Why Skill India is as Important as Make in India


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Organised retailing is expected to be a big job creator in the days to come. A recent report brought out by National Skill Development Corporation(NSDC) suggests that 5.6 crore people will be working in the sector, by 2022. The earlier estimate was around 1.8 crore.

Estimates made by NSDC suggest that organised retailing employed around 3.86 crore in 2013. This number is expected to increase to 4.51 crore in 2017 and finally to 5.6 crore in 2022.

The question is will this happen? We will get around to answering that later in this column. Essentially, countries escape from being under-developedthree ways: geology, geography and jeans. Jeans is basically a code for low-skilled manufacturing.

As the Economic Survey of 2014-2015 points out: “In recent years West Asia, Botswana and Chile, and further back in time Australia and Canada, exploited their natural resources endowed by geology to improve their standards of living. Some of the island successes (Barbados, Mauritius, and others in the Caribbean) have exploited their geography by developing tourism to achieve high rates of growth.”

On the other hand, the East Asian countries (China, Thailand, Indonesia, Malaysia etc.) got out of being underdeveloped by concentrating on jeans i.e. low skill manufacturing. The initial fillip to economic growth came from these countries relying on low-skilled manufacturing. With time, they diversified into more sophisticated manufacturing.

India has missed the low-skill manufacturing revolution, for sure. Information technology was our great big hope. But the sector needs extremely skilled individuals, and thus has its limitations in creating sustained as well as wide-spread economic growth.

Also, it is worth pointing out here that no country in the world has escaped poverty by using skill-intensive activities as the launching pad for economic growth. One of the major criteria for creating rapid, sustained and wide-spread economic growth is the alignment of the fast growing sector with the comparative advantage of the country.

In the Indian case, this happens to be the availability of labour. As the Economic Survey points out: “To ensure that expansion occurs and the benefits of fast-growing sectors are widely shared across the labour force, there should be a match between the skill requirements of the expanding sector and the skill endowment of the country. For example, in a labour abundant country such as India, the converging sector should be a relatively low-skilled activity so that more individuals can benefit from convergence.”

In other countries which have had abundant labour, low-skill manufacturing has put the labour to work, incomes have gone up and sustained economic growth has been created. Due to various reasons, from focus on public sector enterprises to a surfeit of labour laws leading to firms which do not grow a certain size, India has missed out on the low-skilled manufacturing revolution, which has pulled many East Asian countries out of poverty.

The manufacturing sector as it has developed in India has been highly skill intensive. As Amrit Amirapu and Arvind Subramanian write in a research paper titled Manufacturing or Services? An Indian Illustration of a Development Dilemma: “It turns out that registered manufacturing is indeed a sector that is relatively skilled labour intensive…The share of workers with at least secondary education is substantially higher in registered manufacturing than in agriculture, mining or unregistered manufacturing and also greater than in several of the service subsectors. In some ways, this should not be surprising. High labour productivity in this sector is at least in part a consequence of higher skills in the work force. What it does suggest, however, is that registered manufacturing does not really satisfy requirement number four. The skill intensity of the sector is not quite aligned with India’s comparative advantage.”

Given this, Indian manufacturing the way it is currently structured is not going to solve India’s jobs problem. What India needs are jobs for the low-skilled. The current Modi government has tried to tackle the lack of jobs in India, by launching the Make in India programme.

Further, the question is, will the services sector, of which organised retailing is a part, be able to generate enough jobs. Estimates suggest that nearly one million individuals are entering the workforce every year. And this is expected to continue for a while.

Does the services sector have the potential to put low-skilled Indians to work? As Amirapu and Subramanian point out: “Services in aggregate are no less skill-intensive: on average, 78% of workers in the service sector have at least a primary education (77% in registered manufacturing), and 48% have at least a secondary education (43% in registered manufacturing). Furthermore, a large number of service subsectors – including 1) Banking and Insurance, 2) Real Estate and Business Services, 3) Public Administration, 4) Education, and 5) Health and Social Services – have significantly higher educational attainment (90% or more of workers have at least primary education) than registered manufacturing. What this implies is that many service subsectors (precisely the high productivity, high growth subsectors, for the most part), have a limited capacity to make use of India’s most abundant resource, unskilled labour.”

