Towards de-industrialisation? Financial Express 14th December 2013

We have drawn some amount of solace from the latest Q2 GDP growth numbers, which indicate a possible recovery over Q1 from 4.4% to 4.8%. The contribution to growth is more from the farm and services sectors, which is commendable. However, a broader issue is whether or not GDP growth can be feasible at higher levels with the manufacturing sector playing a minimalist role? This issue is serious because the pattern so far has been a growth model that runs on services. These services are almost broadly divided equally across the organised and unorganised sectors with transport (excluding railways), trade and restaurants being mainly in the latter. Growth in these sectors cannot be sustained unless there is high growth in industry—manufacturing in particular as services support business activity.
It is here that it is often argued that India missed one important step in economic transformation where we shifted from an agrarian to service driven economy without really having an industrial revolution. The question is whether there is reason to believe that there has been de-industrialisation in the last two decades? The de-industrialisation hypothesis can be looked at from four points of view. The first is the growth rate in manufacturing relative to other segments. The second is share of manufacturing in GDP, which will indicate its relative importance. The third is share in capital formation—here one should distinguish between infrastructure and manufacturing as investments in mining or power would not really be classified as manufacturing. Last, in terms of employment have there been signs of migration to other sectors? If all or most of these are visible, then there is a problem as the diminishing importance of industry is not good for the future of an economy that still has gaps in terms of unemployment, poverty, inequality, growing urbanisation, social amenities and so on. The accompanying table provides information on these fours aspects of de-industrialisation. The averages for four quinquenniums have been calculated to iron out single year disturbances through extreme numbers. The four pre-requisites of the de-industrialisation hypothesis can be analysed sequentially. Growth in manufacturing has been cyclical across the time periods witnessing alternately high and lower growth rates in these periods. While this trend is similar to that witnessed in overall GDP growth, the intensity of decline or increase of manufacturing growth has been steeper both ways. Two conclusions may be drawn. The first is that higher manufacturing growth does propel GDP growth, but a slowdown does not bring down growth to the same extent as the other sectors provide support. Second, we evidently have to work on this sector if we are looking at double-digit GDP growth rates in future as the services sector can buffer against a decline but cannot, on its own, drive GDP growth on a sustained basis. The share of manufacturing in GDP has remained more or less flat over these periods. This is interesting because during this period of 20 years the share of agriculture has come down sharply from 26.7% to 14.5%, but has not gone in favour of manufacturing. It has shifted in a big way to services with the non-government sector gaining the most. The other interesting conclusion here is that the government is not too intrusive, as the share of personal social and community services has varied between 13.1% and 14.4% during this period. The capital formation story is even more startling. The share of manufacturing has come down from 38.8% to 28.8%, which can be contrasted to levels of above 35% in countries like China, Korea, Malaysia and Thailand. The shares of services has again increased with the three sub-groups—trade, transport and communications; finance, insurance and real estate; and social and community services—witnessing an increase of between 3% and 4% in share over this period. Within industry, construction has witnessed a larger share, which may be attributed to the focus on building roads, airports, ports, etc. This gives one the sense of de-industrialisation where less investment is being channelled to this segment. It also reflects the existence of spare capacity in industry, which could be one reason as to why larger doses of investment are not taking place. Last, the employment profile follows the same trend as in GDP and capital formation. The private organised sector has been used here to gauge whether this sector has provided more job opportunities to labour. With a diversion being witnessed from the primary to the services sector, it is not surprising that manufacturing is attracting less labour in the organised sector. The share has been declining continuously through the four points of time chosen and a fall of over 10% is quite alarming. Interestingly, again the services sector has dominated and, within this group, the finance sector has been the major beneficiary with the share increasing from 3.6% to 20.5%. Quite clearly, given that the remuneration packages offered in this sector are higher than that in manufacturing, there is a disincentive to work for this sector. What does all this indicate? The manufacturing sector has certainly lost its sheen and there are traces of the process of de-industrialisation which is more of a voluntary nature, unlike in the pre-Independence days when the colonial model was to make countries less industrialised with the focus being on agriculture and extraction of raw materials. Should we do anything about it? Yes, it is necessary because the services sector-driven model is not sustainable unless manufacturing grows. The solutions are known to all as to what should be done to drive forward industry which should get translated into action lest we lose this major foundation which appears to be weakening over time

