Most studies, government sponsored or private, estimate that India will need to spend anywhere from US$800bn to US$1.2 tn over the next 20 years to build urban infrastructure capacities to meet the demands of urbanization. Global firms are finding it difficult to find people (either expat or of Indian origin) willing to locate to India and work here.
Anecdotally in the last few years one has heard of many instances where Indian’s who had returned have once again gone overseas. Unfortunately for India there seems to be no urgency to either develop urban centres (existent or new; DMIC is still in the distant horizon) or to compete with other nation states to attract global corporations. This year has seen many global companies shelving their India plans.
Given the above, India has huge challenges to attract large companies as well as global talent. Can this limit India’s growth prospects whatever be our demographics or our potential? According to MGI, “The rise of the modern corporation has been perhaps the defining trend of the past 150 years. This model is now a major building block of the global economy fuelling a significant share of growth, job creation and technological innovation.”
Some would argue that India will choose a different growth path where we do not need large corporations (in favour of SMEs), we can possibly bypass manufacturing (we already have, haven’t we?) and we do not need to worry about job creation because we are creating enough jobs in the informal economy (so looking at the formal sector we are barking up the wrong tree). Some would say we have already shown an alternate path to development and growth as is seen from the share of services sector and share of revenues from outside the home country, which resemble the developed economies more than the emerging ones. But is that really the case?
Most countries have one dominant city for corporations, with the notable exceptions being USA and Germany. Within USA, cities have developed industry specialisations to a large extent. In Germany, there are six metropolitan regions with more than 30 large headquarters, according to MGI. This may be due to the fact that small and medium sized companies have specialised and prospered in Germany, are innovative and are export-oriented and are often based out of small towns spread across the country. The umbrella term for these corporation are Mittlestand.
But the Mittelstand model is not the same as the SME model of India. In India the MSMEs have in many cases remained sub-scale operations even by Indian standards and the only reason many of them continue to survive is that they are protected by regulations, tax and tariff concessions. These are not market driven corporations. They rarely represent innovation or technological edge or high standards of productivity.
Can our informal economy lead us to a new growth path? In a series of excellent reports, Neelkanth Mishra of Credit Suisse has written about rising productivity, income diversification and employment generation and highlighted how systematically India’sgrowth is being under reported (two such reports are India: the silent transformation). and India’s better half: the informal economy). According to one of Neelkanth’s reports, India had 42 mn enterprises in 2005 with average employees of 2.4 (declined from 45 in 1980). As per the last Economic Survey, microenterprises accounted for 94.9% of the working enterprises and 69.2% of the employment generation among MSMEs in India, and medium enterprises are practically non-existent in India.
And since this structure of the economy is not changing, then tax collections will remain low, productivity growth will remain anaemic (yes, it will get some boost from time to time as has happened, for example, with the increased penetration of mobile telephony) and will continue to essentially remain a drag on growth. Poor tax collections impact the state’s ability to invest in infrastructure and adds to the economic cost of doing business, soaring healthcare costs and inefficiencies. You can imagine what kind of enterprises are these when every upper middle class and above family employs more workers than 2.4.
What about job creation? India is adding about 12-13 mn young people into the workforce every year. And between 2004 and 2012, 16.6mn jobs have been created, at an average of just over 2mn per annum (over 10mn of these jobs were created in the last two years when the economy has been anything but strong!). Most job creation is taking place in the informal sector. As per NSSO estimates, 11.1mn people were employed in rural India in animal farming (poultry and fish) in 2005 and the number increased to 14.9mn in 2010, i.e., 3.8mn jobs were created in 5 years. In terms of man days, as Neelkanth points out, this is the same as the number of man days generated from MNREGA in the same period.
16.5mn people are engaged in animal (chicken/ fish) farming in the country, including urban India. This means for every 72 people there is one person engaged in animal farming. Really? In China, the equivalent number is 155 (http://www.ibisworld.com/industry/china/poultry-farming.html). This seems more like disguised unemployment than real job creation. This does not indicate to me better economic clusters and productivity but gross inefficiencies. I suspect that thirty years back we probably had similar ratio for tailors and the same has now given way to readymade garments even in rural areas.
There is no gainsaying that productivity has seen improvement and rural incomes are diversifying thanks to the road development program started by the NDA government (NHAI and PMGSY), penetration of mobile telephony, LPG services and improved power availability.
My most recent productivity gain story is as follows – Arvind is the carpenter who does most of the necessary work in our house. Even a few years back he used to come with the drawings, bring samples of ply and veneer to our home or have my wife visit some stores to see samples. Over the last one year all these exchanges are taking place over email and WhatsApp. Imagine the time and cost savings, and the gains in efficiency and productivity.
Going back to poultry farming for a minute – chicken consumption has been increasing rapidly (cagr of 11.1% in per capita consumption by weight in the last decade), along with consumption of milk and vegetables (a reason why some inflation will likely remain elevated). India’s largest poultry company – Suguna Poultry - has a disaggregated model of supplying feed, one day old chicks and other services to farmers across 8,000 villages and then aggregating the supplies of broiler chickens and eggs into the market. But India’s largest company touches the lives of around 20,000 farmers across 8,000 villages. So this model does not explain the growth in animal farmers.
But the informal nature of the economy, which encourages sub-scale production and services is a matter of concern rather than comfort when 13mn young people are joining the workforce and these young people are aspirational, have some literacy levels and access to information. This can be socially fragile and volatile or an opportunity, demographic disaster or demographic dividend. The jury is still out but the early signs are not reassuring. After all how many poultry farmers will 1.2bn people need? We cannot be a nation of poultry farmers and microenterprises, can we?