The NSDC report on organised retailing also talks about lack of skill in the organised retailing sector. Hence, if the services sector in general and the organised retailing sector in particular, have to create jobs in India, the skill-set of Indian labour needs to improve in the years to come.

As the Economic Survey points out: “Sustaining a skill-intensive pattern on the other hand would require a greater focus on education (and skills development) so that the pattern of development that has been evolving over time does not run into shortages. The cost of this skill intensive model is that one or two generations of those who are currently unskilled will be left behind without the opportunities to advance. But emphasising skills will at least ensure that future generations can take advantage of lost opportunities.”

Further, if a skill-intensive pattern of development has to be followed, what it means is that the Skill India programme is as important as the Make in India programme. As the Economic Survey points out: “What the analysis suggests is that while Make in India, which has occupied all the prominence, is an important goal, the Prime Minister’s other goal of “Skilling India” is no less important and perhaps deserves as much attention. Make in India.”

Disclosure: The basic idea for this column came after reading Akhilesh Tilotia’s research note Forecasts of fewer jobs dull demographic sheen. Tilotia works for Kotak Institutional Equities and is also the author of The Making of India.

The column originally appeared in the Vivek Kaul Diary on June 13, 2016

Govt Fixing Steel Prices: Is Make in India Just a Slogan?

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On February 5, 2016, the directorate general of foreign trade imposed a minimum import price(MIP) on 173 steel products. The prices range from $352 per tonne to $752 per tonne of steel.

The MIP has been imposed in order to counter the dumping of cheap Chinese steel and should help the Indian steel companies. Also, the move should help public sector banks as well.

Why do I say that? As the RBI Financial Stability Report released in December 2015 points out: “A risk profile of select industries as at end September 2015 showed that iron and steel, construction and power industries had relatively high leverage as well as interest burden.”

The report further pointed out: “Five sub-sectors viz. mining, iron & steel, textiles,  infrastructure and aviation, which together constituted 24.2 per cent of the total advances of scheduled commercial banks as of June 2015, contributed to 53.0 per cent of the total stressed advances.”

What does this tell us? Steel companies have borrowed a lot of money from banks which they are now finding difficult to repay. The only way they can repay these loans is by ensuring that their sales and profits continue to grow. And that is not possible if cheap steel from China keeps hitting the Indian shores.

The government has tried to correct this by slapping an MIP on steel, in the process making imported steel more expensive. The idea is that anyone who needs steel within India, buys from Indian companies, instead of importing cheaper steel.

The question is does this make sense? It does for the steel companies. But not for the overall Indian economy as a whole. Before I get into explaining this, allow me to discuss what is known as the broken window fallacy. The French economist Frédéric Bastiat discusses this concept in his 1874 book That Which is Seen, and That Which is Not Seen.

Bastiat talks about a shopkeeper whose rather careless son has broken a glass window of his shop. As Basitat writes: “If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?

The point being if window glasses were never broken what would glaziers ever do? As Basitat writes: “Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it, I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But what about that which is not seen? “It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented,” writes Bastiat.

What is Bastiat trying to tell us here? When we are analysing economic issues, we tend to look at that which is seen and tend to ignore that which is unseen. In the case of minimum import price being fixed on steel imports, it means looking only at the benefits that this would bring to the Indian steel companies.

Stock analysts have labelled this move of the government as a “gamechanger” for the steel companies and have recommended that investors buy these stocks.  Now that is the ‘seen’ part of it, if we were to apply Bastiat’s broken window fallacy to this situation. But what about the unseen?

As Henry Hazlitt writes in Economics in one Lesson: “The tariff has been described as a means of benefitting the producer at the expense of the consumer. In a sense this is correct. Those who favour it only think of the interests of the producers immediately benefited by the particular duties involved. They forget the interests of the consumers who are immediately injured by being forced to pay these duties.”