Next 14’ & the future: Financial Express 8th December 2013

Book Review of Catch Up by Deepak Nayyar

After the financial crisis of 2007, the theory of decoupling has gained importance, and it was felt that developing countries could lead the world economy irrespective of what happens in the developing world. While this phase of elation lasted through the sovereign debt crisis from 2010 onwards, the present power of US tapering dilutes this theory. How exactly should we look at this balance of economic power, and is there a historical context in which we should analyse these trends?
We often talk about how powerful countries like India and China were at one time and that there was a transformation when the balance of economic power moved towards the West, where we see the developed world today. The present emerging markets or developing countries have gone through a name change in the form of being ‘underdeveloped economies’ to the ‘south’ part of the ‘north-south’ concept. But today, there is active discussion on how developing countries could be controlling major growth impulses. To explain this and more, Deepak Nayyar in his book, Catch Up: Developing Countries in the World Economy, broadly divides the economic history of the world into three parts: pre-1820, 1820-1950, and the period after the 1950s till date. The developing countries in his data analysis belong to Asia (minus Japan), Africa and Latin America, while the developed world includes the ones from North America and Europe, and Japan, excluding the Caribbean. Till the 1820s, developing countries dominated the world in terms of both population and income, and hence, when the decline came about, there was a deep fall in prosperity in these countries. The developed countries ‘caught up’ and went ahead after 1820, which was also the time of the industrial revolution, which spread across these countries at different points of time. Growth in trade, investment and migration contributed to this phenomenon and Nayyar points out that the division of labour, which emerged, was unequal. There were several reasons for this transformation, all of which contributed partly, though did not explain fully the story. Culture played a role, where the protestant ethic of Weber played its part, as it was religion that goaded people to work hard and make money. Marx would have said the dialectical process did not quite take off in Asia, but worked in these countries, and which helped to bring about this change. Another reason could be geography, where the temperate climate helped to grow more crops and was more congenial for working hard. Also, being close to the oceans and seas helped in furthering trade. But Nayyar feels that finally institutions that were created were the ones which decided whether countries remained rich or moved towards low levels of income. Where governments were extractive, which was the case with developing countries, economies declined quite sharply. In case of developed countries, the economic and political institutions helped strengthen these countries. Nayyar goes on to explain how the advantages of cheap labour and capital helped herald the industrial revolution in the UK, which helped bring about a slew of innovation across sectors. Simultaneously, the concept of colonisation had caught on and raw materials that were procured helped speed up the processes in the colonising country. This was also the time when traditional industries collapsed in developing countries. There is a lot of data provided by the author to show how the balance shifted to the so-called West. However, following World War II, there was a transition in the other direction, with developing countries ‘catching up’. Within these nations, Asia performed better than others and the only handicap was the growth in population, which lowered the per capita income. The pick-up took place more specifically from 1980 onwards, which was the time when we can recollect the challenge posed by the Asian tigers. This was also the time when there was wide-scale migration to the West, where money was remitted in return, which helped to provide these countries with the requisite foreign exchange for further development. The structure of the economies also changed from agricultural to manufacturing and services, which provided a boost to growth, as the multiplier effect was higher. Here, once again, Nayyar emphasises the role of the state, as accelerated progress was achieved with the help of positive policies with respect to trade, industry, institutions, interventions, etc, to make them globally competitive. If we juxtapose our own Indian story with this development, we can see the results emanating after we went in for economic reforms in 1991. It is here that Nayyar brings up an innovative term for nations within the group of developing nations, which have their own path, called ‘Next 14’. These include Argentina, Brazil, Chile and Mexico in Latin America; Egypt and South Africa in Africa, and China, India, Indonesia, Malaysia, Korea, Thailand, Taiwan and Turkey in Asia. There are three reasons, according to him, as to why these have become important: size, growth and history, even though there is diversity in income. Now, within these nations, he observes convergence in income in Asia, divergence in Africa and stability in Latin America. Once again, he emphasises the role of institutions in explaining disparities in the growth stories of these nations. However, notwithstanding these paths, he clarifies that rapid growth and income do not mean that the absolute number of poor has come down. What then are the prospects? All exercises done by scholars show better prospects for these countries in the years to come and there should be greater convergence with the developed world by 2050, if not 2030. This is so because they have a lower base and a large young population. Further, wages are lower in relative terms and this will enable them to compete on costs with the outside world. Also, given the spare capacity, the probability of improvement in productivity is also higher in the earlier stages of growth than in the latter part, which is good news for them. But, he rightly points out, the ‘Next 14’ cannot on their own be growth drivers for the world economy. They can complement, but never substitute the developed world, especially the US. This probably addresses the question posed in the beginning, as to whether we have entered a decoupled world. Nayyar, of course, is an economist of the highest calibre, who looks at an issue that has not been explored to this length. While it could be a bit academic, as it looks at tomes of data, it is a book that cannot be missed.

