India’s Big Government
Page 17
States are seeing what the economists Amrit Amirapu and Arvind Subramanian call premature non-industrialisation.244 Only in one Indian state has the registered manufacturing share of the state’s GDP crossed the 20 per cent level. This was Gujarat in 2011. As Amirapu and Subramanian point out: “Gujarat has been the only state in which registered manufacturing as a share of [the] GDP surpassed twenty per cent and came anywhere close to [the] levels achieved by the major manufacturing successes in East Asia.”245
In fact, other states like Maharashtra and Tamil Nadu, which are known to be manufacturing heavyweights, achieved their peaks in 1986 and 1990, respectively. At its peak, registered manufacturing in Maharashtra was at 18.9 per cent of the state’s GDP. In the case of Tamil Nadu, it was at 18.1 per cent.246
Registered manufacturing in Haryana peaked in 2003 at 17.3 per cent. For West Bengal, it peaked at 12.3 per cent in 1982. Among the recent peaks are Himachal Pradesh, at 16.4 per cent in 2011, and Madhya Pradesh, at 12.5 per cent in 2008. Hence, registered manufacturing as a share of the state GDP has been going down for most states (with the exception of Gujarat and Himachal Pradesh), with the peak having been reached many years ago.247
Let’s take the example of Uttar Pradesh, India’s most populous state. As the Economic Survey of 2015-2016 points out: “It reached its peak share of manufacturing in output at 10 per cent of [the] GDP in 1996 at a per capita state domestic product of about $1,200 (measured in 2005 purchasing-power parity dollars). A country like Indonesia attained a manufacturing peak share of 29 per cent at a per capita GDP of $5,800. Brazil attained its peak share of 31 per cent at a per capita GDP of $7,100. So, Uttar Pradesh’s maximum level of industrialisation was about onethird that in Brazil and Indonesia; and the decline began at 15-20 per cent of the income levels of these countries.”
And unless a state as big as Uttar Pradesh sees some serious manufacturing activity, how can India hope to create any sort of equitable economic growth which is spread across a large section of its population?
A similar trend is observed when it comes to the total employment in registered manufacturing firms. In Maharashtra and West Bengal, the employment peaked in 1984 at 4.8 per cent and 4.7 per cent, respectively, of the total employment. In Gujarat, it peaked at 5.4 per cent of the total employment in 1984. There are some states, like Tamil Nadu, Haryana and Punjab, where the employment in registered manufacturing peaked in 2010 at 6.2 per cent, 6.1 per cent and 5.4 per cent, respectively.248
As the Economic Survey of 2014-2015 points out: “Most states have not [emphasis original] been experiencing secularxii growth in employment shares over time (the only exceptions are Himachal Pradesh, Tamil Nadu, Haryana and – possibly – Karnataka). Many of the states that… [did] exhibit [their] peak years in 2010 (such as Andhra Pradesh, Rajasthan and Orissa) seem to have employment shares that have been mostly flat, reflecting neither relative growth nor decline.”
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I have happily been using the word ‘services’ throughout this chapter while, nevertheless, the question remains: What does the word actually mean? The services sector includes a whole host of firms operating in different areas like trade, hotels and restaurants, transport, storage and communications, financial services and insurance, real estate and business services, public administration, defence and construction.
As can be seen, there is a whole host of different firms which come under the services sector. The services sector formed 59.9 per cent of the Indian economy in 2013-2014. This was as per the old method of calculating the GDP. As per the new method of calculating the GDP, services formed around 50.7 per cent of the Indian economy in 2013-2014.
While we can argue on whether services form 50 per cent or 60 per cent of the Indian economy, that is really not important when it comes to the basic idea that I am trying to explore in this book.
The pertinent question here is: Given that India has missed out on a manufacturing revolution, can services help create the low-skilled jobs that the country actually needs? Let’s look at some data offered by the economists Amirapu and Subramanian. In 1984-1985, services accounted for around 39 per cent of the Indian economy. At the same time, they had a 20.1 per cent share in the employment. By 2010-2011, services accounted for 57.5 per cent of the Indian economy. At the same time, they had a 21.9 per cent share in the overall employment.249
Within services, there are sectors which have had a higher relative employment growth than others. In 1984, the real estate and business services had a 0.2 per cent share in the employment. By 2010, this had jumped to 1.1 per cent. In the case of construction, the figure had jumped from 3.1 per cent to 8 per cent. On the whole, even though the services sector now forms more than half of the economy, its share in the employment is only 21.9 per cent. 250
At the same time, as far as creating jobs is concerned, the services sector has done a much better job of it than registered manufacturing. Registered manufacturing formed 2.7 per cent of the employment in 1984. By 2010, this had come down to 2.6 per cent. As the Economic Survey of 2015-2016 points out:
Aggregate services employment grew faster than that in registered manufacturing, and a number of service subsectors—transport, real estate and construction—registered substantially faster employment growth. In other words, services are becoming an ever more important source of wealth, and while they have not delivered rapid employment growth, a number of service sub sectors have generated more rapid employment growth than manufacturing.