A tariff is essentially a tax or a duty that is paid on imports of exports. In the case of the minimum import price on steel imports, no duty has been fixed or tax has to be paid. But given that the minimum import price will force consumers of steel to buy steel at a higher price from Indian steel companies, it basically means that the companies are being forced to pay more than they would have, if this move had not been made. In that scenario they could have simply imported cheaper steel, which they cannot do now. Hence, to that extent even an MIP is basically a tariff.

Steel is an input into many different sectors from automobiles to real estate to engineering to construction and infrastructure. Hence, if the price of steel goes up, companies operating in these sectors need to pay more when they buy steel. And this in turn will impact the prices of the consumer goods that these companies produce and the physical infrastructure that they create. This is the unseen negative that people are not talking about.

Take the case of engineering goods, which is as of now, India’s number one export. As TS Bhasin, Chairman of EEPC India, an engineering goods exporters’ body, told The Hindu: “The MIP will raise the cost of raw materials for engineering products by about 6-10 per cent. This will severely hurt engineering exports that have already declined by 15 per cent in the first nine months of this fiscal.” How will Indian engineering companies compete globally in an environment of slow global economic growth, if steel is made expensive?

Further, this also leads to the question as to how serious is the government about “Make in India”. Is it just a slogan? Or is it more than a slogan? If it is more than a slogan then there is no way that the government should be fixing steel prices and in the process increasing the price the consumers of steel pay.

Also, why is the government just trying to protect steel producers. How about retail companies which have been bearing the onslaught of ecommerce companies selling goods at significantly lower prices, backed by foreign venture capital and private equity money?

As Anindya Banerjee, analyst at Kotak Securities puts it: “The offline retailers have been long complaining how ecommerce companies, funded by cheap dollars/euros/yen of yield hungry bubble vision private investors, is undercutting them in every consumer product. They claim that these ecommerce companies are destroying hard working mom and pop stores and their employees, by resorting to unsustainable discounts. So why is the government not imposing a minimum retail price(MRP) for all products sold online. This MRP should be set at a price which is above the offline retail price. I presume my fellow citizens won’t mind paying more for their stuff they buy. After all they are supporting the economy, aren’t they?

Now that is something worth thinking about. And if something like that were to happen, we would be finally back to the eighties. My growing up years will  be back again.

The column originally appeared in The Five Minute Wraupup on Equitymaster on February 10, 2016

The success of Make in India will lead to more jobs in services and not manufacturing

make in india
This column is essentially an extension of the column Devanshu Sampat wrote for The 5 Minute Wrapup on November 13, 2015. In this column Sampat talks about the challenge automation will create for the Make in India programme.

As he writes: “The costs of robots fall every year. At the same time, their complexity is on the rise. It won’t be long before cheap robots will be catering to the needs of a wide range of manufacturing firms.”

This Sampat believes “will prove to be major challenge to the government.” “Will ‘Make in India’ be successful if a large number of people remain unemployed despite a manufacturing revolution?” he asks.

As I have said in several previous columns, nearly 13 million Indians are expected to join the workforce every year. This trend will continue up to 2030. Given this, the government needs to create an environment in which jobs are created, in order to accommodate this workforce at a fast speed.

With automation and robots taking over manufacturing the number of new jobs being created will come down. And this will mean trouble for the Make in India programme given that ultimately it’s a job creation programme.

So what is the way out? The socialist mind-set of India’s politicians will look at it in a way where they may want to make it mandatory for businesses to hire and employ a certain number of people depending on the size of a firm.

To be honest I haven’t heard of such suggestions being made up until now but I won’t be surprised if such suggestions are made in the years to come, if the Make in India programme starts to fail due to automation and various other reasons.

Also, it is worth remembering here that any businessmen will automate if he can. A businessman is a capitalist and he works for ‘more’ profit and if there is an opportunity to make more profit he will try to cash in on it. And stopping that behaviour isn’t the best possible way to operate.

Further, given India’s surfeit of labour laws which make the business environment even more challenging, automation may be the best way out for any businessman.