Is the economy on the mend? - NO: Hindu Business Line December 7, 2013

Against a rather dismal economic performance in FY13, there may be indications that the economic fortunes have turned around. Yet, we may have to be sure before drawing any conclusions.

During Q1, the economic conditions turned negative. Growth slowed to 4.4 per cent, and industry continued to slump. The rupee fell as foreign investors withdrew due to possible Fed action on quantitative easing (QE). Households preferred to hold gold. Inflation remained whimsical and monetary policy uncertain. The silver lining was that the government cleared a number of investment proposals. Also, the monsoon forecast was positive, which meant output would be normal, that would temper inflation; rural incomes would be spent on industrial goods.

Inflation worries

But the story did not unravel like this. The first six-eight months do not quite reinforce the belief that we have overcome these problems. First, industry continues to stagnate. Low core-sector growth for October dispels the turnaround theory. Second, investments that have been cleared have not taken off. The debt or credit market does not point to a corresponding demand for funds.

Third, inflation continues to be high, with consumer inflation in double digits. Prices of food have gone up, affecting consumption of non-food items and eroding savings. Fourth, the RBI perforce has followed an anti-inflationary stance to keep real interest rates positive and encourage savings. But this will delay investment decisions. Fifth, while the Finance Minister sounds credible when he says that the 4.8 per cent fiscal deficit number will not be breached, it will have to be at the cost of capital expenditure. This will affect growth, considering that over 84 per cent of the fiscal space has been used up. Sixth, the lower growth this year (pegged by the Finance Minister at 5 per cent), against the 7.4 per cent Budget assumption, will mean slippage on tax collections. Seventh, while the harvest has been normal, the link with inflation has been severed due to pricing policies as well as high current levels of inflation. The latter enters the pricing decision of farmers.

Gold, the silver lining

A big positive has been the decline in gold imports. While the current account deficit has improved, one should remember that growth in exports has taken place over negative growth rates last year (compared with April-October 2011, they were a tad lower). While the share of exports in GDP (Q2) is high, it is not really a case of exports becoming an engine to growth. The $34 billion of FCNR swap money sounds impressive, but one is still not sure if this is fresh money, churning of existing deposits, or substitution from other NRI deposits or remittances.

There is still hope that consumption would pick up during October-December and some cleared projects will fructify on the ground. Inflation could moderate statistically and a gentle recovery may take place. But there is too much uncertainty.

