A new paradigm for creating jobs

It would be prudent to take up a few sectors initially, get the policy instruments right, and put in the critical mass of resources to achieve a self-sustaining inflexion point

The belief that we need higher GDP (gross domestic product) growth rates and employment generation would follow is crumbling. We have had high GDP growth rates but have not been creating the jobs that we need. The focus now has to be on job creation with GDP growth becoming the consequence.

This needs a fundamental change in our mindset. We need to move beyond the “Washington Consensus”, which we embraced with the economic reforms in 1991. The state should limit its role to maintaining sound macroeconomic fundamentals, providing better physical and social infrastructure, and improving the ease of doing business. Free markets would then deliver. The limitations of this approach are best seen if we compare ourselves with China. In 1991, we were on a par in per capita incomes and technology. They are now five times ahead. Instead of leaving market forces alone, the state in China steered industrialisation and success in exports, making China “the factory of the world”. The Chinese learnt and improved on the policies adopted by South Korea and Japan, which had succeeded earlier.

The Indian state now needs to assume greater responsibility for job creation. But for this, we have to first believe that the state can craft smart policies and implement them to get the private sector to invest in creating the jobs that we need. Leaving markets alone is no longer an option. We underperformed till 1991 by believing in centralised planning and the ability of the state to micro-manage the economy. After the reforms of 1991 we have underperformed by accepting that the state should not try to steer market forces to get desired outcomes.

There are two macro-level policy changes that are essential but not sufficient for success. First is the real exchange rate, which does not get the attention it deserves. There has been a consensus among economists in the world that an appreciation in the real exchange rate has an adverse effect on domestic value addition and job creation. India has been experiencing real exchange rate appreciation without an increase in productivity and exports that normally lead to a strengthening of the currency. This has been the result of the unusual combination of increasing remittances and large capital inflows into our stock markets. Our policy has been to let the markets determine the exchange rate. This has been hurting us. It is time for a change and for the Reserve Bank of India to intervene in the markets to prevent real exchange rate appreciation. The East Asians actually practised artificial depreciation to industrialise faster.

The second is to reduce the cost of doing business. A poor, developing economy constrained for resources resorted to pricing distortions in the pre-reform era through cross-subsidies and extremely high tax rates on “luxury” items. In an open economy these stubborn legacy distortions impose a cost disadvantage beyond the control of a firm. Our costs of logistics are about 50 per cent higher than those of our competitors. Ideally diesel should be in the low or at best medium slab of goods and services tax (GST). But it is taxed at almost twice the highest rate of GST. Reducing the cost of business requires greater priority than improving the ease of doing business. The production-linked incentive (PLI) scheme is the result of the acceptance that our higher costs need to be mitigated by budgetary support. Since all production cannot be supported by PLI, it would be better to take decisions needed to lower the cost of doing business if we are to succeed in getting private investment to create jobs. (Filling up vacancies in government is no solution to the real crisis.)

Then we need smart sectoral policies. First, identify labour-intensive sectors in manufacturing and services where we have the wage advantage to be major players in the global market. We have to give up the dated belief in the natural endowment of competitive advantage. In the contemporary high-technology global economy, firms create the competitive advantage. Governments can help firms to create this advantage. They can also pursue foreign direct investment in sectors where a large number of jobs would be created. To do this, pragmatic sector-specific policy instruments need to be evolved in consultation with market players. To illustrate, PLI for smart phones has resulted in Apple making India a manufacturing hub for the global market. In just a few years about 150,000 jobs have been created. The Apple example gives us an idea of our potential.

The key would be to put in place the measures that begin yielding results in the next two to three years. These would need to be specific to the sector selected. A policy instrument that is not in violation of our treaty obligations should not be off the table; provision of concessional finance, cheap land, public investment, government procurement with stipulation of domestic value addition, increase in import duties, etc. What would work for a breakthrough in garment exports would be different for what tourism needs. The Taj Mahal Hotel of Delhi is a good example of public-private partnership (when the phrase had not yet come into usage) where the New Delhi Municipal Council and Delhi Development Authority provided land and the building structure with the Tatas investing in finishing and furnishing and entering into a long-term revenue sharing contract. These were highly profitable investments for both sides.

It would be prudent to take up a few sectors initially, get the policy instruments right, and put in the critical mass of resources to achieve a self-sustaining inflection point. Spreading resources too thinly would be a mistake. After initial success, there would be greater state capacity and confidence for taking up more sectors. Success in the domestic market and in exports has to move in tandem as we are part of the globalised economy. Reverting to a protectionist and closed economy is neither desirable nor an option. A political-economy transition in favour of the producer who creates jobs and workers with their interests getting precedence over those of consumers and traders is essential for a breakthrough in job creation.

The writer is former secretary, DIPP, Government of India