Modi’s Job Creation Promise for India
Photo Credit: The Financial Express
By Alvin Cheng-Hin Lim

Modi’s Job Creation Promise for India

Feb. 20, 2017  |     |  0 comments

Indian Prime Minister Narendra Modi’s Bharatiya Janata Party is contesting in the ongoing assembly elections in Uttar Pradesh, which began on February 11 and is scheduled to end on March 8 (“Uttar Pradesh Elections,” 2017). Among the issues of concern to voters in the Uttar Pradesh elections is job creation (“UP elections,” 2017). Indeed, job creation was a key issue for Modi’s campaign for the 2014 general elections, when he promised that he would create 10 million jobs for India’s youth if elected (“Modi promises,” 2013). However, job creation under the Modi government, badly impacted by the fall in exports caused by the global economic slowdown, is now at its “lowest in seven years” (Karnik, 2016).

This is not for want of trying, however. Park and Xie (2016) note that while the Modi government has implemented a range of schemes to attract foreign investment — “Make in India, Digital India, Clean India, Start-up India, Smart City, Skill India, and more” — the results have been disappointing, with potential investors being deterred by issues including “the threats of retrospective taxes, a sudden increase in the customs duty, the unexpected overturn of public tender awards, and abrupt curbs on benefits for investors.”

The model that the Modi government is seeking to replicate for India is that of China and the East Asian Tiger economies, which were successful in delivering, through foreign investment in the manufacturing sector, large numbers of well-remunerated jobs for their people. China’s experience of economic takeoff is of particular importance, given the stark juxtaposition of the Chinese economy pre- and post-takeoff. Brautigam (2009) recalls that when Deng Xiaoping assumed the leadership of the Chinese Communist Party in 1978 and initiated a program of market reforms, the Chinese economy was in bad shape, not least because China had just emerged from the chaotic years of the Cultural Revolution: “At the start of the 1980s, China qualified as one of the world’s twenty least developed countries. The country’s annual per capita income of $208 placed it squarely between Mozambique and Burma” (p. 54). Following the start of Deng’s market liberalization program, Husain and Dayal-Gulati (2000) observe:

“China’s growth performance since the initiation of market-oriented reform in 1978 has been impressive. Real GDP has grown by an average annual rate of almost 10 percent; real per capita output has averaged 8 1/4 percent per annum. This economic takeoff has coincided with large inflows of foreign direct investment (FDI), which have averaged over $40 billion (5 1/2 percent of GDP) annually in recent years” (p. 3).

Indeed, by 2009, China had overtaken Germany as the world’s third-largest economy, and by 2011, China had overtaken Japan as the world’s second-largest economy in terms of nominal GDP. Economists expect China to overtake the US as the world’s largest economy sometime between 2020-30 (McCurry and Kollewe, 2011). In terms of GDP adjusted for purchasing power parity, China already overtook the US as the world’s largest economy in 2014, according to measurements by the International Monetary Fund (Bird, 2014).

How did this remarkable growth happen? Huang (2012) reminds us that the Chinese government undertook different strategies to pursue market liberalization. At one level, “Deng Xiaoping liberalized trade and foreign investments by setting up special economic zones in the coastal provinces … China’s export-oriented manufacturing, largely foreign-funded, employed millions of rural migrants, boosted their income, and reduced poverty far and wide” (p. 147). At another level, “rural private entrepreneurship and financial reforms” increased agricultural productivity and “created conditions for Chinese peasants to switch to higher value-added activities such as industrial production and service provision” (pp. 148-151). In addition, FDI has led to technology transfer from foreign companies to China’s indigenous companies, including its state-owned enterprises. This has allowed Chinese companies to ascend the value chain in global production networks (Bennett, Hall, He, and Wang, 2006).

Under the universal basic income proposal, the bottom 75% of Indian citizens will receive Rs 7,620 (about USD 110) annually.

China’s experience fits Akamatsu’s (1962) famous flying-geese model of industrial development, in which economies which are more advanced in their levels of industrial development transfer their less technologically-sophisticated industries to less-developed economies, allowing these less-developed economies to advance their industrial development (pp. 17-18). Through this process of FDI-led technological transfer, countries in East Asia have famously ascended the ladder of economic development, with Japan leading the way for the Tiger economies of Hong Kong, Singapore, South Korea, and Taiwan; and later China and the Tiger Cub economies of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. Modi’s government has hoped that India would be able to replicate the East Asian experience, with industrialization leading to the mass creation of good manufacturing jobs. However, despite government initiatives like “Make in India,” industrial investment has yet to bring about significant job creation. Analysts have identified a range of government policies as the cause of India’s low rate of job creation, including its “antique, and counter-productive, labour laws” and its punitive tax rates (Bhalla, 2017).

