On a path of rapid de-industrialisation

Deccan Herald
By Professor  

There has hardly ever been a time when government statistics have been subject to such critical scrutiny and scepticism. The recent “back series” debate on comparing GDP numbers of the UPA and NDA regimes reflect an illogical effort to politicise, rather than understand, the underlying trends in growth numbers, which is the actual purpose of collecting and analysing GDP data.

Going beyond the issue of the method used in calculating the back series per se, there is an interesting thread of evidence on India’s growth trajectory that points at a much deeper, structural concern. On a closer historical analysis of aggregate growth numbers, one can see a rapid degree of deindustrialisation, structurally altering the growth trajectory.

With a slowing manufacturing sector, which is measurable in terms of its contribution to both total output and value-added, a rapid deindustrialisation wave is already imposing significant economic and social costs (in the form of loss of employment, higher wage inequality). Most of these observed effects are also likely to worsen over the coming years, unless a miraculous coordinated effort revives India’s ailing manufacturing sector (particularly the medium and small-scale manufacturing enterprises, or MSME).

Deindustrialisation, in simple terms, refers to a waning effect of the manufacturing sector’s impact on a nation’s growth via contributions to processes of employment generation, wage growth mobility and total output added (measurable via GDP). In conventional economic wisdom, manufacturing growth over a period of time presents itself in an inverse U-shaped trajectory, where long-term deindustrialisation is seen as a natural phenomenon as the average income of citizens rises, allowing service growth to pick up.

On the other hand, a rapid, premature deindustrialisation phase (loss in employment in manufacturing due to shift in production patterns), observed when average income levels are low in a developing country, signals a disconcerting scenario with long-term effects.

In the Indian context, differential processes of technological adoption have adversely affected relative prices of manufactured products which, in turn, has impacted its domestic and export markets as well. Some recent data depict a historical pattern of deindustrialisation seen across national and state levels.

The evidence of the overall decline in manufacturing’s contribution to total output and employment generation is striking for a few reasons. First, controlling for the rise in India’s demographic dividend’ (increasing share of youth in overall employable category of citizens), the observed decline is only likely to get worse in years to come as more capital intensive methods are incorporated into manufacturing segments, thereby reducing wages and labour productivity.

Second, looking at the aggregate numbers on India’s manufacturing growth performance since the 1990s, calling India’s manufacturing plight as ‘premature deindustrialisation’ may be off the mark. In fact, we are currently transitioning from a state of limited industrialisation into a state of non-industrialisation.

On analysing the state-level scenario of manufacturing performance since 2010, in some states like Tamil Nadu, Haryana and Himachal Pradesh, the employment shares show an upward trend, while others (say, West Bengal, Delhi, Maharashtra) exhibit no movement or strike downwards. As we dig deeper, much of the same is true on the state-level contribution of manufacturing in their total output shares (and GSDP levels).

Gujarat emerges as the only Indian state where manufacturing growth (in terms of value-added) touched above 20% (22.7% in 2011), close to the levels achieved by East Asian countries. In fact, politically, Gujarat’s manufacturing strengths allowed Narendra Modi to significantly leverage his pro-business and pro-manufacturing position during the 2014 general elections. Nevertheless, since 2014, the aggregate national manufacturing growth numbers and their contribution to total output and employment levels have consistently fallen.

The current plight of India’s manufacturing base, in a post-demonetisation and GST landscape, has been further punctured by the public sector banking crisis. Most MSMEs depend on public sector banks for credit. Worse, the slowdown in demand for credit from the MSMEs is a cause of great worry.

From a policy perspective, rehabilitating low-skilled manufacturing appears quite unachievable at this point. There is an effort to focus on skill-intensive manufacturing-led growth (Make in India). But that has so far not yielded results.

One reason for this is that reforms in education have not happened in conjunction with the needs of industry. As a result, wage inequities, loss of employment opportunities (for low-skilled and medium-skilled manufacturing) continue to widen, warranting a more coordinated policy effort between the government, the private enterprise and the banking system.

Lessons on coordinated efforts between these stakeholders could be derived from countries like Vietnam, Thailand and (to some extent) Bangladesh for states across India to carve out their own manufacturing growth path for improved socio-economic convergence.