What India needs to become China

Mon, 25 Nov Pre-Open

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Economist Arvind Panagariya recently wrote an open letter to the Mr Rahul Gandhi in response to the latter's statement as to why India imports rakhis and Ganeshas from China, rather than manufacturing them in the country. Mr Gandhi seemed to have used these items as metaphors to understand why India is poor in the labour intensive manufacturing sector.

Given the vast population of the country, there is a massive workforce available that can be used. But, despite this, India Inc. has continued to invest largely in capital intensive industries rather than labour intensive ones.

Mr Panagariya believes that the present government could have done something about this when it came into power about a decade ago, shortly after the import licensing on consumer goods was terminated in 2001. It is due to the latter, that imports from China started to pick up. He also stated that the government should have worked towards achieving both, inclusive growth and inclusive spending, rather than focusing on one element. And as rightly stated by him, both go hand in hand when it comes to having 'gainful employment'.

Large scale manufacturing has its obstacles in a country like India. This is because of the very restrictive labour laws. In fact, it was a few years ago that the World Bank had criticized India's labour laws, citing them as very complex and restrictive. It also stated that there was a need for reforms in the laws (something that Mr Manmohan Singh also stated at the time). The institution was of the belief that this has led to constraints in growth of the manufacturing sector, the area where these laws are applicable the most. As written in an article on Firstpost's website, '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.'

Manufacturing forms around 15% of India's output. For the country to grow richer in the longer term, a much bigger manufacturing base would be needed. And this would provide a large scope for the workforce to be absorbed. Indeed, a restrictive labour law environment has been one of the major hurdles to the development of the Indian manufacturing sector. Thus, corporate India will need to evaluate existing laws - which are quite archaic - on a priority basis. It, along with the government, will have to work towards ensuring that there is a major overhaul in these laws in keeping with the changes in the economic and industrial landscape. Otherwise, India's hopes to become a world class manufacturing behemoth would only be a distant dream.