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Great Expectations

December 6, 2011

Services, rather than manufacturing, are likely to offer India the jobs it needs

“ Aman’s reach should exceed his grasp, or what’s a heaven for?” The National Manufacturing Policy (NMP) and its lofty ambitions seem to have taken Robert Browning’s lines to heart. The policy’s objective is to boost manufacturing output so that it is 25% of GDP by 2022, and creating 100 million additional jobs in the next 10 years. Scepticism may well be in order.

Numerous constraints inhibit manufacturing, and while some of them may be minimised — even overcome — the possibility of achieving a compound average growth rate of over 12% is, indeed, dim, and the 100 million jobs seem like a pie in the sky. Increasing productivity, new production techniques and greater automation are all contributing to a reduction in the labour-intensity of manufacturing. Productivity, for example, was growing at over 7% a few years ago, against 4% a decade ago. It would, by now, be higher. Little wonder then that in Gujarat, the state favoured by most industry honchos, organised employment grew by a measly 0.5% a year from 1995 to 2008, though the state domestic product grew at a brisk 8% annually.

In today’s world of freer global trade, India in unlikely to be competitive in the massmanufacture of standardised low-value products. Despite the proposed National Manufacturing Investment Zones — which would, presumably, have first-rate infrastructure and logistics — countries with more efficient systems, better infrastructure and low costs (China, for example) will dominate this segment. Also, lower-value and standardised manufacturing, which create mass-scale employment today, is getting increasingly automated. Even in industries like automobiles or steel, which have seen rapid growth in India over the last few years, employment growth has been only marginal. More importantly, in all industries, the automation typically takes place from the lowest levels. Therefore, even as manufacturing grows, there is unlikely to be much demand for unskilled and semi-skilled labour. Since the competitiveness of such manufacturing is based mainly on wage arbitrage, companies and industries tend to continuously migrate to ever-lower wage locations, as their suitability improves. Thus, banking on low-value mass-manufacturing as a source for job creation is fraught with risks, because of both automation and migration to lower-wage foreign destinations.

India’s real advantage lies in manufacturing products that leverage its abundance of engineering and science talent, and IT software capabilities. Such products are typically high-value and, compete on the basis of parameters like quality, design and innovation, rather than merely on cost. Infrastructure efficiencies are, therefore, less important. These hitech, high-value products, however, do not typically generally large employment. Let us not count on manufacturing to create the jobs we need. Services, on the other hand, are less prone to automation. The rapid growth in India’s service sector has been matched by growth in employment. While an overwhelming majority of all employment in India is in the unorganised segment, it is noteworthy that the singlelargest employer in the organised private sector is an IT services company. The phenomenal growth of India’s IT software and services sector has led to unprecedented growth in job opportunities. While the direct employment is over 2 million, the indirect jobs created are estimated to be 3-4 times this number. A majority of these support and spin-off jobs employ persons who are not graduates; in fact, many have not gone beyond the school-level.

It seems clear that the services sector is, potentially, the most dependable source for mass employment in India, on the scale required and to sustain the millions of semi-skilled villagers who can no longer be gainfully employed in agriculture. Unfortunately, present policies — and their implementation — do not encourage the growth of the services industry. The full potential of IT software and services, for example, is stymied by myopic and excessively aggressive stance of tax authorities, focused on short-term revenue maximisation. Policies like the SEZ scheme are of little use to the services sector.

It is not a question of manufacturing versus services: India needs to grow vigorously in both. Manufacturing needs to focus on key areas like strategic sectors: aerospace, nuclear, defence; IT, communications and electronics (else, imports of equipment in this sector alone will exceed our oil and gas imports in but a few years); and areas of comparative advantage, like pharmaceuticals and automobiles. However, as far as job creation is concerned, the emphasis must be on services. This will create far more employment, in a dispersed, decentralised manner, and for semi-skilled and unskilled people. It will, thereby, ensure growth that is more equitable and sustainable. However, this requires vision, backed by appropriate initiatives and action.

Ultimately, India needs a large, vibrant, value-creating manufacturing sector that is knowledge-based rather than wage-arbitrage driven. Equally important, it requires a much larger employment-creating services sector, which spans the value chain from low-end localised services, to the most sophisticated globally-competitive, intellectual property-based services. For this to happen, the manufacturing policy needs to be complemented by a services policy.

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