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THE
NEW ECONOMY: GUEST COLUMN
New
Hype Old Hope
It is
time for B2B-back to basics-in the macroeconomy
By
Jairam Ramesh
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The
author is with the Congress party. The views expressed here are
personal.
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India
presents three
apparent macroeconomic puzzles. These puzzles need to be understood and
addressed for the new economy to be more than an enclave and to be on
a sustainable foundation.
First, all
countries as they develop see the share of agriculture fall in their respective
GDPs. India is no exception and now agriculture accounts for about 25
per cent of its GDP, down from around 55 per cent 50 years ago. But where
India is unique is that the share of agriculture in total employment has
not fallen equally sharply as has happened elsewhere. This share still
remains at a high two-thirds. It is this that explains much of rural poverty
in India.
Second,
all countries move from having a high share of agriculture in their GDP
to having an increasing share of industry. Thereafter, the share of the
services sector increases. Again, India is an exception. It is moving
from agriculture to services without going through and enjoying the fruits
of broad-based industrialisation. World Bank data shows that in 1998,
services value-added were 46 per cent of GDP in India and 33 per cent
in China. On the other hand, industry value-added in India accounted for
25 per cent of GDP and 49 per cent in China.
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Ninan
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Third, when
we take just the manufacturing segment of industry alone and examine its
structure, we see another Indian peculiarity. For our level of development,
we have a high share of machinery and chemicals in manufacturing value-added-42
per cent as compared to 37 per cent in China. Indeed, among all late industrialisers,
India stands out for not adopting what economists call the "textiles
first" strategy and it has paid the price. The share of manufacturing
in total employment instead of growing as in other countries has remained
virtually constant at 10-11 per cent. And unlike other countries, two-thirds
of our manufacturing employment is in tiny workshops as opposed to modern
factories.
What explains
these puzzles? India is a special case not because of history, geography,
culture or climate but because of its policies and its industrialisation
paradigm. The planning strategy formulated by Professor P.C. Mahalanobis
in the early 1950s gave us a high share of heavy industry. Import policy
in the pre-1991 period tilted the balance away from metal-bashing industries
in which India had a competitive advantage to capital-intensive feedstock-based
industries. The Gandhian legacy ensured that we followed policies for
the small-scale sector rooted neither in economics nor in technology.
And our labour laws have strongly discouraged employment expansion. Ironically,
it was Mahalanobis himself who wrote in 1969 that "certain welfare
measures tend to get implemented in India ahead of economic growth ...
the present form of protection of organised labour ... would operate as
an obstacle to growth and would also increase inequalities".
India must
get its macroeconomic structure right. We have to rediscover the virtues
of mass manufacturing. In a study just published in the Economic and Political
Weekly, Adrian Wood and Michele Calandrino detail a vision of widespread
modernisation of manufacturing brought about by diffusion of the new economy,
through greater openness to international trade and by wider expansion
of factory employment. India is already an attractive destination for
value-added services in manufacturing like research, development, engineering
and design. But it is mass manufacturing-textiles and garments, agro-processing,
consumer goods, toys, electrical appliances, sports goods, components,
sub-assemblies to name a few-that will create blue-collar jobs. The vision
must be bifocal keeping both the domestic and global markets in mind,
with both domestic producers and global companies using India as a production
and sourcing base. The obstacles are formidable, what with tight labour
laws, small-scale reservation, poor infrastructure, high import duties
on raw materials and intermediates and fiscal anomalies that make imports
of finished products cheaper. But these have to be tackled. Yashwant Sinha's
forthcoming budget should signal a changed mindset with the stress not
on Indian manufacturing but manufacturing in India.
To be sure,
services must be encouraged aggressively. Three segments alone, worker
remittances, software exports and tourism, will bring in about $16 billion
(Rs 73,600 crore) in 2000-01 and pay for about 30 per cent of imports.
Economists classify services as "invisibles" in the balance
of payments statistics. But their economic impact is anything but invisible.
India's large trade deficit (merchandise imports minus exports)becomes
a safe current account deficit only because of these earnings. But as
services grow, our pressing challenge is still to restore dynamism to
agriculture and buoyancy to mass manufacturing through new investments
and technology. This is the new economy's trishul.
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