However, there is a far more terrible possibility: that structural changes in the global economy have made it unlikely or even impossible for India and other developing countries to replicate the East Asian experience. The first of these is the slowdown in global demand. As Zhong (2015) points out: “as developed countries age, there are signs that global demand for everything from cars to furniture is plateauing. Since the 2007-2008 financial crisis, world exports and imports have been expanding more slowly than world economic growth for the first time in decades.” This will have an impact on foreign firms’ decisions to invest in industrial plant in India, and even if they decide to do so, the expected demand for their manufactured goods will limit the number of personnel hired. Technological advances like “factory automation and robotics” will likewise limit hiring decisions. In addition, India faces competition from other global manufacturing hubs, especially China:

“Industrial latecomers now have to compete against China, whose massive, integrated manufacturing machine has made it the world’s factory floor and created a huge barrier to entry … Bargain-price Chinese goods, produced at titanic scale, mean that even with India’s factory labor costs at around $5 an hour versus almost three times that in China, manufacturers have to work harder to compete than they would have a decade ago” (Zhong, 2015).

Indeed, it’s not just China that India has to compete with for manufacturing jobs: “Lower trade barriers and better communication have made it easier for supply chains to be spread over farther-flung locales, bringing more countries into direct competition for factory investment. India must joust more often with other cut-rate producers like Bangladesh or Vietnam for slices of the manufacturing process” (Zhong, 2015).

The result of these structural changes is a phenomenon Rodrik (2015) describes as “premature deindustrialization,” in which the affected economies experience a retrenchment in their manufacturing sectors “at levels of income that are a fraction of those at which the advanced economies started to deindustrialize. These developing countries are turning into service economies without having gone through a proper experience of industrialization” (p. 3). While the affected countries may seek employment gains in their service sectors, including the well-remunerated IT and finance sectors, “these service industries are typically highly skill‐intensive, and do not have the capacity to absorb — as manufacturing did — the type of labor that low‐ and middle‐income economies have in abundance” (p. 24). Hence, while India has nurtured its IT sector, the jobs produced are insufficient to absorb India’s working population, which is “growing by a million people every month … Between 2005 and 2012, the most recent year for which comprehensive data are available, India created only six million new jobs in manufacturing and 21 million in services. The total workforce expanded, during that period, by around 55 million” (Zhong, 2015).

How should the Modi government deal with the challenge posed by India’s premature deindustrialization — or, as the government’s chief economic advisor Arvind Subramanian once put it, premature non-industrialisation? Subramanian believes that instead of chasing for ever-elusive manufacturing jobs, India should “concentrate on churning out more highly skilled workers” (“Arrested development,” 2014). How will this benefit the unemployed and underemployed masses? Subramanian is currently working on a proposal for universal basic income (UBI). Under his UBI proposal, the bottom 75% of Indian citizens will receive Rs 7,620 (about USD 110) annually. While this annual amount is “less than a month’s pay at the minimum wage in a city … it would cut absolute poverty from 22% to less than 0.5%.” As UBI is intended to replace existing welfare entitlements, part of its funding will come from “recycling funds from around 950 existing welfare schemes, including those that offer subsidised food, water, fertilizer and much else besides.” The remainder will come from the government’s tax coffers, which are themselves expected to increase following the Modi government’s crackdown on tax evasion in its recent demonetization campaign (Shepard, 2017; “Rupees for nothing,” 2017).

However, even with UBI restricted to the bottom 75%, the projected cost is still “prohibitively high,” at almost 4.9% of India’s GDP. UBI payments may hence have to be restricted further, perhaps excluding “people who possess cars, air-conditioners or bank balances above a certain size.” The planners are also considering restricting UBI only to women, as they face “worse prospects in almost every aspect of their daily lives — employment opportunities, education, health or financial inclusion.” While the Modi government is not planning to implement UBI just yet — Subramanian himself suggests the idea needs “further deliberation and discussion” — this remains a tantalizing and radical proposal that could allow India to move past the challenge of premature deindustrialization and bring millions of its citizens out of poverty (Zhong, 2017).


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