India falls short of taking advantage of its talented young population and low wages in labour intensive manufacturing.
Understanding the reasons for this is essential for a breakthrough in job creation.
What was the pre-1991 job creation approach?
In the period before the economic reforms (1991), India had a broad-based industrial job creation approach.
It promoted small-scale industries as well as attempted to create a capital goods industry.
Taking this approach further, over 800 industrial goods, ranging from TV sets to toys, were reserved for small-scale industries alone.
Jobs in khadi, handlooms and handicrafts were protected and promoted.
In the then closed Indian economy, this approach worked to an extent, as the growing demand had to be met by domestic production only.
What is the post-1991 scenario?
With the 1991 economic reforms, the Indian economy was opened up to global players, and import duties were lowered sharply.
But this was seen as an error as it should have been done after first removing small-scale reservations in industry.
This would have given time for manufacturing to modernise and acquire economies of scale to survive competition from imports.
But the small firms remained the same and did not grow and become large or modernised.
The removal of small-scale reservation, thereafter, was a slow incremental process which continued till 2010.
So eventually, there was deterioration of the manufacturing of the reserved items in India.
What was the impact?
The consumer’s purchasing power increased and so the demand was met with better and cheaper imported goods.
E.g. Trade with China rose from $3.6 billion in 2001 to $80 billion now with a trade deficit of over $60 billion.
This is primarily driven by the import of manufactured goods from China that were earlier made in India.
There was thus loss of jobs, both actual and potential, in the most labour-intensive sectors of India.
E.g. in areas such as electronics, toys, or shipbuilding, India remains a consumer and not a producer
In all, despite the varied economic and institutional developments after 1991, job creation remains a matter of serious concern.
In labour-intensive areas, globally, jobs have historically moved from high wage locations to lower wage destinations.
Low-wage jobs have recently been moving out of China, going to many countries but not to India.
What are the successful models?
In the post-reform period in India, state policy has not been successfully used to create competitive capacity in any particular industrial segment.
But the East-Asian economies such as Japan, Korea, and, more recently, China worked with firms to create and increase competitiveness in select sectors.
In an open economy, success in the domestic market vis-a-vis imports is usually the starting point for success in global markets.
If global brands get significant value addition done in India, then they would like to use this in regional as well as global markets.
E.g. in small car industry, India is a globally competitive manufacturing hub
This is because, initially, the small car industry and its supply chain were created by the state through Maruti.
Once the supply side capability in auto components had been created, global companies found it worthwhile to source from within India.
What should be done?
Getting private investment into labour intensive manufacturing for the domestic as well as global markets is the need of the hour in India.
Macro as well as sector-specific interventions by the state will help boost private investment in labour-intensive manufacturing and create jobs.
