by Vinod Rai
The twin questions facing us are: Can India reverse the trend of low share of employment through focused policy intervention? And does India represent the emerging global trend of manufacturing’s contribution to GDP and employment plateauing at substantially lower per capita income levels than those in advanced economies or East Asian ‘tiger economies’, including China?
Current Trends in Global Technology and Production Networks
The global economy is experiencing the ‘Fourth Industrial Revolution’. Industry 4.0 has demonstrated the ability to replace not only routine but also complex and intelligent human intervention in both manufacturing and services. Industry 4.0 has resulted in some remarkable changes.
Energy is becoming cheaper and cleaner with countries committing to 100 per cent energy from renewables. Smart grids are likely to dispense large generating plants on the one hand and establish a time-of-the-day energy market on the other.
The onset of 3D printing might replace serpentine assembly lines for several industries by final assembly or manufacturing in closest proximity to the consumer.
E-commerce has already disrupted wholesale and retail trade. More transformative changes in the pipeline would alter the logistics needs of manufacturing, and manufacturing itself. Mass customization will be on offer widely.
Robotization, greater use of sensors and artificial intelligence (AI), backed by ‘big data’, has radically altered factor proportions in manufacturing. Labour is being rapidly replaced by ‘inter-facing machines’ reducing the labour intensity of traditional labour-intensive industries (e.g. textiles, leather, garments)—once considered impenetrable by AI and robots.
Industry 4.0 is resulting in ‘re-shoring of industries’ with labour-intensive industries being attracted back to advanced economy locations to operate in close proximity to demand centres. This will transform the character of global production networks and the comparative advantage of emerging market economies like India.
Competitive advantage in global manufacturing will henceforth be determined almost entirely by the countries’ ability to establish world-class infrastructure and acquire high-quality, knowledge-intensive human resources that can adapt to changing technology.
The days of sequential catching up from initially starting with hugely labour-intensive manufacturing operations to semi-assemblies and subsequently to high technology and design-intensive manufacturing may be behind us.
Challenges and Prospects for Indian Manufacturing: Some Recommendations
It is far too optimistic to expect that the Indian manufacturing sector will succeed in contributing a quarter of GDP or generate 100 million jobs over the next two decades or more. The sheer pace of sustained acceleration required to achieve these targets is staggering. With the annual GDP growth expected to be in the range of 7–9 per cent in real terms, manufacturing must grow by 10–12 per cent in real terms, or more than 15 per cent in nominal terms, for its share to start rising. In the past, there have been only seven years when manufacturing attained high, double-digit growth (Figure 8). With barely 11–13 per cent of the workforce engaged in the formal manufacturing sector given the stagnation in jobs and job losses in recent years, it would be a real challenge to generate sufficiently large opportunities for employing 20 per cent or 100 million additional workers in the manufacturing sector.
Figure 8: Annual Growth Rates of the Manufacturing Sector in India (1970–2016)
Source: World Development Indicators Database, World Bank, and Ministry of Statistics and Programme Implementation, Government of India.
The employment challenge is compounded by the strengthening of Industry 4.0 trends lowering labour intensities across the board. Rising automation and robotization has been severe on employment of unskilled and even semi-skilled workers in manufacturing. Manufacturing will henceforth see the emergence of production processes that integrate software and hardware in machines and require highly-skilled workers to be sufficiently flexible for adapting to evolving technologies.
The emerging trends have given rise to strong ‘manufacturing pessimism’ in emerging economies, including India. This is perhaps needed to balance the optimism of those who conceive of manufacturing growth in India as replicating the Chinese experience of the last three decades. That is simply not possible. Conditions in domestic labour markets, which prevent wages in India from matching those in countries with semi-authoritarian regimes, increasing use of hybrid and automated technologies, and growing pressure from global competition based on mass customization and rapid product innovation, rule India out of the phase of becoming an exporter of mass-produced, low-quality and labour-intensively manufactured products. An alternative strategy needs to be devised for accelerating the manufacturing sector growth.
Unfortunately, in the current and evolving global scenarios, there are no easy fixes to increasing the share of manufacturing or for it to generate a large number of new jobs. Both the government and industry must recognize that they will have to work closely together for Indian manufacturing to achieve global competitiveness, which is a sine qua non for ramping up domestic manufacturing capacity.
India must try and achieve greater integration of its manufacturing capacities with regional and global production networks for increasing the share of intra-industrial trade in its total trade. This has two important policy implications. One, the prevailing infrastructure deficit, putting Indian manufacturing at a significant disadvantage vis-a-vis its competitors and discouraging foreign investors from choosing India as an export hub, must be eliminated at the earliest. The government will have to take the lead in this as physical infrastructure is a public good where social returns greatly outweigh private returns. Two, foreign trade procedures must be streamlined and made seamless for encouraging intra-industry trade, which accounts for more than two-thirds of global trade flows. Intra-industry trade, in which emerging economies manufacture and export relatively low technology components and sub-assemblies, perhaps, remains an area where India can see greater labour absorption and expansion of manufacturing capacities.