While services are creating more jobs than registered manufacturing, the question is whether the firms operating in the sector can create enough jobs for India’s low-skilled workforce. Before I try to answer this question, let’s take a look at the kind of workers that the registered manufacturing sector in India employs.
Registered manufacturing in India, the way it has evolved, is skilled-labour intensive. Around 43.2 per cent of the employees in registered manufacturing have at least had secondary education (i.e., they have passed Standard X). By comparison, only 13.9 per cent of the individuals working in agriculture have had at least secondary education. At the same time, if one looks at manufacturing as a whole (which includes unregistered manufacturing as well, i.e., firms with up to 10 employees), the proportion of employees with at least secondary education stands at 24.8 per cent. This basically means that the proportion of employees with secondary education in unregistered manufacturing is considerably lower in comparison to that in registered manufacturing, but higher than that in agriculture.251
As Amirapu and Subramanian put it: “In some ways, this should not be surprising. High labour productivity in this sector is at least in part a consequence of higher skills in the work force…. The skill intensity of the sector is not quite aligned with India’s comparative advantage.” India’s comparative advantage is the abundance of low-skilled labour.
How do things look for the services sector? Around 47.8 per cent of those employed in the services sector have at least had secondary education. This is higher than those in registered manufacturing. This is simply because of the fact that many areas within the services sector need people with high skills. These include the financial services and insurance (83.6 per cent with at least secondary education), real estate and business services (77.5 per cent), education (88.8 per cent), as well as health and social work (76.7 per cent). There are other sectors, like construction, transportation and communications, and wholesale and retail trade, where the education levels of the employees are a lot lower. In these respective sectors, only 14.4 per cent, 33 per cent and 34.6 per cent of the employees have had secondary education.252
As Amirapu and Subramanian point out:
A large number of service subsectors – including 1) Banking and Insurance, 2) Real Estate and Business Services, 3) Public Administration, 4) Education, and 5) Health and Social Services – have significantly higher educational attainment (90 per cent or more of [the] workers have [had] at least primary education) than registered manufactur
ing. What this implies is that many service subsectors (precisely the high-productivity, high-growth subsectors, for the most part) have a limited capacity to make use of India’s most abundant resource, unskilled labour. This may explain why the share of employment from services (especially the high-growth service subsectors) has risen so modestly, even while the share of output from services has grown so substantially.
In fact, even in some low-skilled sectors, the need for high skills seems to be creeping in. Take the case of taxi/auto-rickshaw drivers in Mumbai or any other Indian city. What they needed to know until now was just how to drive. The knowledge of the roads and localities within the city could be picked up on the job. Now, with the launch of taxi aggregator services like Uber and Ola, it is not enough just to know how to drive.
The driver should know how to operate a smart phone. He should know English, so that he can read the map on the smart phone screen. Furthermore, he should also have some sophistication and be able to call up the customer and talk to him or her. Many taxi/auto-rickshaw drivers do not have these skills. In fact, many drivers who drive for Uber and Ola do not have these skills either.
The larger point being made here is that both registered manufacturing and the services require skilled workers. And this goes against India’s basic competitive advantage of having an abundance of unskilled and low-skilled labour. So what is the way out? Should India keep concentrating on the skill-intensive pattern of growth? This would mean that the labour force will have to be much better educated than it is today. As we have seen earlier, the state of India’s education system is terrible, and it continues to decline. Hence, even those who have been to school can offer no guarantee of the basic skillsets of reading, writing and the ability to do some basic maths.
Also, education standards cannot be improved overnight, despite the best intentions of any government. The basic problem of teachers not wanting to teach continues to remain. Hence, any concentration on a skill-intensive model of development would mean that one or two generations of people who are currently unskilled will get left behind.253 This basically means that the disguised unemployment in agriculture will continue to remain high. At the same time, unemployed youth are easy prey for anti-social elements. Finally, no country till date has followed this model to create economic growth and eliminate poverty.
So that leaves us with manufacturing and industry. The problem here is that India has already seen significant levels of de-industrialisation, with the share of manufacturing in many states falling after having achieved a peak. This will not be easy to reverse. Examples of countries which were able to reverse the process of de-industrialisation are few and far between.
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The manufacturing game to drive economic growth through exports has become increasingly difficult to play over the years. One reason for this is that, since the success of China in the manufacturing game, many other countries, including the likes of Bangladesh and Vietnam, have entered the global manufacturing competition.254 In fact, Bangladesh exports more textiles than India does.
Other than increased competition, exports haven’t grown at the same pace since 2010 as they had in the past. Between 1995 and 2000, global exports grew by 7 per cent per year. This slowed down to 5 per cent per year between 2000 and 2005. The growth fell further to 3 per cent between 2005 and 2010. The export growth since 2010 (i.e., between 2010 and 2015) has stayed at 3 per cent.255 One of the reasons is the fact that developed countries have been trying to protect their domestic companies.
