On June 2-3, the Stanford Center for International Development held its 15th annual conference on the Indian economy. Unsurprisingly, the theme was what the new government needs to do to get the economy moving again. Arvind Panagariya laid out a reform agenda for the new government, and highlighted the failure to create enough jobs, due to the lack of sufficient growth in labour-intensive manufacturing. He emphasised the need to create a better environment for business, including the vexed problem of labour regulations. Rana Hasan, presenting work that I have discussed earlier (What to vote for, FE, April 14, goo.gl/1KP4ja), buttressed Panagariya’s argument, giving evidence that indicators of financial development, business regulations that promote competition and flexible labour regulations have all been associated in India with larger reallocations of labour from lower to higher productivity sectors.
But these pointers on what India should do were tempered by the presentation for which I served as a discussant. Arvind Subramanian presented work with co-author Amrit Amirapu that called into question what India can actually accomplish. Building on the work of Dani Rodrik, they argued that within Indian manufacturing, there is evidence of catching up of less productive units to more productive units, but there is much weaker evidence of catch up to the global productivity standards. Furthermore, they argued that India’s manufacturing sector is shrinking, despite rising profits. These authors, similarly to Panagariya and Hasan, hypothesised that barriers to competition and inefficiencies in the markets for labour and for land contribute to this paradoxical situation. Rising wage premiums for skilled labour and insufficiently dynamic exports were also adduced as possible contributing factors.
This is all very worrisome, because labour-intensive, low-skilled manufacturing is the classic first step toward broad-based economic development. Indeed, inclusive growth arguably should be built around this process of manufacturing growth. Furthermore, Rodrik has argued that the scope for export-led growth is lower than it was in recent decades, and that manufacturing, too, is becoming more skill-intensive and capital-intensive. Then where will the jobs that India desperately needs come from?
In seeking an answer, I went back to some of my own earlier work, revisited a case study from four years ago, and consulted India’s foremost academic expert on manufacturing. Pankaj Chandra’s earlier work highlighted factors such as lack of competitive pressure and insufficient managerial quality (a theme in the work of academics like Nicholas Bloom as well), as well as a poor business