by Vivek Kaul
c) Improvement of Physical Infrastructure: Globally, when it comes to cost, India competes well with other countries with major exports. But cost is not the only factor that encourages entrepreneurship and manufacturing. In fact, the two most consistent predictors of overall entrepreneurship in an area are local education levels as well as quality of the local physical infrastructure.327 As E Ghani, WR Kerr and SD O’Connell write in a research paper titled ‘Who Creates Jobs?’: “Goods and services cannot be produced and delivered without roads, electricity and telecommunication.”328
In fact, cities and states that have embraced entrepreneurship have created more jobs and, at the same time, experienced faster regional growth. The same is true for India as well. Economic growth has been strongest in the regions that have exhibited high rates of entrepreneurship.329
For entrepreneurship to flourish, India needs better physical infrastructure than it currently has. This means better roads, better railways and better ports. Take the case of Indian ports. They play a crucial role in Indian trade. They handle 95 per cent of the merchandise trade by volume. But the turnaround time of most Indian ports, except for a few private ports, continues to remain high. Turnaround time is essentially the time taken by a ship between berthing at a port and leaving it, with loading and unloading, and getting the ship ready to leave, happening in between.
The Pipavav port has the fastest turnaround time, of 0.5 days, among Indian ports. The Mundra port, with a turnaround time of 1.5 days, comes in next. Other ports like Chennai, Paradip, Mumbai, Kolkata and Kandla take 2.1 days, 2.6 days, 2.9 days, 3 days and 4 days, respectively.330 This needs to improve in the days to come.
Also, despite the fact that India has 187 minor ports and 12 major ports, almost every sea-based cargo that leaves India or is coming to India is first trans-shipped to mega-hubs like Colombo or Singapore.331
As far as the Railways is concerned, it has more or less been ignored for a long period of time. In fact, since the 1990s, many railway ministers from the Eastern part of the country basically used the Railways as a job-creation exercise in their respective states.
In fact, since Independence, most of the investment in the Indian Railways has been incremental in nature. Both expansion of routes and technological upgradation have been limited. The current Modi government is trying to correct this by investing more in the Railways. Between 2009-2014, the average capital expenditure of the Railways had stood at Rs. 48,100 crore and grew by around 8 per cent per annum. In 2016-2017, the capital expenditure of the Railways has been budgeted at Rs. 1,21,000 crore.332
As the current Railways Minister, Suresh Prabhu, said in the February 2016 Railways Budget speech: “This year, our investment would be close to double of the average of previous years – a feat never achieved earlier.”
Over the years, the freight operations of the Railways has subsidised its passenger operations. This has meant that the government has increased freight prices without increasing the ticket prices for passengers. This has led to a situation wherein the transportation of goods has moved more towards road transport, as the freight pricing of the Railways has become uncompetitive.
As the White Paper on the Indian Railways, released in February 2015, points out: “Railway expenditure as a percentage of [the] transport sector expenditure used to be about 56 per cent in [the] 7th Plan (1985-90). It has reduced to 30 per cent in [the] 11th Plan (2007-12).” Table 6.5 shows a similar trend.
Table 6.5: Share of the transport sector in the overall GDP (in %).
Source: White Paper on the Indian Railways, 2015.
One thing that is holding back the freight business of the Railways is the slow speed of freight trains. In fact, how slow their speed is can be made out from the fact that Prabhu, in the February 2016 Railways Budget speech, said that the plan is to increase the average speed of freight trains to 50 kilometres per hour. Currently, freight trains use the same tracks as passenger trains, and this slows them down.
In order to get around this problem, the Railways is trying to build Dedicated Freight Corridors for the freight trains. As Prabhu said during the course of the Railways Budget speech: “The Dedicated Freight Corridor project, the largest infrastructure project in the country, is gaining momentum. I am happy to inform the House that, before this financial year closes, almost all the contracts for civil engineering works would have been awarded. Since I assumed office, contracts worth Rs. 24,000 crore have been awarded, against Rs. 13,000 crore worth of contracts in the last 6 years.”