Having said this, the question that arises here is that why should we expect the manufacturing industry to solve India’s employment problem? This is a fair question to ask. A straightforward answer for this lies in the fact that every country that has gone from being a developing country to becoming a developed one, has gone through a manufacturing revolution. India is possibly an exception to this, given that we have had a services revolution before a manufacturing one.

Nevertheless, even with automation we should not be so worried. TN Ninan in his book The Turn of the Tortoise—The Challenge and Promise of India’s Future offers a very interesting perspective on the basis of his interactions with some leading industrialists.

Take the case of RC Bhargava, the chairman of Maruti Suzuki, India’s leading car maker. As Ninan writes: “The chairman of Maruti Suzuki says, in response to a question on the greater automation that exists in newer car plants, that car factories should not be expected to solve India’s employment problem.”

So what about job growth? “If job growth is to come, according to Bhargava, it will have to be in associated areas—manning petrol pumps or maintaining and repairing vehicles, which are service sector jobs and don’t compare with high paying factory jobs.”

Bhargava also points out that every third car bought in India is not driven by the owner but a hired driver. Data from the Society of Indian Automobile Manufacturers (SIAM) points out that 2.6 million cars were sold in India in 2014-2015. If every third car is being driven by a driver as Bhargava talks about, then that means 8.5 lakh new jobs for drivers were created just in 2014-2015. And that is a substantial number.

The broader point is that even though manufacturing jobs may not grow, the setting up of new factories will lead to an increase in jobs in services. As Ninan writes: “The ratio of non-factory to factory jobs in the car industry is said to be 7:1. The head of another car company puts the figure at 16:1. Other manufacturers of engineering goods endorse the view that shop-floor employment in the engineering goods sector is unlikely to grow rapidly because of steadily increasing automation as well as gains in productivity.”

Ninan also recounts an interaction with Jamshyd Godrej, chairman and managing director of Godrej & Boyce, the diversified engineering company. Godrej “recalls a time early on when the majority of his company’s employees worked in the factory.” Now, the number of employees working outside the factory are four to five time the number of employees working in the factory.

The moral of the story, as Ninan puts it is “Success in quite a lot of manufacturing sectors, therefore, leads to employment growth in services, not manufacturing. Not that it should matter, since incomes will be better in both than in agriculture.”

In this scenario, it is important that the government realises that the success of Make in India, should not depend on the number of manufacturing jobs it ends up creating. Even if it does not create manufacturing jobs, it will create jobs in services.

Hence, the government should keep working towards a better ease of doing business environment. The labour laws need to be simplified. The physical infrastructure needs to improve. The roads, railways and ports need to improve. The contracts need to be honoured. A bankruptcy law needs to be in place. The courts need to function well.

The simple things need to be done well.

(The column originally appeared on The Daily Reckoning on November 17, 2015)

For Make in India to succeed, India needs to be a part of global supply chains

make in india
Indian exports have been falling for a while now. For September 2015, the merchandise exports (or goods exports) fell by around 24.6% to $21.8 billion, in comparison to September 2014.

In fact, the merchandise exports between April and September 2015, the first six months of this financial year, have gone down by 17.6% to around $133 billion.

This isn’t surprising in an environment where global growth is slowing down. The International Monetary Fund (IMF) projects the global growth for 2015 to be at 3.1%. This is 0.3% lower than in 2014. Further, it is also 0.2% lower than the forecast IMF made in July 2015.

As the IMF points out: “Prospects across the main countries and regions remain uneven. Relative to last year, the recovery in advanced economies is expected to pick up slightly, while activity in emerging market and developing economies is projected to slow for the fifth year in a row, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries.”

It further points out that: “In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies.”

What this means is that the global economic growth this year and possibly the next, will remain worse than it was in the past. Hence, this will impact Indian exports. Exports for one country are essentially consumer and industrial demand in another.

Having said that Indian exports have fallen much more than other Asian countries. Take the case of China. The Chinese exports in September 2015 fell by 3.7% in comparison to India’s 24.6%. And this is clearly a reason to worry.

