India’s economic growth rate was 7.7 per cent per annum from 2004 to 2014 but has slowed to 5.7 per cent per annum over the last decade. The number of non-farm jobs created in the earlier period — 7.5 million per annum — fell sharply by up to a half. India’s demographic dividend will run out by 2040, after which India too will age, like China.
The slowdown has been caused by three consecutive economic policy shocks which impacted job growth: the demonetisation of 86 per cent of India’s currency value in November 2016; the badly designed and poorly implemented national Goods and Services Tax in July 2017; and a very strict national lockdown after the COVID-19 pandemic struck in March 2020.
To generate more jobs, the economic growth rate will need to rise to 8 per cent per annum (at a minimum for the current decade) to absorb the projected increase in the working-age population, whose growth will decelerate gradually from 2030 until 2040.
But accelerating growth means addressing problems in its four main drivers — consumption, investment, exports and government expenditure.
Private final consumption expenditure is growing slowly, while the investment share in GDP, which -was between 31 and 38 per cent from 2004–14, a level not seen in the last decade when private investment remained consistently below 31 percent. Exports had grown at 15 per cent per annum over the period 2000-14, but goods exports fell in the five years after Prime Minister Narendra Modi came to power and only services exports have held up. Government expenditure can only do so much and although public investment in infrastructure has risen, it cannot offset continuing. low private investment, especially by micro, small and medium enterprises (MSMEs).
Foreign direct investment has levelled off, and has rarely exceeded 2 per cent of GDP in the past 20 years. This is hardly surprising since India has fallen on every global indicator that affects its investment environment. It was already ranked 132 in the Human Development Index and 142 in per capita income.
To create jobs, strategies are needed beyond just reviving growth. Consumption expenditure growth in rural India has been low, though rural consumption is a significant part of total consumption. Government investment in agriculture to enhance productivity and rural incomes is critical. But the government has primarily allocated funds to agriculture through subsidies and cash transfers for farmers at the expense of public investment directed at boosting long-term productivity.
Unlike the East Asian success stories, India has not had a coherent industrial policy since economic reforms were introduced in 1991. This approach is no longer tenable. The issue is what kind of industrial policy might work in India’s circumstances. India’s manufacturing strategy should be cross-sectoral (horizontal), rather than products-based (vertical), such as seen in the current government’s focus on ‘picking winners’ through its performance-linked incentive scheme for 14 mostly capital-intensive sectors.
Nor must India allow the rupee to appreciate against the dollar so that exports remain competitive.
To create jobs, government policy should focus on the five labour-intensive manufacturing sectors that account for 50 per cent of all manufacturing jobs — garments, textiles, food processing, leather footwear and wooden furniture. Because of the three shocks to the economy between 2016 and 2020, jobs in these activities fell in absolute terms. India is a labour-surplus country and better policy support for MSMEs in labour intensive activities will create productive jobs.
MSMEs are also better supported nationwide through a Cluster Development Program, which has existed since 2005 but remains weak. This strategy, used by late industrialisers like Italy and China, focuses on geographically concentrated clusters that have grown organically over decades. There are 5500 clusters in India producing manufactures. Most are in mid-sized towns that have not benefited from government infrastructure improvement programs. This sector needs upgraded support, including access to credit, skills development, technology upgrades and market development — at the level of each cluster.
Clusters have suffered from three problems — underfunding, fragmented input services and policy incoherence. The use of fintech to enable access to working capital for MSMEs builds financial capabilities. India’s digital infrastructure, the increase in household bank accounts and the expansion of e-payments have seen unprecedented growth, which can contribute to job creation.
India’s youth have received better education in the past two decades. But compared with East Asia — where education spread earlier and supported industrial development — India has neither an industrial development policy nor a technical or vocational strategy aligned with industrial policy. Poor youth education levels are a barrier, requiring an increase in public education investment to at least 4.5 per cent of GDP.
India is a continental country, with land-locked states especially lacking an industrial base. Industrial corridors with industrial hubs are only now developing slowly. The two most advanced are the western Delhi–Mumbai Industrial and Freight Corridor and the eastern Amritsar to Kolkata Corridor. But progress on the Mumbai–Bengaluru, Bengaluru–Chennai and Chennai–Kolkatta corridors, forming the southern peninsular legs, has been slow. These are important to linking the hinterland to the coast and enabling global value chain production and services links, attracting investment and creating jobs.
India must invest, as part of its industrial policy, in its design and research and development capacity to enable industry to prosper and create jobs. A country that can land spacecraft on the moon, launch thousands of satellites and attract over 800 international firms to establish Global Capability Centres, can mobilise the professionals needed to foster its product and process design capacity. India still spends only 0.69 per cent of its GDP on research and development, miniscule for the world’s fifth largest economy compared with China’s 2.25 per cent or Korea’s 4 per cent.
A carefully articulated, horizontal industrial policy that supports skills formation and infrastructure to assist industry and which does not shy away from international competition would further grow India’s services-driven and highly entrepreneurial economy and its manufacturing sector. India can become a powerhouse connecting its domestic demand potential to international competitiveness if it can address growing inequality and its K-shaped post-pandemic recovery.
Santosh Mehrotra is Research Fellow at the IZA Institute of Labour Economics, Bonn, Germany.