Prabhu also proposed to “take up the following freight corridors: North-South connecting Delhi to Chennai, East-West connecting Kharagpur to Mumbai, and East Coast connecting Kharagpur to Vijayawada”. This is important, given that freight customers are the mainstay of the Railways and bring in over Rs. 1,00,000 crore of revenue during the course of a year.333 Their major problem is the slow speed of freight trains, given the congestion on all major railway routes. This is being addressed.
In fact, once the dedicated freight corridors for freight trains come up, it will ease up congestion on the current railway routes and, in the process, passenger trains are also likely to get faster. Prabhu, in his budget speech, aimed at increasing the speed of mail and express trains to 80 kilometres per hour on an average.
For this expansion and overhauling of the Indian Railways, the Railways will borrow Rs. 1.5 lakh crore from the Life Insurance Corporation of India on extremely favourable terms.334
So that leaves us with roads. India’s total road length has increased from 4 lakh kilometres, as on March 31, 1951, to 52.3 lakh kilometres, as on March 31, 2013, growing at an annual rate of 4.2 per cent. In fact, India’s road density, at 1.59 km/sq. km of area was “higher than that of Japan (0.90 km/sq. km), the USA (0.67 km/sq. km), China (0.44 km/ sq. km), Brazil (0.19 km/sq. km) and the Russian Federation (0.08 km/sq. km)”.335
But this statistic is misleading, given that only 60.6 per cent of India’s roads are paved. And this proportion is “much lower as compared to the UK, France, Korea, Russia and China”.336 Take a look at Table 6.6. It presents a breakdown of the various kinds of roads that India has.
Table 6.6: Types of roads in India and associated statistics.
Category of Road Length of Roads (km) Share in Total Road Length (%)*
National Highways (NHs) 79,116 1.5
State Highways (SHs) 1,69,227 3.2
Other Public Works
Department (OPWD) Roads 10,66,747 20.4
Rural Roads 31,59,639 60.4
Urban Roads 4,46,238 8.5
Project Roads 3,10,955 5.9
Total 52,31,922
* The total doesn’t add up to 100 due to rounding-off errors.
Source: Basic Road Statistics of India, 2012-2013.
As is clear from Table 6.6, rural roads form 60.4 per cent of the total roads, and much of that is unpaved. Furthermore, the National Highways form only 1.5 per cent of the total roads. Nevertheless, they carry around 40 per cent of the total traffic.337 Given this, it is not surprising that they are congested. This congestion slows down the movement of goods across India.
In fact, most of the goods are moved across India through road transport. In 1950-1951, the Railways accounted for nearly 90 per cent of the total transport. By 2011-2012, roads accounted for 65 per cent of the total transport. In fact, the roads overtook the Railways sometime in the early 1990s. This was primarily on account of the Railways being unable to provide the kind of door-to-door service that road transport could. Furthermore, with the Railways subsiding passenger services through their freight operations, road transport eventually turned out to be cheaper.338
Interestingly, the National Transport Development Policy Committee of 2014 expects the Railways to increase its share in the years to come and, by 2031-2032, the ratio of Railways to roads, when it comes to freight movement, is expected to be 50:50.