So what can India to do step up its exports? It is important to understand here that there are no quick fixes to this problem. An important thing for any country looking to drive up its exports in this day and age is to be a part of global supply chains.

As the World Trade Report for 2013 points out: “A central feature of this second age of globalization is the rise of multinational corporations and the explosion of foreign direct investment (FDI)…By 2009, it was estimated that there were 82,000 multinationals in operation, controlling more than 810,000 subsidiaries worldwide. Upwards of two-thirds of world trade now takes place within multinational companies or their suppliers – underlining the growing importance of global supply chains.”

This is an important factor that Indian policymakers need to understand because this is something that the country is clearly missing out on.

As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “India has not allowed large retail networks to set up base in India. The sourcing requirements of global retail chains would have encouraged scale manufacture that would have led in turn to export success. With the exclusion of the big firms and big supply chains, the country has found itself relatively excluded from global supply networks—and this has stunted export growth.”

One way of correcting this was by allowing foreign direct investment in big retail. The Modi government and the ruling Bhartiya Janata Party (BJP) have been against this. A possible explanation for this is the opposition of the trading community to big retail. The trading community remains a big supporter of the BJP.

In fact, India becoming a part of global supply chains is very important for the Make in India programme to succeed. As of now, it continues to remain a fancy slogan.

As Ninan writes: “In everyday terms, therefore, India does not have the equivalent of an Infosys or a Tata Consultancy Services when it comes to merchandise trade. Nor has it made it easy for Wal-Mart or IKEA to set up store chains in India, the way that IBM and Accenture have set up back offices for BPO. Some of this can still be done, though the political reluctance to allow a free run to large retail trade chains is a constraint.”

One school of thought often espoused these days is based that India will end up capturing the low-end export market being vacated by China. This logic is based on the Chinese labour costs going up. The per capita income of China in 2004 was $1498.2 (current US$, World Bank Data). This had jumped nearly five times to $7,593.9 in 2014. Hence, Chinese labour costs have shot up.

A May 2015 news-report in The Economist points out: “The China price is under pressure, though. Since 2001, hourly manufacturing wages in China have risen by an average of 12% a year…Some believe this means that China’s days as a manufacturing powerhouse are numbered.”

In 2013, Asia as a whole accounted for 46.5% of global manufacturing output. China accounted for half of Asia’s output.
With increasing labour costs the low end manufacturing may no longer be viable. As an example, The Economist points out: “Garments are a natural first step in the spread of production out of China: they are low-skill, low-cost and highly transportable.”

Is India in a position to capture this low-end manufacturing market which is likely to move out of China? In theory, yes. The per capita income in India in 2014 was at $1595.7, which is close to 79% lower than that of China at $7,593.9.

Hence, as far as labour costs are concerned India is cheaper than China. But there are cheaper options like Bangladesh and Myanmar, which are available to manufacturers. The per capita income of both these countries in 2014 was at $1092.7 and $1203.8 respectively.

Also, the labour cost is just one of the things that manufacturers look at. As Ninan summarises the issue: “China has the enabling factor of a very efficient infrastructure, which will not be replicated in the foreseeable future. Indeed, most producers looking for alternatives to China are not looking at India. Its rigid labour laws remain a handicap, its workers are not always productive, the infrastructure is deficient and dealing with the authorities is a nightmare. Almost all countries in East Asia offer easier working environments.”
The column originally appeared on The Daily Reckoning on Oct 24, 2015

The shift from agriculture to manufacturing will not be easy

make in india
One of the points that I have often made in The Daily Reckoning is about close to 50% of Indians being engaged in agriculture generating around 18% of the Indian gross domestic product (GDP). What this clearly tells us is that agriculture is a low-income earning activity.  It also tells us is that there are many more Indians employed in agriculture than there should be. And this can be made out from the fact that only 17% of Indians employed in agriculture, survive on money they make from it. The rest, have to do some other work along with working on the farm, in order to add to their meager income.

