Services can’t be the new manufacturing PDF Print E-mail
Monday, 12 June 2017 08:17
AddThis Social Bookmark Button

If global trend is factory-first-services-later, it is because unskilled workers are best absorbed in manufacturing

An ADB study links manufacturing employment & per capita income (PCI) – it found no economy that failed to cross 16% employment share achieved a PCI of $6,000, for instance

With very limited jobs creation, new narratives are being fleshed out. There is the Mudra-loans one which talks of converting job-seekers into job-creators—according to this, Rs 3.2 lakh crore loans have been given to 7.5 crore persons over the past three years; how unsustainable these tiny enterprises are is obvious. The second big narrative revolves around services—the world may have gone the manufacturing way, but India can create its own path since it has an advantage in services thanks to its brain-power. There is obviously scope for charting one’s own path, but to dismiss the global experience is a bad idea. Also keep in mind that many, though not all, of the problems that afflict Indian manufacturing—high land prices, poor infrastructure, poor labour laws, etc—will also hit a services-driven economy.

The primary reason why all countries have gone the manufacturing route before moving to services is simple. Manufacturing with its emphasis on repetitive tasks is ideally suited to absorb a largely illiterate and unskilled rural work force. As manufacturing grows and the work force gets both better paid and educated, this creates a market for services—how can a market for plumbers or shop-assistants come up if there aren’t enough people earning money to demand these services? Certainly, India can design mobile phones or even space shuttles, but with the bulk of the work force either illiterate or with just a few years in school, how many can be trained to become even shop assistants, much less teachers or health workers?

Interesting, in this context, is data put together by Metro Valley, a firm that is working on environmentally sustainable urban development. This shows that, in Asia, it was only when countries reached a per capita income of $6,000 (2005 dollars, not PPP) that they moved to services in a big way. Even more interesting is an ADB paper (goo.gl/ubJjG2) on whether it is possible to grow rich without a sizeable manufacturing base—it found there was practically no country that had high GDP without, at some point, having had a manufacturing employment share of 18-20%. It found, for instance, that “no economy that failed to cross 16% (18%, 20%) achieved a per capita income of $6,000 ($8,000-$22,000; $24,000-$30,000) … peak manufacturing employment shares in excess of 18%-20% strongly predict that an economy is rich; while peak shares below this threshold are near perfect predictors that an economy is not rich”. While the US employment share from manufacturing is 10.4% right now, it was 26.4% at its peak; India’s share is 12.2% right now, and was 14.8% at the peak.

As a result of India’s de-industrialisation, contributed to by liberalising imports before fixing domestic conditions especially for MSMEs, these units contribute to 7% of GDP and around 12% of employment as compared to, for Germany, 54% and 62%, respectively. In other words, within manufacturing, the biggest driver (MSMEs) is all but dead.

The reasons for this are well-known and centre around India’s poor infrastructure, labyrinthine laws that delay contract enforcement, high power costs, huge costs of land and capital and, worst of all, poor labour laws that don’t allow firms to grow. So while India’s labour costs are around half China’s, poor labour productivity means China’s cost of production is half India’s. With poor labour laws resulting in India having a lot more small firms than China, this ensures India can never get the same economies of scale.

What Metro Valley is proposing is SEZ-style Employment Zones (Urban and Rural ones) which over, say, 3,000 acres for the urban ones will offer plug-and-play factory areas with top-class infrastructure, dormitories for workers, worker cafeterias, smart electricity grids, effluent/sewage disposal, warehousing, railway links, etc. The idea is to plan this as a PPP with the government as a shareholder, and offer factory space on monthly rentals as low as Rs 4 per square foot—factory land is a big cost for MSMEs, along with costs for electricity—and, as in the case of SEZs, the labour laws will be more flexible, though with enough financial safeguards for employees. If things go to plan, urban industrial slums will be a thing of the past, industrial pollution will fall dramatically and, for the MSMEs, it will be a chance to work in an environment with top-class infrastructure which is reasonably priced.

Whether the plan will work or not needs to be studied, but what is clear is that services employment cannot substitute for industrial jobs till the work force is not a lot more educated as well as skilled, and till the economy reaches a certain size or level of demand. And industrial employment cannot be created unless the pain points of MSMEs are taken care of, and these include poor infrastructure, rigid labour laws and high cost infrastructure—a PPP, where the government chips in with land, apart from easing various laws, is the only way to address this.



You are here  : Home Miscellaneous Services can’t be the new manufacturing