Challenge of the Decade: Between Globalization and Protectionism

Bharat Jhunjhunwala

Global consultancy firm Price Waterhouse Coopers has said that India has the potential to become world’s No 2 economy in 2050 after China if it adopts the required structural reforms. The question is which structural reforms? The “structural” reforms of demonetization and GST, though touted as path-breaking etcetera have led to a secular decline in our GDP growth rates. Remember that international agencies like these had supported these steps of the Government. So, let us think through the challenges lest we lose the No 2 slot.

The challenge of the decade is how to manage the new technologies. A driverless Metro Train was inaugurated in the country recently. Good. But Matthew D Johnson, Professor at St. Stephen's University, Canada has forecast that robots will displace 50% of jobs by 2035. The situation will be much worse by 2050 when India has the potential to become No 2 in the world. The total employment in the organized sector has been declining in the country in the last many years while large numbers of youth are entering the labour market. Let also provide jobs to the backlog of unemployed; we are adding to the unemployed by killing the existing jobs, in part, by adopting new technologies. Robots are making pizzas and serving to the customers in human-less shops in the United States today. Wherefrom will the crores of our small shop owners and youth make a living then? A restaurant in Kerala recently introduced robotic waiters. So, jobs are vanishing. On the other hand, the small industries that are in the forefront of job creation are under pressure from big companies that manufacture through global value chains. A large pharmaceutical manufacturer in India may be importing raw materials from China, containers from Brazil, electronic equipment from Germany and logistics software from India. They roam the world looking for the lowest prices for raw materials and highest prices for their finished goods. They also get “economies of scale.” The cost of production is less when undertaken on a large scale. A small pharmaceutical company cannot possibly compete with these large companies because it has to buy raw materials locally even if they are expensive; and sell the finished goods locally even if the price is less. The small entrepreneur may be a graduate who is the purchase manager, production manager, human resource manager, accountant, finance manager and marketing manager of his small unit. How can she possibly compete with the numbers of Engineers and PhDs employed by big companies for each of these functions?

If our small industries come under pressure, if the job-creation suffers then the youth entering into the job market will engage in counter-productive criminal activities instead of productive activities. This is the logical result of adopting efficient production by hi-tech global value chain driven big companies. Thus, global consultancy firm Arthur D Little and Bank of America have said that local production should be encouraged and small industries should be provided assistance. I do not think the “encouragement” and “assistance” will be effective given the huge and ever-increasing gap in the technologies and global value chains developing between small- and large companies. “Encouragement” and “assistance” means that the big- and small will continue to compete in the market. This will not work in the coming decade just as it has not worked in the last three decades of liberalization. I recall a report commissioned by the Manmohan Singh Government that suggested that clusters of small industries must be established to enable them reduce their cost of production by making community water pollution treatment plants, for example. That did not work.  We will necessarily have to provide “protection” rather than “encouragement” and “assistance” to our small businesses to enable them to stand competition from large companies in order to provide jobs to our youth.

The protection provided to domestic- and small industries may lead to them making sub-standard or expensive products. They will be able sell their shoddy products in the domestic markets because good quality products made by large- and foreign companies would be subject to high taxes and get priced out of the market. An example of this was the production of the shoddy Ambassador cars in India for three decades till Sanjay Gandhi entered in collaboration with Maruti the eighties.

One possible way out is to limited robotic and large-scale production for exports. That will enable our industrialists to adopt frontline technologies and also obtain the benefits of cheap labour available in our country—but only for the exports. The country will get advanced technologies and jobs will be created in the export sector; while the domestic market will provide space to the small companies and they will create jobs. But let us not fool ourselves. The “inefficient” production undertaken by the small manufacturers in India will lead to high cost of production. The garment that could be produced by a large company at Rs 200 will be produced by the small manufacturer at Rs 250. This will impose an “unnecessary” cost on the Indian consumer. This cost should be seen as a “employment tax.” When the consumer pays Rs 50 more for the garment she will pay Rs 100 less for the loss due to increased crime. The choice before the Finance Minister is this: Will we ask Indian consumers to buy expensive domestic goods with jobs; or cheap foreign goods without jobs?

The demographic divided being touted as India’s strength is slowly but inexorably moving towards becoming a demographic disaster. Demonetization, GST and Covid Pandemic have dealt three heavy blows to our people. Those who have lost their jobs are eking out a living by selling vegetables. According to one district-level official of the BJP from UP, the daily earning of vegetable sellers has declined from Rs 2,000-a-day to Rs 500 today. Today there are 20 vegetable vendors where there were only two previously. This decline in people’s income will certainly explode—even if it takes a few years for that to happen.

The challenge for the next decade is to find a pathway between the efficiency of the job-eating large businesses; and the inefficiency of the job-creating small businesses.                                                                                                   

Dr. Bharat Jhunjhunwala, Formerly Professor of Economics at IIM Bengaluru

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Jan 2, 2021

Dr. Bharat Jhunjhunwala

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