Economist Arvind Panagariya has written an open letter to Rahul Gandhi, on the edit page of today’s edition of The Times of India. In this piece Panagariya answers Gandhi’s query to Indian industrialists, as to why India has to import ganeshas and rakhis from China and can’t produce them on its own.
Panagariya’s answer is very simple. India sucks at labour intensive manufacturing. As he writes “our top industry leaders are very comfortable doing what they do: invest in highly capital-intensive sectors such as automobiles, auto parts, two wheelers, engineering goods and chemicals or in skilled-labour-intensive goods such as software, telecommunications, pharmaceuticals and finance. The vast labour force of the nation stares them in the face but they look the other way.”
This is the major reason as to why India cannot compete with China in manufacturing rakhis and ganeshas. But some historical context also needs to be built in, in order to completely appreciate India’s lack of competitiveness on this front.
Prasanta Chandra Mahalanobis founded the Indian Statistical Institute in two rooms at the Presidency College in Calcutta (now Kolkata) in the early 1930s. He became close to Jawahar Lal Nehru, the first prime minister of India, and was appointed as the Honorary Statistical Advisor to the government of India.
As Gurcharan Das writes in India Unbound –From Independence to the Global Information Age “Mahalanobis had a profound effect on Nehru’s thinking, although he held no offcial position. His title, “Honorary Statistical Advisor to the Government of India,” certainly did not reflect the extent of his influence. His biggest contribution was the draft plan frame for the Second Five Year Plan…In it he put into practice the socialist ideas of investment in a large public sector (at the expense of the private sector), with emphasis on heavy industry (at the expense of consumer goods) and a focus on import substitution(at the expense of export promotion).”
Hence, big heavy industry became the order of the day at the cost of small consumer goods. The alternative vision of encouraging the production of consumer goods was put forward as well. As Das writes “It belonged to the Bombay (now Mumbai) economists CN Vakil and PR Brahmanand. It was neither glamourous nor as technically rigorous as Mahalnobis’s, but it was more suited to the underdeveloped Indian economy. Its starting point was that India lacked capital but had plenty of people…The thing to do was to put these people into productive work at the lowest capital cost. The Bombay economists suggested that we employ the surplus labour to produce “wage goods,” or simple consumer products – clothes, toys, shoes, snacks, radios, and bicycles. These low-capital, low-risk, business would attract loads of entreprenurs, for they would yield quick output and rapid returns on investments. Labour would produce the goods it would eventually consume with the wages it earned in producing the goods.”
But Mahalanobis’s vision of an industrialisted India sounded a lot sexier to the politicians led by Nehru who ran this country and hence, won in the end.
The Indian industrialists had done their cause no good by drafting and accepting the Bombay Plan in 1944. “In 1944, India’s leading capitalists had come together in Bombay and crystalllized their vision for a modern, independent India. They inclued the giants of Indian business – JRD Tata, GD Birla, Lala Shri Ram, Kasturbhai Lallabhai, Purshotamdas Thakurdas, AD Shroff and John Mathai – they produced what came to be known as the Bombay Plan,” writes Das.
The Bombay Plan put forward the idea of rapid and self reliant industrialisation of business in India. At the same time the businesses were willing to accept “import limitations on the freedom of private enterprise”. “Even more disastrous was their acceptance of a vast area of state control – in fixing prices, limiting dividends, controlling foregin trade and foreign exchange, in licensing production, and in allocating capital goods and distributing consumer goods. Without realising it, the Indian capitalists had dug their graves,” writes Das.
Hence, the government became the mai baap sarkar which gave out licenses for everything. And the Indian businessman if he had to survive had to become a crony capitalist to get these licenses. This was initiated during the regime of Jawahar Lal Nehru and perfected during the rule of his daughter Indira Gandhi.
The orientation of the Indian government was towards setting up big industries. What they did not want to set up themselves, they would give licenses to the private sector. And in order to get licenses a businessman had to be close to the government.
This ensured that both the government as well as the private sector set up and continue to set up capital intensive businesses. This is reflected in the slow growth of the number of workers working in private sector etablishemnts with ten or more people. As Jagdish Bhagwati and Arvind Panagariya write in their book India’s Tryst with Destiny – Debunking Myths that Undermine Progress and Addressing New Challenges. “The number of workers in all private-sector establishments with ten or more workers rose from 7.7 million in 1990-91 to just 9.8 million in 2007-2008. Employment in private- sector manufacturing establishments of ten workers or more, however, rose from 4.5 million to only 5 million over the same period. This small change has taken place against the backdrop of a much larger number of more than 10 million workers joining the workforce every year.”
Hence, an average Indian business starts off small and continues to want to remain small. “An astonishing 84 per cent of the workers in all manufacturing in India were employed in firms with forty-nine or less workers in 2005. Large firms, defined as those employing 200 or more workers, accounted for only 10.5 percent of manufacturing workforce. In contrast, small- and large-scale firms employed 25 and 52 per cent of the workers respectively in China in the same year,” write Bhagwati and Panagariya.
What is true about manufacturing as a whole is also true about apparels in particular, a very high labour intensive sector. Nearly 92.4% of the workers in this sector, work with small firms which have 49 or less workers. In comparison, large and medium firms make up around 87.7% of the employment in the apparel sector in China.
The labour intensive firms in China ensure that they have huge economies of scale. This drives down costs and explains to a large extent why India imports ganesha idols and rakhis from China. Everyone wants a good deal. And China is the country providing the good deals and not India.
A major reason for Indian firms choosing to remain small is the fact that the country has too many labour laws. Since labour is under the Concurrent list of the Indian constitution, both the state government as well as the central government can formulate laws on it. As Bhagwati and Panagariya point out “The ministry of labour lists as many as fifty-two independent Central government Acts in the area of labour. According to Amit Mitra(the finance minister of West Bengal and a former business lobbyist), there exist another 150 state-level laws in India. This count places the total number of labour laws in India at approximately 200. Compounding the confusion created by this multitude of laws is the fact that they are not entirely consistent with one another, leading a wit to remark that you cannot implement Indian labour laws 100 per cent without violating 20 per cent of them.”
This explains to a large extent why Indian businesses do not like to become labour intensive and choose to stay small. The costs of following these laws are huge. As Bhagwati and Panagariya write “As the firm size rises from six regular workers towards 100, at no point between these two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra cost of satisfying the laws.”
In fact, Bhagwati and Panagariya narrate an interesting anecdote told to them by economist Ajay Shah. Shah, it seems asked a leading Indian industrialist about why he did not enter the apparel sector, given that he was already making yarn and cloth. “The industrialist replied that with the low profit margins in apparel, this would be worth while only if he operated on the scale of 100,000 workers. But this would not be practical in view of India’s restrictive labour laws.”
This is the answer to Rahul Gandhi’s question of why India imports rakhis and ganeshas from China. Like is the case with almost every big problem in this country, even this is a problem created by his ancestors.
The article originally appeared on www.firstpost.com on November 18, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)