Nevertheless, as things stand, trucks currently move the bulk of India’s goods. But, given the con
gestion on India’s national highways, they move at very slow speeds. Over and above the congestion, inter-state check-posts also slow down trucks to an average of around 300 kilometres per day. Electronic tolling is the need of the hour (which would again bring down Big Government).339
In order to decrease congestion, the single- or double-lane highways need to be converted into four- or six-lane roads. Two of the biggest hindrances to road construction are land acquisition and environmental clearances.340
What does not help is the fact that truck drivers are badly paid. Hence, they drive at a slow speed to save on diesel and make some money in the process. Only truck drivers engaged for delivering fruits or vegetables or hired by courier com panies are given enough diesel and paid a reasonable salary, which incentivises them to drive at a fast speed.341
The Narendra Modi government has taken up road construction across the country with great zeal. In July 2016, the Road Transport and Highways Minister, Nitin Gadkari, told American investors in Washington: “The pace of road construction has accelerated to an all-time high of 20 kilometres per day, and next year, we plan to increase it to 41 km per day.”342
Other than improving physical infrastructure which leads to the easier movement of goods, the construction of roads also creates many low-skill jobs, precisely the kind of jobs that cater to India’s natural competitive advantage of having a surplus of low-skilled labour.
As the annual report of 2015-2016 of the Ministry of Road Transport and Highways points out:
During April 2014 to January 2016, about 9,280 kilometres of road length (including 3,034 km of National Highways) have been constructed by the Ministry of Road Transport and Highways, which is likely to generate employment of about 3.78 crore man-days in total…. [The] Ministry is aiming for the construction of 10,000 kilometres of road projects in 2016-2017, which [is] likely to generate employment of about 4 crore man-days.
The fast pace of road construction needs to be maintained in the years to come if a programme like Make in India has to see some success.
d) Savings: Between 2007 and 2013, as inflation remained high, this led to the domestic savings in India coming down. The savings peaked at 36.8 per cent of the GDP in 2007-2008. By 2012-2013, it had fallen to 30.1 per cent of the GDP. Between 2005-2006 and 2007-2008, the average household financial savings had stood at 11.6 per cent of the GDP. In 2009-2010, it rose to 12 per cent of the GDP. After that, it started to fall, and by 2011-2012, it had fallen to 7 per cent of the GDP. Since then, the figure has gone up only marginally.
In fact, India’s domestic savings as a percentage of its GDP, in comparison to other countries in Asia which have a record of growing at a very fast pace, is low. It is much lower than China’s, at 51.8 per cent; Singapore’s, at 52.1 per cent; Malaysia’s, at 35.5 per cent; and South Korea’s, at 34.1 per cent.343
Ultimately, it is domestic savings which will finance the Make in India programme. For that to happen, the domestic savings need to be at 36 per cent of the GDP between 2017-2018 and 2021-2022, and rise to 41 per cent of the GDP between 2027 and 2032. Domestic savings are made up of both physical savings in the form of land, homes and gold, and financial savings, which are basically investments in various financial instruments. Household financial savings need to jump to 11.4 per cent of the GDP between 2017-2018 and 2021-2022 and 13 per cent of the GDP between 2027-2028 and 2031-2032.344
This will only be possible with sustained reduction in the rate of inflation. This sustained reduction in the rate of inflation would lead to low nominal interest rates. Nevertheless, low nominal interest rates should be accompanied by positive real interest rates, i.e., the rate of interest should be higher than the rate of inflation.
Through much of the period between 2007-2008 and 2013-2014, the rate of inflation was higher than the rate of interest. This led to people’s financial savings falling and their looking at other modes of investment other than financial savings.
If the government wants to control the overall inflation, it first needs to control the food inflation. And for that to happen, a thorough reform of India’s current agricultural policy is needed. Big Government in India’s agriculture needs to come down. Until now, the government has primarily concentrated on acquiring foodgrains, i.e., rice and wheat. This has led to the overproduction of these grains at the cost of pulses, fruits and vegetables, which India is now eating more and more of. The demand for pulses, fruits, vegetables, eggs and meat will continue to grow at a much faster pace than the demand for foodgrains, especially as income levels increase and people eat better. This is something that government policies haven’t taken into account until now. If food inflation has to be reined in, the government policies need to account for this factor as well. We will discuss this in detail in Chapter 12.
Furthermore, the trouble is that every government wants low interest rates all the time, given that it is the biggest borrower in the financial system. But that is not good for the nation if a reasonable level of domestic savings, which are necessary to finance a programme like Make in India, needs to be built.
