiness. ‘Stimulus’ has been targeted at the wrong end, focusing on supply, when demand had to be revived.
India is a demand led economy. Real wages (relationship to inflation) have been plunging. The ‘middle incomes’ have lost jobs, poor livelihood and farmers’ income is waning. Declining income, inequalities & hierarchical distribution slows upward mobility (consuming) class which is ‘prepared’ to pay more for quality and differentiated products.
This drags demand, resulting in stagnation and spirals a vicious cycle of low-income, lower demand, prolonging the revival. Money into the hands of the poor is a multiplier.
India needs to grow at 8% this decade, to escape the slide to the pre-reform days. This growth rate will require more than slogans, ideas and ‘pilots’. The PM’s policymakers are trying to ‘balance’ everything. But the economy is not a trapeze act.
Pathway to value migration
We need to shift focus and reallocate resources. Move people from the ‘farm to the factories’ and from resource-intensive to a high income, knowledge-based high yielding, and higher potential sectors. While ‘farm to factory’ catalyses, and indeed drives growth, the marginal returns begin to ‘evaporate’ as quickly, in the light of rising wages.
The Crux insight focussed on ‘value migraters’ across 8 largest economic hubs highlights that the knowledge-based economy can ‘add’ value ranging from 55% to 70%. And if knowledge is coupled and in tandem with sophisticated, state-of-the-art technology led manufacturing the value-add can even double. This momentum percolates into neighbouring hubs, creating a positive & enabling ecosystem and amplifying impact.
The corporate sector has a role to play too. It must adapt, imbibe technology, innovate more, and invest in research. It must inject innovation, enhance quality scale and productivity, to ‘ease’ into profitable markets.
Root Cause Reforms. Not tinkering
Twenty first century India needs a holistic economic policy framework.
India’s ‘steel fortress’ administration is antiquated, creaking, but a deeply entrenched apparatus. Policymakers have narrow focus. Myopic approach and lazy policymaking, rampant half-hearted reforms, indifferent implementation, bureaucratic overreach, and indifference have caused a depreciating ecosystem. Quick fixes have been the norm, not the exceptions.
Admittedly, the PM inherited an economy with several frailties.
But some others are of his own making. Mr. Modi’s path ‘breaking’ initiatives have not carried the day. Most revolutionary reforms (farm bill) are mired into state-centre conflict, many fail the federalism test. The ‘Make in India’ promised a lot, delivered little in the absence of enabling ecosystem. GST is still a ‘work in progress’. IBC and skill development are muddled, with little success. Financial inclusion initiative is yet to ‘include’ the poor.
Bureaucracy, an ‘opposition in residence’
Rule of law, ‘checks & balances’ have weakened, and institutions are declining, subverted even. He must strengthen capacities, vest greater autonomy, and build a cadre of implementers who deliver without fear or favour.
The PM must be mindful of the policy risk associated with too much ‘government’. The instincts of central planning are alive; government ‘enjoys’ extensive, disproportional, and arbitrary power.
The Prime Minister must be concerned. While he has largely succeeded and ensured bureaucrats focus on ‘implementation and not influencing’ policy making, he must go beyond and initiate bottoms-up re-engineering of the status quo-ist bureaucracy.
Similarly, India needs judicial reforms. The judiciary is wading in every area, influencing, and impinging governance. It is now venturing, even invading policy-making domain.
This must concern any democracy.