Society and selves: Financial Express 1st December 2013

Book review of Interrogating India's Modernity by Surinder Jodhka

Indian society has evolved in terms of structures, processes and dynamics of social institutions. While modern institutions of democracy have changed and the idea of citizenship has become popular, ethnic identities and religious beliefs are still strong and entrenched. The question is how do different sections of society participate in this modern India, where issues like religion, caste, urban spaces, global branding, changing hierarchies, civil society and democracy dominate? More importantly, do we really manage to reconcile these differences? These are the issues taken up by Surinder S Jodhka in his book, Interrogating India’s Modernity: Democracy, Identity, and Citizenship (Essays in Honour of Dipankar Gupta).
The book is a collection of 11 essays and pays tribute to the contribution of Dipankar Gupta, one of the most reputed social scientists in the country. Gupta’s views on three issues are brought to the fore before putting forth views of other sociologists. The first is his take on the concept of modernity, which is actually a way of life, where there is little differentiation based on birth. Yet, in Mumbai, which is regarded as the bastion of modernism in the country, we have seen the rise of strong ethnic values typified by the Shiv Sena. While such a movement was expected to decline, this one has not. There have been explanations given, such as this was done by capitalists to break unions. But the fact that the lower- and middle-income classes supported the movement dispels this argument. Second, there is the issue of stratification on which he has a different explanation. While there is a hierarchy based on superiority, lower castes do not quite accept it and still prefer marriages within their own caste, spurning inter-caste weddings. Also, while the idea of sanskritisation did show aspiration, it did not lead to convergence with a higher caste, but only a claim to an equivalent status. Third, the issue of citizenship is serious; we have seen during riots in Mumbai and Gujarat when Muslims have had to periodically prove that they are citizens of the country. This is an unhealthy development. With this encapsulation of some of Gupta’s thought-provoking theories, the author takes in contributions from other social scientists who hold Gupta in high esteem. TB Hansen talks about the growth of cities in India and tackles the issue of communities being forced to live together for better identity and protection. He gives examples of how ‘mohalla committees’ set up in the aftermath of the Mumbai riots had only Muslims taking part, while Hindus stayed away. The result was that Muslims now tend to live together and have been secluded from the mainstream. Another example given is of south Indians, who stay in specific areas in Mumbai, where the twin entities of identity and protection are offered. Jonathan Parry surveys life in the Bhilai Steel Plant and concludes that in these societies, class matters more than caste and, invariably, people belonging to an organisation hierarchy would typically be eating together, where caste or any other social background does not matter. The difference is between naukri, which is permanent employment, and kaam, which is informal work. In a similar light, Andre Beteille expounds on the growth of the middle class, which has ensured that the polarisation spoken of by Karl Marx has not taken place. People enter a class based on education, work, salary and job type, and stratification is more on these lines. In fact, a secretary and managing director of an organisation would belong to the same class based on family income or wealth, and it is no longer the case of hierarchy deciding status. Further, with emerging lifestyles and aspirations, there is movement into this class. At another level, Kriti Kapila distinguishes scheduled tribes from castes and the reservations made for them. While in case of castes, it has been done to right ‘a wrong done over ages’; in case of scheduled tribes, it is more a case of bringing them into mainstream society and hence the motivation for integration. This was brought in after independence, as the British had not done much to alleviate their miseries. In a more contemporary context, Gurpreet Mahajan writes on the growth of the move towards civil society and the anti-corruption crusade that has been launched by Anna Hazare and his followers. This could be more an act of people being pushed to the wall and a cry for better governance, which will pick up as the level of intolerance of the general masses grows. As we can see, this is one of the major political issues, which could tilt the scales in the coming elections. There is also an interesting essay by Christopher Jafrelot, who examines the growth of Hindu nationalism and the now-common mode of governance through what we call coalition governments. Some common threads in extremist parties are that they always accept the rule of law. Second, they invariably dilute their ideology at the time of elections to attract outsiders and appeal to a wider audience. Third, when they do not get a majority, they look at coalition parties, who do not normally share their ideals. Last, they emancipate themselves from their extreme positions and move on successfully. The glaring example is that of the BJP, which has finally followed the path of moderation when in power. This, according to him, is the only way to take the country along in a smooth manner. Two other essays are quite illuminating. The first is by Bimol Akoijam, where he talks of citizenship and what has transpired in our context. In particular, he discusses the use of the Armed Forces Special Powers Act (AFSPA), which gives the military powers without any fetters. This, according to him, has been probably overused in places of insurgency, such as Jammu & Kashmir and the north-eastern states—extraordinary powers being used to tackle ordinary issues. Naxalites do talk of overthrowing the government, yet we do not see the application of AFSPA. The other engaging piece is by Sumanta Banerjee on democracy. In the West, citizens have democratic space and rights. It is not so in Asia and here, he gives the example of khap panchayats in India, which have their own laws that punish citizens for marrying out of caste. Yet nothing is done to exterminate these self-styled courts. Quite interestingly, he points out that the US is also no less intolerant, as seen by its reactions to WikiLeaks or its own invasion of Afghanistan or Libya. Then he gives the well-known statistics of how many MPs in India have criminal charges and how many are millionaires—315 of them. More than 25% belong to the industry, trader, builder and business classes. Can we expect a true democracy here or will policies be geared towards their own good? The judiciary, too, is not above all this and the constant use of TADA or POTA to terrorise one’s own citizens makes one think hard about what democracy is all about. The book is brilliant and puts together some of the best minds to write freely on issues where the media could get shy. By adding the sociological angle, there is a lot of explanatory power added to some things we see around us. Gupta should be pleased with this collection, as this is a great acknowledgment of his work.