Pradeep Mehta and Abhishek Kumar
One of the first things that Prime Minister Narendra Modi has done in his second term is to set up two separate yet interlinked cabinet committees on investment and growth and employment and skill development, both to be headed by him. This shows the seriousness of the crisis faced by India, a country ambitious enough to aim for a $5 trillion economy by 2024.
At the root is a simple fact. The Indian economy has failed to engage most Indians in the production of goods and services. Most of our workforce is characterized by low incomes and low-to-medium skills. As an economy which is predominantly consumption-led, with consumption expenditure contributing more than half the gross domestic product (GDP), this is extremely worrying. Making matters worse is plateauing demand among the population’s top 100 million who have held up the economy through the years. The answer will lie in the combined efforts to encourage consumption and promote investment.
The central government has already taken steps to reduce non-essential imports, encourage domestic industries to fill the gap, and promote exports where it can. It has also begun to identify manufacturing clusters around the country catering to complete value chains in a particular geography. Similar initiatives will be required by state and local governments, which will need to adopt policies that can promote local industries and create decent income-generating opportunities for local residents. Ensuring economies of agglomeration will be the key in this regard. This will give a fillip to consumption demand in the country.
However, in our own work on strengthening the discourse on “Good and Better Jobs” in India, supported by the Ford Foundation, we have learnt that economies of agglomeration in India are few and far between. For instance, in the textile and apparel sector in Rajasthan, we find that most workers in the powerloom and garments industry come from states like Uttar Pradesh and Bihar. A simple question to ask is why industries that need their skills can’t be located closer to where these workers are. Absent economies of agglomeration also result in huge variance in minimum wages, thus impacting the consumption capacity of workers.
Apart from an enabling regulatory regime, manufacturing clusters need to provide the necessary hard and soft infrastructure, house skilled workers and attract relevant industries for businesses to leverage the economies of agglomeration. Creating such clusters would require sound policies that can take good jobs to people, thereby fuelling consumption demand.
To put it simply, we need to focus on creating self-sustaining clusters across several geographic locations and ensure that they work for the well-being of an enterprise as well of a worker. Such strategies are likely to increase local workforce participation, making respective state governments more sensitive towards the well-being of workers. Additionally, these can bring down input costs for an enterprise. States then can become truly competitive on the back of their peculiar strengths. An intended consequence of such an approach will be better agency and incomes for workers, which in turn can help us avoid a demand crisis of the kind we are currently seeing.
However, sparking consumption demand alone is not enough. It needs to be complemented by investments. India today is at a stage where it cannot choose a consumption-led growth model over an investment-led growth model. India would need both, particularly in light of the fact that with shrinking export avenues, the most promising market that India has is India itself, at least for essential items. With the apparel sector in Rajasthan as an example, we observe a trend of export-oriented units turning to the domestic market because of a slump in export demand.
The participation of larger corporations in apparel retailing is aiding this transition, but among other things, a lack of competition and fair contractual terms is inhibiting growth, which could potentially be faster. This might result in the migration of workers to other areas in search of better income-generating opportunities, creating difficulties in ensuring economies of agglomeration. Central and state governments will need to act fast to facilitate a level-playing field in apparel and other sectors and clamp down on unfair contract terms.
The choices for Indian policymakers are tough, with an emphasis needed on structural policy changes. In order to enjoy a certain growth level, India has had to work hard to maintain fiscal discipline, keep inflation low and its current account deficit in check. The present situation is so complex that the pressure on policymakers to ignore some of those bounds is huge. If we do so without addressing India’s structural problems, we will again be resorting to palliatives that would prove inadequate to the challenge over the long term.
We need structural changes that can take good jobs and livelihood to people and multiply economically active clusters, which means looking at consumption and investment through the same lens without focusing on one at the expense of the other. These structural changes will inevitably happen at the intersection of multiple policies—industrial, competition, trade and labour, for example—and will come with difficult trade-offs for which we need to be ready.