The other factor that makes the manufacturing game difficult to play is the increasing amount of automation that is likely to take place in the years to come. Robots are likely to take over jobs at the lower end of the spectrum. HfS Research, a research firm based in the United States, has predicted that, by 2021, India’s information technology companies will lose around 6.4 lakh jobs to automation.256 This is something that high-ranking officials of Indian IT firms have also said.
As Rutger Bergman writes in Utopia for Realists: “Scholars at Oxford University estimate that no less than 47 per cent of all American jobs and 54 per cent of those in Europe are at a high risk of being usurped by machines. And not in a hundred years or so, but in the next 20.” He then quotes a New York University professor as saying: “The only real difference between enthusiasts and skeptics is a time frame.”257
In fact, this has already started to play out. In May 2016, the shoemaker Adidas announced that it would start manufacturing shoes in its home country of Germany after nearly two decades. But it shall use robots and not human beings to do the same. The company calls its robot factory the speed factory. A second such factory is being planned in the United States as well.258 In another similar case, Foxconn, a company which manufactures mobile phones for both Samsung and Apple, is replacing 60,000 workers with robots.259
In mid-September 2016, the textile major Raymond said that it was planning to slash 10,000 jobs across its manufacturing centres all across India and replace them with robots and technology. The company currently employs 30,000 employees.260 Hence, robots are likely to replace one-third of its workforce.
Furthermore, driverless cars have already arrived. As Ruchir Sharma writes in The Rise and Fall of Nations: “The most common job for American men is driving, and one forecast has driverless smart cars and trucks replacing them all by 2020.”261
And if all this wasn’t enough, on October 3, 2016, the World Bank President, Jim Yong Kim, said in a speech: “Research based on World Bank data has predicted that the proportion of jobs threatened by automation in India is 69 per cent, 77 per cent in China and as high as 85 per cent in Ethiopia.”262
These are just a few examples of the expectation that robots will take over human jobs. As can be seen, this threat looms not just over India but over large parts of the developed as well as developing world.
Indeed, the threat of robots taking over human jobs is nothing new. So what makes the threat this time around so different from the previous ones? As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow:263
This is not an entirely new question. Ever since the Industrial Revolution erupted, people feared that mechanisation [which is what robots are after all about] might cause mass unemployment. This never happened, because as old professions became obsolete, new professions evolved, and there was always something humans could do better than machines. Yet this is not a law of nature and nothing guarantees it will continue to be like that in the future.
The question remains: What has changed this time around?
Human beings essentially have two kinds of abilities: a) physical abilities; and b) cognitive abilities, i.e., the ability to think, understand, reason, analyse, etc. As Harari writes: “As long as machines competed with us merely in physical abilities, you could always find cognitive tasks that humans do better. So machines took over purely manual jobs, while humans focused on jobs requiring at least some cognitive skills. Yet what will happen once algorithms outperform us in remembering, analysing and recognising patterns?”264
Hence, the robots used until now essentially replaced the physical things that human beings did in factories. The trouble is that now the robots have also started thinking (in the form of algorithms), and hence, many more human jobs are on the line. Harari feels that “as algorithms push humans out of the job market, wealth might become concentrated in the hands of the tiny elite that owns the all-powerful algorithms, creating unprecedented social inequality.”265
This argument, along with the evidence offered earlier, seems to be pretty convincing, if seen in isolation. But there is a lot more to this than just the evidence that is currently being offered. As Sharma writes: “While the robotics revolution could come faster than most previous technology revolutions, it is likely to be gradual enough to complement rather than destroy [the] human workforce. A huge gap still exists between the size of the world’s industrial robot population—about 1.6 million [16 lakh]—and the global industrial l
abour force of about 320 million [32 crore] humans.”266
As per the International Federation of Robots, South Korea currently has the highest penetration of robots. The country has 437 robots per 10,000 employees. Japan and Germany come in second and third with 323 robots and 282 robots per 10,000 employees, respectively. China has 14 robots per 10,000 employees. Half of these robots are unintelligent machines currently used in car manufacturing.267
The point is that there aren’t as many robots going around as there are made out to be. Also, it is worth remembering here that large parts of the Western world and Japan are currently seeing their population decline. China will also soon reach that stage as well. Hence, in that sense, the robots will arrive at the right time, replacing the decline in the labour force. As Daniel Kahneman, the Nobel Prize-winning psychologist (he won the Economics prize), told John Markoff, a journalist who covers science and technology for The New York Times: “You just don’t get it…. In China, the robots are going to come just in time.”268
The point is that, when it comes to big predictions, like robots taking over human jobs, there are always a few ifs and buts. The trouble is that these ifs and buts are not being highlighted as much as the core argument of robots taking over human jobs currently is.
Other than these factors, there is a basic law in economics which goes against the entire idea of robots totally destroying human jobs. It’s called Say’s Law, which I discussed in Chapter 1. It essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. As seen earlier, a pithier version of this law is “Supply creates its own demand”.
As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads to Disaster: “[The] French businessman and economist Jean-Baptiste Say discovered that ‘products are paid for with products’, not merely with money. He meant that you needed to produce things to buy things.”269