Hence, it’s a no-brainer to suggest that people need to be moved out from agriculture into other higher paying areas like industry and services. As TN Ninan writes in his new book The Turn of the Tortoise—The Challenge and the Promise of India’s Future: “Both productivity and incomes will go up substantially if more people can be moved from low-paying agriculture to higher-paying industry and services—a key transition the country has barely begun.”

The Make in India initiative of the Narendra Modi government should be seen in light of this. The programme envisages “an increase in the share of manufacturing in the country’s Gross Domestic Product from 16% to 25% by 2022” and “to create 100 million additional jobs by 2022 in manufacturing sector”.

One reason why this target at best remains a pipedream is because of the lack of education among Indians. The rate of literacy as per the 2011 Census stood at 74.04%. As this website points out: “Compared to the adult literacy rate here the youth literacy rate is about 9% higher. Though this seems like a very great accomplishment, it is still a matter of concern that still so many people in India cannot even read and write.”

The trouble with this literacy number is that it does not give you the whole picture. As per the Human Development Report 2014, the average Indian male has around 5.6 years of schooling and an average Indian female has around 3.2 years of schooling. Both Bangladesh and Pakistan are ahead of us. For Bangladesh, the numbers being 5.6 years and 4.6 years, respectively. For Pakistan, the numbers stand at 6.1 years and 3.3 years, respectively.

And this is where the plan to move people from agriculture to industry or services for that matter, starts to go haywire. As Ninan writes: “Acquiring job-related skills without the benefit of a basic education is a challenge—it is hard to be a fitter or an electrician at a construction site if you don’t know basic arithmetic and can’t read simple instructions on a product pack.”

What this means is that the Make in India plan cannot take-off beyond a point unless our primary education system starts to improve. Individuals need to spend more time in school receiving better quality education. As things stand currently not much is being learnt in schools.

In fact, surveys have pointed out that most children cannot read basic text. The Annual Status of Education Report facilitated by Pratham points out that only 48.1% of children enrolled in Class V could read standard II level text. This means more than half of children enrolled in standard V cannot read standard II level text. In fact, more than one-fourth of children enrolled in standard VIII could not read standard II level text. The report further points out: “The gap in reading levels between children enrolled in government schools and private schools seems to be growing over time.”

And this is a worrying factor. Further, moving people away from agriculture into other more productive domains is a time taking process. As Ninan writes: “Thailand, one of the most successful manufacturing countries, has those in agriculture continuing to account for 40 per cent of its workforce. China, despite its considerable success in building a factory sector, has 35 per cent of its workforce still engaged in agriculture, generating about 10 per cent of its GDP.”

The point being that “whether one likes it or not, the transition away from agriculture as the primary source of employment is going to be slow”.

So what is the way out? Ninan suggests that one way out is to increase productivity of Indian agriculture. “Paddy output per hectare [in India] at about 3.7 tonnes, is 20 per cent short of the global average and barely half of China’s. One reason is that Indian farmers are not using the latest strains of high-yield varieties (growing them is also more employment-intensive) or adopting new methods of cultivation that require less water. It’s the same with maize,” writes Ninan. If these numbers were increased India’s agricultural output would go up in the days to come, and so would the income of people dependent on agriculture for their living.

The problem here is that the size of farms over the decades has grown smaller. Take a look at the accompanying table from the annual report of Department of Agriculture and Cooperation 2013-2014.

What does the table tell us? It shows very clearly that most farms are small in size and less than two hectares in area. 85% of the farms are less than two hectares in size and 67% of the farms are less than one hectare in size. And this doesn’t help the productivity cause at all.

As Mihir Sharma writes in Restart—The Last Chance for the Indian Economy: “Indian farms are tiny. Over 80 per cent of them are smaller than 2 hectares…And they are getting even smaller. They are just over half as big today, on average, as they were in 1970. Everywhere else in the world, farms have gotten bigger in the same period…Many people have been convinced that if there was just some way to increase agriculture’s share of output, some way in which all of agriculture received ‘support’, things would be better.”

Only if it was as simple as that.

The column originally appeared on The Daily Reckoning on October 20, 2015