India has been unable to display significant strength in manufacturing exports or to use export-oriented manufacturing sectors as a launchpad for economic development the way several East Asian and South-East Asian countries have been able to do. India's export emphasis in the last two decades has been in the area of software, which tends to employ people who have a substantial amount of education and who have the specific ability to write software. Not surprisingly, therefore, the export sector has been unable to be a mechanism for lifting large percentages of the population from poverty in India, as it has been been in South East Asian countries, Taiwan, Korea and China. The export sectors in these other Asian countries were able to absorb vast amounts of semi-skilled and unskilled labor. Therefore, in these countries, the export-oriented sector became a way for bringing about inclusive growth, a term that is much discussed in the Indian context, but which has not materialized in India to any siginificant extent. The elitist bias in India's export policy is just one aspect of the overall elitist bias in the policies being followed by the Indian political establishment. In the absence of good mechanisms to ensure rapid absorption of unskilled and semi-skilled labor, economic growth in India has displayed several undesirable characteristics. India's manufacturing sector has languished while India's service sector has grown the fastest and the service sector has grown in a way that has not provided the kind of rapid absorption of labor from the agricultural sector that is needed in order to provide a sustainable mechanism for lifting people out of poverty. More than sixty years after independence, sixty percent of the population still relies on agriculture for its livelihood and most of this population tends to live in rural areas. Not only are per capita incomes lower in this sector than in other sectors, but the growth rate of per capita income has been negligible in the last two decades in this sector. The service sector has grown the fastest, providing rapid increase in income and wealth to those who are already well-off and who tend to be urbanites. The growth in the manufacturing sector has been lacklustre. Moreover, there are some disturbing recent trends where India's manufacturing sector has tended to become less labor intensive and more capital intensive, with higher amount of automation. So, India has neither an export-oriented policy nor a domestic policy that encourages inclusive growth or the creation of jobs for unskilled and semi-skilled labor.
There is a possibility that as China and South-East Asian countries move higher along the ladder of comparative advantage, India will start exporting some of the goods that countries like China and South-East Asian countries currently export. However, there are a few problems with this line of thinking. First, it may take a long time, perhaps decades, before this kind of dynamics takes effect. Secondly, several of these countries had higher literacy rates and better health conditions before they succeeded in bringing about massive levels of poverty alleviation with exports as a leading mechanism. Even for jobs involving unskilled and semi-skilled labor, the ability to produce efficiently and to compete in the export arena depend significantly on human development indices like literacy and health. India's has had serious failures in the area of rural education and rural health due to a number of factors like an unresponsive democracy, a corrupt political establishment, lack of initiative in the area of rural development and lack of good implementation of announced measures. So, this state of affairs has serious implications for India's ability to get labor-intensive and high-employment-generating export-oriented industries going.
India's efforts to create and promote special export zones need to be understood in this context of a miserable human development index record and the persistence of lop-sided growth that tends to favor the urban areas. The fact that a country that finds the resources to send expensive space missions for exploratory research while rural education, rural water supply, nutrition standards and proactive export policies are neglected is a clear indication that the democratic process in the country has been hijacked by self-serving and corrupt elements. India's ability to bring about uniform development, rather than elitist growth, will depend crucially on the extent to which the democratic system can be tranformed in order to be more responsive and less feudal and reactionary in nature.
Land rights issues also have a significant bearing on India's ability to build and operate new special export zones. For example, some plans to build new special export zones have encountered stiff resistance from farmers on whose land they are being planned. India's rapid population growth rate and India's lack of dispensable land that is not needed for agriculture, herding etc are all factors that bring about these conflicts between the need for export-oriented development and the land rights of people. That the Indian political establishment has let things deteriorate to this extent during sixty years of independence is testimony to the fact that India's democratic process is a higly imperfect one and that it is in the grip of special interests, both urban and rural. And the government has failed to educate the public or enthuse the public about the need for exports in sectors that employ semi-skilled and unskilled labor. And it has failed to come up with good quantitative strategies to reach the right resource allocation between scarce land and the need for labor-intensive exports.
The other aspect of India's special export zones is the extent to which they are going to be funded or subsidized by the government. While giving tax breaks to private entrepreneurs who locate their industries in special export zones is a passive way of trying to promote exports, it can prove to be insufficient to solve the problem. For example, a lot of cheap, lower-end goods are already being produced and exported and supplied to the global market by other countries that implemented effective export promotion policies in the past. Moreover, a lot of these products whose manufacture require unskilled or semi-skilled labor are flooding the Indian market itself. In such a scenario, expectations that tax breaks in special export zones will lead to susbstantial investment in labor-absorbing export-oriented industries can be highly misplaced. Effectively, the Indian consumer is buying a lot of goods that foreign workers are making and getting paid for while a rural sector with high levels of hidden unemployment languishes economically in India.
In fact, this problem of the encroachment of foreign manufactures of labor-intensive manufactures into the Indian market should be a cause for great worry among Indian planners. However, there is no discernible sense of urgency in this regard. The problem is serious enough that India may well have to think in terms of import-substitution in addition to export promotion. As the situation deteriorates further, the import-subsitution aspect will assume larger importance. Import-substituion is a term that is considered anathema in the modern, globalized, so-called knowledge-economy-driven world. However, this latter world is a fiction created by cynical government propaganda machineries, by media outlets that are controlled by business interests and by think-tanks and academia that lend an aura of respectability to reactionary and elitist economic frameworks. New catch-phrases cannot obliterate hard realities about the economy. The extent of rural poverty in India, the amount of hidden unemployment in the Indian agricultural sector, the inability of the service sector alone to absorb labor from the agricultural sector to the extent required to bring about a healthy sectoral distribution of income and the utter recklessness of running huge deficits by importing so many manufactured goods that domestic laborers can potentially produce with the right planning and the right encouragement are all realities that any serious and unbiased analyst needs to consider in the Indian context.
The time has come for Indian economic planners to face the fact that import-substitution is something that needs to be considered seriously if growth and development are to have any real meaning for the broad masses. Talking about export-promotion and ignoring the need for import-substitution in certain areas is a sign of naivete given our serious trade deficit situation. Tariffs and other trade barriers are one way to implement import-substitution measures as a way of protecting domestic jobs and creating domestic jobs that use unskilled and semi-skilled labor. However, these measures cannot be expected to be sufficient. In fact, a reappraisal of India's stances regarding multi-lateral trade frameworks like the WTO may be needed given the seriousness of the trade deficit situation. And another crucial thing that needs to be considered is if the right kind and amount of import-substitution can be brought about merely by providing incentives to the private sector, or if the government needs to own and operate large numbers of export-oriented manufacturing outlets. While India's public debt-to-GDP ratio is manageable at the moment, it is increasing at the rate of about 5% of GDP every year. Even with growth of 8 or 9%, India's ability to afford additional public spending will be severely curtailed as the public debt-to-GDP ratio climbs. And the problem of government involvement in export promotion will become a more intractable one as this happens. The time to act in this area is right now, but there is not much initiative in this regard.
by C. Jayant Praharaj ( send comments to [email protected] )