While the overall growth of the Indian economy may be relentless, it has not been so fortuitous in terms of job creation. In response to the country’s need for close to 10 million new jobs annually for its growing youth population, several economists have claimed that focusing on services is the way to go. The claim is that China is too dominant and efficient a competitor in manufacturing, and thus that ship has sailed.
A nation of 1.4 billion, however, cannot afford the luxury of focusing on just one thing and can, in fact, profitably take on a wide range of economic activity. This dilemma raises questions that have long nagged the Indian development story – What should the primary drivers of job creation in the coming years be in India? How best to harness the twin potentials – the demographic potential of the rapidly increasing young labour force, and the as yet untapped potential of urbanisation? Can manufacturing bring the two together by playing a more significant role in the next stage of economic development?
An old quote, usually sourced to Gandhi, notes that villages are the cradle of Indian civilisation. But then, one could say, nobody should stay in the cradle forever. Cities, with their dense interactions, cross-fertilisation of ideas, and intense collaboration on a massive scale, help bring to the fore the vibrant possibilities of specialisation, innovation and economic development. Urbanisation is both a consequence of, and a further boost to, the forces that drive economic growth. Nearly everywhere, the twin forces of urbanisation and manufacturing, in the wake of rural-urban migration, have been both the initial impetus to job creation, and the transitional step in economic development.
In every country, urban agglomerations have been the workhorses of the economy. It often starts with manufacturing clusters; later, when manufacturing moves out to peri urban and other areas, the main cities turn into intricate hives of support services and production and supply chains, on the one hand, and as the main source of demand, on the other. The production and exchange of goods, services and ideas, made possible in a dense, interactive and productive environment feeds the economic engine, further drawing people into its orbit. The urban world is a ceaseless, dynamic cycle of life and livelihood.
To assess the role urbanisation can play in development, one needs to recognise that Indian cities are burdened by two specific legacies. The first has a colonial origin and concerns the location of the major urban centers of modern India. Ancient and medieval nations and empires were primarily land-based. This was true of the military campaigns of Alexander of Macedonia across the Eurasian heartland, empire building by the Mauryas in the Indian heartland, and the territorial conquests of Genghis Khan.
Many, if not most, of the major cities of the time were in the hinterland, controlling access to strategic land assets, and straddling vital trade routes and rivers. Both the Mughal empire in India and the successive Chinese dynasties were, by and large, inward looking and oriented to their vast hinterlands. Colonialism, however, was a seafaring enterprise, and the rise of colonial powers led to the development of large coastal cities such as Bombay, Cape Town, Rio and Hong Kong, which served both as the locus of colonial power and as entrepôts for trade.
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The geographical distribution of major cities in pre-colonial versus colonial/post colonial India and elsewhere serves as a vivid illustration of how wrenching economic and political changes can affect the urban landscape. Thus appeared the relatively recent Bombays, Calcuttas and Hong Kongs, displacing the Agras and the Kaifengs (one of many capitals of ancient and medieval China).
Cities, though, are resilient, living historic monuments and while their prospects may wax and wane, even neglected cities do not wither away under the churning and dislocating impact of modern economic development. That path dependence and history still matter is borne out by Delhi and Beijing, both historic hinterland cities, which have retained their importance throughout the colonial and contemporary periods. Urban growth in the colonial period was marked by the pattern of trade and linkages of the colonial periphery (say India) with the core (Britain), rather than by any organic economic process from within. It is this pattern that has left scattered across India a series of second and third tier cities that present both a challenge for urban development, and an opportunity to wean people and resources away from the megapolises and their diseconomies of agglomeration. While megacities get most of the attention, the second and third tier cities are frequently the anonymous workhorses of an economy; in fast-developing economies their step-city status obscures their potential to be drivers of economic growth and urbanisation.
The US provides an interesting example of “alternative urban centers”; in 33 states in the US, the state capital is in a second-tier city – Albany, Sacramento, Carson City, Salem, Olympia, among others, which has resulted in the geographic separation of the economic and political seats of power. The location choice processes were idiosyncratic, with differing compulsions and histories, but they did help in creating an alternative, Greenfield focus of urban agglomeration and job creation. Is there a lesson here about how to promote alternative urban centers to the main metros, given that many Indian states have just one congested city serving as the economic, political and cultural capital, all rolled into one?
There is a second legacy of a somewhat different nature with which India must grapple, and which determines overall constraints of policy. Unlike other countries with a democratic form of government, democracy in India preceded both full blown industrialisation and urbanisation. Most countries in Europe and the US reached India’s present-day level of urbanisation (under 40%) in, or before, the second half of the 19th century. The UK and the US developed into manufacturing and global powers at a time when large segments of their population, including men without property, women and minorities, did not have the right to vote.