Also, the total fiscal deficit (central government fiscal deficit plus the fiscal deficits of the state governments) needs to come down through the curtailment of expenditure. (Did we say Big Government?) Every time the government goes overboard while borrowing, it takes away money from the private sector. Also, this crowding out pushes up interest rates. India has been trying to move towards a fiscal deficit target of 3 per cent of the GDP for many years. In fact, before it does that, it needs to first start calculating its fiscal deficit properly, which I will discuss in Chapter 10.
Another thing that is needed to increase domestic savings is to increase financial inclusion. This the government is currently doing through the Jan Dhan Yojana programme. As of early August 2016, 23.62 crore bank accounts have been opened under the Jan Dhan Yojana. The accounts have a balance of Rs. 41,723 crore. This is a huge jump from the 5.3 crore bank accounts in September 2014. Nevertheless, a lot still needs to be done on this front. Despite this success, the penetration of basic savings accounts remains low in many states.
What also does not help is the fact that only 27 per cent of villages have a bank within a distance of 5 kilometres. This means that last-mile connectivity is a problem. Things need to improve on this front if the domestic-savings-to-GDP ratio has to go up, so that there is enough money going around to finance a programme like Make in India.
To conclude, for the Make in India programme to be successful, the Modi government needs to hold back Big Government in many, many areas and allow the private sector to flourish.
xi Interestingly, the Chinese female labour force participation rate has also been falling. World Bank data suggests that it had stood at 73 per cent in 1990 and at 64 per cent in 2014.
xii In this case, the term ‘secular’ has been used to talk about trends which remain consistent over a long period of time.
xiii Data taken from the Garv Dashboard (garv.gov.in/dashboard) of the Central government.
7.INDIA’S HOTEL CALIFORNIA PROBLEM
Is it possible that our best intentions for labour are not actually met by laws that sound progressive on paper but end up hurting the very workers [that] they are meant to protect?
– MANMOHAN SINGH, NOVEMBER 2010
The National Manufacturing Policy of 2011 estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people. This means that any SME, on an average, employed 2.27 individuals.
The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.345
What this clearly tells us is that the size of an average Indian SME is small, in fact, very small. These firms basically employ the owner and one
more person, on an average. Interestingly, nearly two-thirds of these firms are own-account enterprises without any hired workers. These firms are highly unproductive and are unlikely to create any employment. As the economist Vijay Joshi writes in India’s Long Road: “The vast majority of owners are not ‘capitalists in waiting’ but people who would gladly switch to decent employment if it were available.” Another 15 per cent of firms employ less than six workers each. These firms are also highly unproductive.346
Hence, if jobs need to be created, firms with greater than ten employees need to become bigger and employ more people.
In fact, there are more such datasets showing the essential smallness of Indian firms. As the economist Pranab Bardhan writes in Globalisation, Democracy and Corruption: “Take the highly labour-intensive garments industry, for example. A combined dataset [of both the formal and informal sectors] shows that about 92 per cent of garment firms in India have fewer than eight employees.”347
The economists Jagdish Bhagwati and Arvind Panagariya offer a lot of data around the small size of the average Indian firm in their book India’s Tryst with Destiny. The trouble is that some of this data is dated, but that is a standard problem in trying to write anything detailed on Indian economics. More often than not, there isn’t much recent data going around.
In 2005, 84 per cent of the workers in Indian manufacturing were employed in firms with 49 or less workers. Firms with 200 or more workers, defined as large firms, made up for only 10.5 per cent of the manufacturing workforce. Now compare that to China, where small- and large-scale firms employed 25 per cent and 52 per cent of the workers, respectively. In a labour-intensive sector like apparel, 92.4 per cent of the workers in India work with small firms, which have 49 or less workers. Again compare this to China, where large and medium firms make up around 87.7 per cent of the employment in the apparel sector.348