Why India needs a vibrant manufacturing sector

The Indian industrial slowdown has drawn attention to the fact that it never provided enough jobs anyway. 

The specific characteristics of the Indian growth slowdown are poised, according to some observers, to stall a major structural change to the Indian economy.

According to the ratings agency Crisil, its researchers estimate that "non-farm employment will decrease more than 25 per cent to 38 million in the financial years 2013-19 compared with 52 million seen in financial years 2005-12".

Whatever the exact calculations behind this quantitative assessment, the direction is nonetheless startling.

Crisil argues that this decrease in non-farm employment will mean that, in the six years from April 2013, 12 million people will re-enter agricultural work, while in the seven years from April 2005, 37 million people left jobs on the farm.

…

This structural reversal, if it happens, would be a major problem for the Indian economy - and for its society, which has come to accept progress and urbanisation as desirable.

The argument that Crisil and other observers make is not a complex one. First of all, it is argued that a slower trend pace of growth - say, around six per cent a year instead of over eight per cent earlier - will reduce the capacity to employ people in non-agricultural jobs. 

In addition, whatever growth India will see might not come from the manufacturing sector, and in particular from labour-intensive manufacturing: "GDP growth is driven increasingly by less labour-intensive services such as financial, real estate and business services (including information technology and IT-enabled services). For example, in 2011-12, these services, with a nearly 19 per cent share in GDP, employed only 3 out of 100 workers in the economy."

…

This is, of course, not a phenomenon unique to India. Jobless growth caused by skill-biased technology is a global problem. However, it would be futile to expect that a return to the 2005-2011 high-growth path will solve India's problem.

As the Crisil report also points out, even in the years from 2005, "the employment elasticity of manufacturing - defined as the percentage increase in employment for every percentage point increase in manufacturing GDP - deteriorated sharply to an average 0.17 in the seven years to 2011-12 from 0.68 in the seven years to 2004-05".

In other words, the problem is not the recent slowdown; the slowdown has merely exacerbated the symptoms of a problem that already existed.

…

There are, however, good reasons to suppose the exact nature of this fear - that the farm sector will be forced to take on a deluge of people with no options in other sectors - is not being borne out in reality.

The consistently high and increasing wage rates across skill levels and regions for agricultural labour, for example, suggest there is no glut in the rural labour market. In fact, every indication - statistical and anecdotal - suggests the reverse.

However, there can be no questioning the larger point: that the Indian industrial slowdown has drawn attention to the fact that it never provided enough jobs anyway.

And clearing stuck mega-projects won't work here; it might revive growth numbers, but it won't provide the structural change that's needed.

That comes from labour law reform and from a clear focus on labour-intensive sectors, particularly those whose products can be exported to world markets.