In India, the authorities and the political class must continuously reconcile, at least to some extent, the needs of the poorest and the most dispossessed with the demands and unequal consequences of urbanisation and industrialisation. Civil society participation and political empowerment, therefore, play a much larger role in shaping Indian urbanisation and economic development than they did in a nascent democratising Europe or US. In pursuit of policies related to urbanisation or job creation riding roughshod over public opinion is usually not an option.
But while urbanisation is a driver of economic growth where, concretely, can the jobs come from? How can the push of migration from rural to urban areas be complemented by the pull of job creation in the latter, and through which sectors of the economy?
Those who advocate a service-based growth strategy, including tradable services, underplay the problems with the nature of service jobs. Studies of developed countries, all of which are predominantly service oriented, reveal several issues with the sector (barring software and internet related services), which can weigh the economy down. Many services are hampered by slow productivity growth (which is vital for economic growth and increase in standards of living); indeed, the very concept of productivity underscores the futility of applying criteria from “economics” to human activity in some service sectors (how to interpret productivity of service personnel in hospitality, or bus drivers, or people in the arts and creative fields? Faster driving? Quicker painting? Speedier singing?)
While some of the tradable services, especially in specialised high-end segments such as chip-design, software and AI, may not be afflicted by the curse of low productivity, there is a limit to the number of cutting-edge specialists our education system can produce, especially at the masters and PhD level. Certainly, we should exploit every available niche, but these high-end tradable services jobs will make barely a dent in the problem of job creation for the nation as a whole.
In addition to the difficulty of scaling up, focusing on creating jobs through the export of services poses other kinds of problems. Services are “designed to market” to a greater degree than are goods. An importing country often needs customisation of imported services unlike imports of standardised goods. Exporters of services have to deal with institutional and cultural specificity, as well as the heavy arm of regulation of the importing country. All these factors lead exporters to create jobs abroad, and put considerable constraints on the potential of services, or services exports, to be the main driver of job creation domestically, as the experience of services dependent economies has shown.
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Finally, many services, such as medical care, environmental services, transportation services and software require sophisticated manufactured goods for their delivery. Manufacturing and services are therefore inseparable, and it is difficult to sustain competitiveness in manufacturing-dependent services without commensurate quality in complementary manufacturing sectors. Indeed, you could say that an advanced services economy must, above all else, be an advanced manufacturing economy.
The need to work out a joint strategy of urbanisation and manufacturing is critical. While the benefits of urbanisation are self-evident, manufacturing also comes with a range of blessings. They include – significantly lowered vulnerability to external shocks; the possibility of large scale, which is important for, and compatible with, a country like India; the critical importance of having supplies of tangible goods available within a few hours in moments of crises – whether natural or human made; great spillover benefits of innovation, useful even for the services sector; and the possibility of rapid productivity improvements, without which neither GDP nor standards of living can rise.
How can we tap into the strengths that we do have – our vast human resources, skill sets, geography, and location, to develop manufacturing with Indian characteristics? We can do so by focusing on many sizeable niches of tangible goods production (light industry, sub-sectors in industrial goods production, food processing, vehicle manufacturing and green manufacturing clusters, rejuvenation of those sectors in which India traditionally had the competitive advantage and where China and other nations’ advantages are minimal), in addition to our competitive tradable services sectors. We must also integrate industrial policy and vocational training, an indispensable prerequisite for creating manufacturing jobs.
The bogey of competition with China should not keep India from leveraging the full potential of manufacturing. I have been told repeatedly over the last 15 years by senior executives in China, of both foreign multinationals and Chinese companies, that they were looking at India and Vietnam as the main alternative destinations for manufacturing investments. That ship is still in the harbour, given our specific advantages – a large, young, energetic, labour force; a more strategic location vis-a-vis Europe, Middle East and Africa; reputation as a benign power across geopolitical divisions; the potential for scale at par with China on a far more compact, evenly populated landscape, and a coastline geography that opens out to the East and West.
The question, of course, is not whether we focus on manufacturing or services, but which sectors and occupations, given today’s global economic climate and the nation’s needs, are most opportune and strategic to pursue. India is already the third largest economy in the world going by purchasing power parity. More transformative growth lies ahead. Ultimately, the arithmetic is simple – GDP growth comes from an increase in the number of people employed together with the growth in output per employed person (productivity). Tapping into the potential of manufacturing and urbanisation would lead the country to a higher, more sustainable growth path and generate a trickle-up tsunami by stimulating broad based demand.
Ashok Bardhan is an independent economist.
