No Short Cuts To Growth

Attempting to create a services-led model would merely invite a social catastrophe

NASSCOM says that services are to India what oil is to the Middle East. Morgan Stanley chief economist Stephen Roach says that what manufacturing is to China, services are to India. By services, these wise men mean tradable services, alias IT-enabled services, aka Business Process Outsourcing (BPO). You know well the arguments in favour of BPO----our low-cost, big-brained, English-speaking labour force making India the back office of the world. It could very well come true.

It's essentially export-led growth of services that the experts are looking at. They don't seem to hold the domestic economy in much regard. Probably they believe, with C K Prahlad, that it's only sectors of the Indian economy that have as little to do with the domestic sector (such as diamond polishing) that are globally competitive.

 

Why this pessimism? After all, the US economy is a shining example of growth led by domestic consumption. But then, the US economy is different. It's not as if incomes of most people in the US have shot up.

Till the mid-nineties, real wages were lower than where they were in the late seventies, and working class wives left home in droves to make both ends meet. No, the grease in the US economic engine is ever-growing debt.

Consumer borrowing has helped the US economy spend its way through the shortest recession in its history. With every bank worth its salt going in for retail lending, that model could be partly replicated in India. The trouble is -- is it sustainable?

What's wrong with the BPO-led model? Consider the fact that when we had agricultural growth, like in the Green Revolution, more crops meant not only more money for farmers, but more work for farm labourers. Witness the great seasonal migrations of landless labour from Bihar to Punjab.

The poorest people had a stake in that kind of growth. Next, consider manufacturing growth. The poor from Uttar Pradesh's impoverished villages flocked to Bombay for work in the mills. All the poor farm boy had to do was to buy a train ticket to the nearest town.

Now consider IT-led or BPO-led growth -- the only way the two-thirds of the population who live in the villages can profit from that is to wait for the benefits to trickle down. It's tough creating a mass market in these conditions. And if there's no mass market, the only way out is export-led growth.

On the other hand, consider China. It has been able to absorb its teeming masses in manufacturing, although serious problems do exist with its financial system. It initially liberalised agriculture, and the surplus created there was used to promote manufacture.

At the same time, it realised that, because of its large workforce, wages would rise only slowly. Consequently, if a mass market were to be created, there was no alternative to reducing prices. That's exactly what the Chinese have done, and their manufactures are the cheapest in the world.

Countries throughout the world have progressed from agriculture to manufacturing to services. Attempting to create a services-led model would merely invite a social catastrophe.