The brunt of component manufacturing and exports should be borne by SMEs, many numbers of which are ‘informal’. These must be formalized and provided access to commercial bank credit at reasonable terms; made attractive to foreign joint venture partners; and given access to information about global markets and technology trends. This requires a major shift in the focus of industrial policy by making it focused on SMEs. The formalization and, more importantly, modernization of the tier two and three of private-sector firms, predominantly unlisted and working as proprietary and partnership companies, could see an exponential growth in domestic manufacturing capacities in the coming years. The focus on intra-industry trade and the ‘next 500’ companies offers a good bet for accelerating manufacturing growth and employment generation in India.
Greater attention must be devoted to strengthening the sources of the knowledge economy. This implies greater attention to R & D, especially directed towards product innovation. Total R & D expenditure in India is woefully low at barely 1 per cent of GDP, compared to more than 3 per cent in Japan and the United States and 4 per cent in Korea. The Indian private corporate sector hardly contributes to this abysmally low R & D expenditure. This must change. Government policy should aim to provide sustained incentives for product innovation as opposed to process or cost-reducing form of ‘incremental innovation’ that presently dominates corporate R & D expenditure. Strengthening of the intellectual property regime; greater collaboration amongst public and private corporate R & D activities; and lowering of policy-induced barriers for scaling up operations could be possible policy responses for addressing this perceptible weakness in Indian manufacturing, especially in view of the immense breakthrough opportunities offered by the ongoing fourth global technology revolution.
A special effort is necessary to push back global protectionist tendencies being echoed domestically. India must participate more forcefully in the G-20 platform f
or protecting the multilateral liberal global trading regime that has delivered the longest and most robust rise in living standards of global population in the post-Second World War period. The perception in some quarters that a liberal order determining global trade, technology and financial flows is detrimental to Indian manufacturing is misplaced. That would stunt Indian manufacturing capacities and capabilities as domestic firms will neither achieve economies of scale for becoming globally competitive nor acquire critical new technologies essential for increasing shares in the global market. The inevitable result will be slow and certain shrinking of domestic manufacturing, which will be unable to withstand import competition.
Instead, policy should be directed to urgently address critical constraints making Indian manufacturing globally uncompetitive. Greater focus should be on productivity-enhancing policy measures at reasonable price points. This includes addressing infrastructure deficits, including transport (roads, railways, ports and airports); electricity availability and its quality; and logistics. Notwithstanding some improvements over the past two decades, significant gaps remain, especially as one moves away from metros and state capitals.
There is a critical need to improve the level of trust between the government and business. This lack of mutual trust results in over-regulation and excessive compliance burdens on private businesses, and leads to extensive rent-seeking opportunities. The prevailing environment of mistrust and over-compliance explains the inability of many SMEs to scale up operations and become globally competitive. This is neatly summed up in the terse remark that conditions in India spawned companies that are not born as regular start-ups that grow over time but as ‘midgets’ that remain stunted and globally uncompetitive.
The private sector can and must play its due role in building the trust-based relationship with the government, which is a sine qua non for achieving global competitiveness, pushing innovative growth strategies and successfully integrating with global and regional production networks. For starters, as Prime Minister Narendra Modi has suggested, the Institute of Chartered Accountants as the established self-regulating and self-certifying institution should enforce corporate governance and financial accountability as required under existing statutes.
Apex industry organizations like the Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce and Industry (FICCI) and the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and indeed the principal regional ones as well, must disqualify members charged with misdemeanours and evasion of statutory compliances. This process of self-regulation has been effective in several countries and helps in improving prospects of collaboration between public and private sector and attracting FDI, which may then have greater confidence in forming joint-ventures with Indian companies.
The issue of reducing mutual mistrust and laying the basis for greater collaboration and partnership between the government and business has not received adequate attention either in policymaking or in academic enquiries. It is a critical driver of India’s manufacturing prospects and deserves greater focus going forward. These improvements can lead to the emergence of a true ‘India Inc. coalition’, which is presently confined to rhetoric. Creation of an effective India Inc. coalition is one of the principal conditions for expanding India’s share in global manufacturing and for its firms to achieve sustained global competitiveness.
XII
Land: Finite, Fragmented, Fragile, Fraught
Sanjoy Chakravorty
There is little doubt that land is India’s most important resource, and because of the rising demands on this finite and increasingly fragmented resource by a growing and urbanizing population, it is also the source of some of the most intense conflicts in the nation. Land is a fraught subject. Much of the recent attention to the subject has been focused on land acquisition. However, it can be argued that equally important and deep structural issues arise from the low income generated by agricultural land, the fragility of some land due to climate change and agricultural intensification, and the extraordinary land market that has emerged in the new millennium and created arguably the highest land prices in the world.
