The liberalization program since 1991 has paid off handsomely. India grew at a striking 8.5 percent annual rate during the eight years spanning 2003–2004 to 2010–2011. Therefore, at first blush it may seem that the battle for Track I reforms has already been won and nothing more need be done. This may even be the view of some within the current United Progressive Alliance (UPA) government, which came to power in 2004 and has chosen to focus almost exclusively on the promotion of social programs—Track II policies.
Yet, it would be wrong to think that Track I reforms have been fulfilled. If truth be told, India is far from done on Track I reforms for two broad reasons. First, the potential for growth remains grossly under-exploited. The economy remains subject to vast inefficiencies. Removing these inefficiencies offers the opportunity not only to arrest the recent decline in growth but also to push the economy to a double-digit growth trajectory. Second, the poverty reduction that directly results from growth, in terms of enhanced wages and employment opportunities per percentage point of growth, can be increased: India can get a larger bang for the buck.
As regards the first issue, productivity remains well below the potential. For instance, according to a 2007 Government of India report, 57 percent of the workers were employed in low-productivity agriculture, which produced only 20 percent of the total output in 2004–2005. And even within industry and services, 84 percent of the workers were employed in enterprises with fewer than ten workers, and these enterprises are generally characterized by low productivity. Employment in larger private-sector enterprises has been extremely low in comparison to other countries such as South Korea, Taiwan, and China and has been growing at best at a snail’s pace.
In services, firms with four or fewer workers accounted for 73 percent of the employment but only 35 percent of the value added in 2006–2007. Even more dramatically, approximately 650 of the largest service sector enterprises produced 38 percent of the value added but employed only 2 percent of the workers that same year. Larger firms also show dramatically higher growth: value added grew at the annual rate of 28.2 percent in firms with five or more workers but only 4.5 percent in the smaller firms between 2001–2002 and 2006–2007.
Manufacturing exhibits a similar pattern. The point is best illustrated by comparing the employment patterns in apparel in India and China. In 2005, 90 percent of apparel workers in India were employed in enterprises with eighteen or fewer workers. In comparison, only 2.5 percent of the Chinese apparel workers were in such small enterprises the same year. At the other extreme, India employed 5.3 percent of the apparel workers in enterprises with more than two hundred workers, compared with 56.6 percent in China.
Clearly, huge scope remains for improving efficiency and accelerating the growth rate through progressive expansion of employment in the formal sector. The productivity figures are per worker, of course, rather than for total factor productivity. But total factor productivity is certain to yield the same conclusion because the astonishingly small enterprises are characterized by inefficiencies that should translate into overall inefficiency in that they get much less for the same input than the large enterprises.
Our second reason for continuing with additional Track I reforms is that they would make growth even more inclusive. While all evidence indicates that the acceleration in growth since the 1980s has helped reduce poverty, this effect is far more muted in India than in countries such as South Korea and Taiwan in the 1960s and 1970s and in China more recently.
The key reason for this difference has been the nature of the growth. Whereas growth was driven by rapid expansion of highly productive large-scale firms in labor-intensive sectors, such as apparel, footwear, toys, and light consumer goods, in these other countries, it has been propelled instead in India by capital-intensive and skilled-labor-intensive industries, such as automobiles, two-and three-wheelers, engineering goods, petroleum refining, telecommunications, and software. This difference has reflected itself in a rapid movement of workers out of agriculture into gainful employment in manufacturing and services in South Korea and Taiwan in the 1960s and 1970s, and in China more recently, but in a continued heavy dependence of workers on agriculture in India.
To put the matter concretely, South Korea grew at an annual rate of 8.3 percent between 1965 and 1980. During this period, the proportion of the workforce employed in agriculture in the country fell by 25 percentage points from 59 percent to 34 percent. Simultaneously, the workforce employed in industry rose from 10 percent to 23 percent and in services from 31 percent to 43 percent. Alongside, real wages grew at 11 percent per year.
In sharp contrast, the share of agriculture in employment in India fell proportionately so gradually that, with the workforce growing, the absolute number of workers in this sector actually rose between 1993–1994 and 2004–2005. With the output share of agriculture having shrunk to 20 percent in 2004–2005, an extremely large proportion of the workforce depends on a very small proportion of income. Further Track I reforms are needed to create good jobs for these underemployed workers.
~~Why Growth Matters -by- Jagdish Bhagwati
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