Domestic demand-led growth

When the Narendra Modi government took office in May 2014, it plumped for “Make in India’, “zero- defect zero-effect” policy of low-carbon growth pattern, and a surge in the country’s merchandise exports.  Things have not radically changed since May 2014. Industrial growth continues to plod on with tepid growth, besides no tangible employment generation from the secondary sector in the absence of consistent and continuous policy support for skill upgradation from legions of job-seekers across the country.

It was former RBI Governor Dr Raghuram Rajan, who reminded us that growth sans productivity enhancement had little meaning. Moreover, India could not hope for export-led growth as there were weak links between trade in manufactures and industrialisation. But his sapient counsel was not heeded.  Now in its flagship annual publication, Trade and Development Report (TDR), 2016, the UN Conference on Trade and Development (UNCTAD) has unequivocally urged developing countries in general and more specifically large emerging economies such as India to shift their sight from “export-oriented industrialisation to domestic-demand driven industrialisation”.

Tracing missing linkages,  the report said the “striking difference” between the tiger economies of East Asia (Malaysia, Thailand, and Singapore) and other developing regions over the past three decades or so lie not much in the relative weight of industry in total output, but of manufacturing activity. The rapid growth of manufacturing was accompanied by robust employment creation and rising productivity, allowing these countries to successfully enter global markets and drive up the rising share of developing countries in global trade in manufactures over the past few decades.

In contrast, in other regions, manufacturing growth has fallen below overall output growth, and employment growth has been associated with little growth in productivity or vice versa, the report rued adding that in successful catch-up experiences, support for the manufacturing sector was not at the cost of other sectors; rather various intra and cross-sector linkages and complementarities further enhanced productivity and employment growth.

Thus, as the manufacturing sector expanded, primary production also tended to become more efficient as a result of declining input prices as well as technology and knowledge spillovers. Similarly, the services sector typically developed in conjunction with manufacturing with certain service activities being spun off from continued progress in manufacturing. These activities also provided leeway for productivity spurts which helped heighten the potential for further productivity growth in the industrial sector by providing more and better quality inputs to manufacturing processes.

Stating that over the past five decades, the growth in productivity has grown the fastest in developing regions where the investment-to-GDP ratio and investment per capita were the highest, the report contends that improvements and adaptation of workers’ skills, management know-how, and entrepreneurial competence have been vital to successful structural transformation. 

As the UNCTAD report points out, the composition of manufacturing activities, in terms of low, medium, and high technology has major implications for how knowledge and skill acquisition supervenes.  It is also an irony of sorts that a country of India’s famed credentials in software technology and cruising on the information super highway to the chagrin of even advanced countries that do not boast of such skilled manpower in cutting edge technologies, such advantages have not been effectively put to use to propel the secondary sector from notching up amazing growth.

When so much learning takes place in design and engineering activities that can be applied to a broader spectrum of sectors, industrial production is characterised by steep learning curves that favour the emergence of inter-sector linkages and improved efficiency overall, the report succinctly states. Yet Indian manufacturing sector, whether be they in public or private, with a few limited exceptions, failed miserably in this important step as had been successfully demonstrated in areas like textiles by tiger economies.

If the productivity gains are mainly used for augmenting profits, those profits may be reinvested in additional productive capacity and technological upgrading. As such reinvestment is not guaranteed, the report argues for incentives including a supportive macroeconomic framework and prospects of expanding demand.

In this regard, it notes that to the extent that productivity gains also translate into higher employment and wages, they lead to stronger domestic demand, which can spur entrepreneurs to further invest and to the emergence of economies of scale for domestically produced goods and services of mass consumption.

Alongside, strong productivity gains also boost government revenues through higher corporate and income taxes without an absolute erosion in private sector incomes. Those revenues can be channelled into productivity-enhancing infrastructure investments, including the provision of public utilities and services. To cap it all, productivity gains may translate into lower prices for exported goods, thereby helping to gain or maintain global market shares. 

In hindsight, Indian policy planners and authorities could still retrieve the losing grip on the manufacturing front if only they follow up the series of steps laid out in the UNCTAD report. The report rightly concedes that public spending has played a stellar role in the process of structural transformation. Transport, logistics and telecommunication infrastructures, power and water utilities, the provision of education, professional training and R&D support, and information and coordination services strongly sway productivity growth in all sectors, as well as the pace and pattern of structural transformation. It is time NDA authorities stepped up public outlays in all these vital areas for realising its ambition of Make in India, Stand Up India, and overall manufacturing vroom.

As per the UNCTAD classification, India did not succeed in the eminent category of catch-up industrialisation which entailed a steadily rising per capita investment as a key ingredient for reaching a critical mass in certain manufacturing activities. In the second category of stalled industrialisation were India and Mexico in which shares of industrial income and employment begin to stagnate after a prolonged spell of growth of manufacturing output but at lower levels of per capita income and overall productivity.

Hence, the report urges upon the governments in developing countries to be ambitious but not unrealistic in the light of changes in the global economy.  Emerging economies including India should strive for a high development road by fostering new sources of growth and dynamism. It said while small and incremental steps could be useful, more radical “comparative advantage defying” measures must be needed to shift towards higher value-added and employment-generating activities with high-income elasticities and more capacities for creating synergies through knowledge creation. The moot issue is whether the Modi government would go on this desirable developmental track to rev up industrial growth in India.