No one is immune from the need for land. This is especially because, just like us, 1.3 billion other Indians also need land. Half the labour force (and population) still derives some or all of its income from working on land. They, and much of the remaining half, the working and struggling classes, spend most of their lives and their savings, such as they are, looking for land and housing. The upper middle class uses the land and housing market as the primary location for parking its savings (investments); criminals focus most of their activities on land and housing (which are far more lucrative than the old standards—the smuggling and sex trades); and the political class derives much of the considerable (black) money needed to run parties and elections from the land market. At the same time, the old struggles of domination and alienation between majorities and minorities, the powerful and the marginalized, have not only not gone away, but may also have intensified. These are expressed through innumerable caste and tribal conflicts over land in various parts of the nation, most sharply in what is euphemistically called the ‘Maoist’ insurgency, but what truly is an Adivasi uprising for control of their traditional lands.1
These manifold and vital issues cannot be covered in this brief essay. One reason for being selective is the fact that despite its significance as a major element in India’s political economy, there is relatively little research on the subject, especially in the last three decades after the death of ‘land reform’ as a serious policy issue (discussed later). Some of the most interesting and consequential matters—such as criminality and corruption on land among agents from the underworld and politics (embodied, more and more often, in the same person, the ‘real estate politician’)—have not even been researched. It is the tiger in the room—everyone knows it is there, but is too scared to acknowledge it. Moreover, capable scholars tend to find that land as a research subject (like public administration and urban planning) provides less attractive career opportunities. Thus, despite land being the most constant subject on the minds of most Indians, it has hardly received serious analytical attention.
The remainder of this essay focuses on three subjects among the many that are important. First, it presents some basic information on land in India: how much there is, how much is cultivated, and most important, how fragmented it is. Second, land policies in India are discussed, focusing on ‘land reform’ in the first decades after Independence and ‘land acquisition’ in the last decade. Third, it outlines the basic condition of the land market, with some general information about prices. It argues that land prices in India have exploded in the new millennium and now are possibly the highest in the world. The essay ends with a brief discussion on the consequences of this new land market.
Distribution
India’s total land area is about 812 million acres.2 To put it in context, one acre (43,560 sq. ft.) is roughly the size of a soccer field, or sixteen tennis courts, or twenty-nine apartments of 1500 sq. ft. each. Of the total, in 2007–08, about 348 million acres (or 43 per cent) was under cultivation. The remaining land was forested, steep, urban, fallow, under water, or in use for transportation or other infrastructure. The most productive land is irrigated land.3 About 154 million acres or about 44 per cent of India’s cultivated land area is irrigated. Much of this is also land on which more than one crop is grown annually. These ‘multi-crop’ lands cover about 136 million acres or about 39 per cent of the land under cultivation.
According to the most recent agricultural census of 2010–11, the agricultural land in the country (not all of it is cultivated) covers about 395 million acres divided into 138 million discrete land parcels; an average of 2.86 acres per holding. This is the lowest average ever recorded. Data from previous agricultural censuses show that the average landholding size was 5.63 acres in 1970–71 (in the first census), 4.55 acres in 1980–81, 3.83 acres in 1990–
91, and 3.04 acres in 2005–06. In the forty years that the agricultural census has been undertaken, the average landholding size has decreased by about half.
To put it in context, while not the lowest in the world, the average size of agricultural landholding in India is among the lowest (Bangladesh, for instance, is lower). It is worth noting that the nationwide average of 2.9 acres masks the reality that small holdings (92 million of the 138 million land holdings) averaged just 1 acre per holding. In several major states, the average landholding size was less than 2.5 acres (which is roughly 1 hectare): Kerala (0.5 acres), Bihar (1 acre), Uttar Pradesh and West Bengal (1.9 acres each), and Tamil Nadu (2 acres); together, these states cover close to one-quarter of all the agricultural land in the country.
In contrast, the average landholding size in France is 110 acres; in the US, it is about 450 acres, and even more than that in much of South America. Largely as a result of this abysmally low size of landholding, income from cultivation is also low. According to the most recent National Sample Survey (NSS) assessment (70th round, 2012–13), the average monthly per capita income from cultivation for agricultural households was merely Rs 687 (or about Rs 41,000 per year for a household of five). This—the fragmentation of agricultural land—is the root cause of poverty in India.4 This point cannot be emphasized enough.
Data from the agricultural censuses show that there has been a massive growth in the number of marginal farms5 (tripled in forty years) and an equivalent decline in the area covered by farms larger than 10 acres (down to one-third in forty years). The condition is unambiguous and unrelenting: agricultural land in India continues to fragment into increasingly unsustainable sizes as a result of the continuing growth of the agricultural population, the intergenerational subdivisions of already-small holdings, the inability to move enough of the population into salaried jobs in the formal sector (instead of casual labour) or business or other non-farm occupations, and the inability of the urban sector to absorb low-skill rural labour (caused principally by the slow growth of urban jobs, the failure to create a labour-intensive manufacturing base, and the appalling quality of life for the urban poor).