View: Creating good jobs requires a more open economy and wide-ranging reforms
What the second Narendra Modi government can do is to put in place employment-friendly policies.
The Narendra Modi government has won a resounding mandate. This soundly puts him and his administration in a position to seriously confront a problem that confronts India. Today, a disproportionately large part of India’s workforce consists of farmers with holdings of less than a hectare, self-employed, and those employed in low-productivity activities in farming or micro enterprises in industry and services. This vast workforce earns near-subsistence level of income or wages.
Creation of well-paid jobs for this vast workforce is nearly synonymous with transforming India into a modern economy. As such, no one should make light of the challenge this task poses. Accomplishing it requires interconnected reforms in virtually all areas of the economy.
The first point that the new government, businesses and public at large need to recognise is that job creation is not the job of the government. What the second Narendra Modi government can do is to put in place employment-friendly policies. But private entrepreneurs must create the vast majority of well-paid jobs.
Often the government may not know precisely what it is that is keeping entrepreneurs from creating jobs. Under such circumstances, entrepreneurs, their industry associations and public policy experts have the responsibility to inform it of necessary policy changes rather than join the political class in continuously attacking it for the failure to create jobs.
Because private sector needs to be on the forefront of this mission, the first step is to accelerate fiscal consolidation. Today, the public sector, which includes agencies such as Food Corporation of India (FCI), borrow nearly all financially intermediated household savings, plus even a part of corporate savings. This greatly weakens private investment. Woes of banking sector have added to this problem. We also need to resuscitate it by accelerating a non-performing assets (NPAs) clean-up and infusion of capital.
Beyond private investment, reforms of the new government must address the bottlenecks responsible for holding back labour-intensive sectors such as apparel, footwear, furniture, travel goods, watches and clocks, office and stationery supplies, plastic products, baby carriages, toys and sporting goods in industry and tourism, construction and transportation in services. Here, key reforms, which cannot be spelt out in detail due to space constraint, relate to international trade, exchange rate, labour laws, land laws and urbanisation.
We need to fundamentally change our attitude towards the role of international trade in creating good jobs. In recent years, forgetting our past history of total failure of import substitution industrialisation (ISI), we have embraced it yet again. A fundamental theorem of international trade is that a tax on imports is equivalent to a tax on exports. Therefore, an import tariff leads to the expansion of costly or inferior domestic substitutes while contracting less costly and superior export products.
Import liberalisation reverses this process. It allows us to buy goods in which our costs are high cheaply from foreigners. But we cannot pay for these goods unless we earn additional foreign exchange by expanding exports. The only other alternative is to borrow abroad to pay for the extra imports, but this adds to the current account deficit that RBI usually avoids.
An even more compelling argument for liberal trade policy is related to scale and productivity. Under ISI, we are nudging our entrepreneurs towards the small domestic market. This encourages smaller and inefficient firms. In contrast, an exportoriented strategy encourages efficiency and scale. All evidence shows that export-oriented firms are larger and more productive than their import-competing counterparts.
ISI lovers might tell you that we can capture both domestic and foreign markets. But, alas, this is not how the world works. Even after 70 years of prohibitive tariffs and punishing prices paid by domestic consumers for decades, our auto manufacturers are yet to capture even 2% of the global export sales of passenger vehicles.
With India’s political will now pretty much fully behind, Prime Minister Modi, it’s time to open the economy and implement wide-ranging reforms. Job creation will follow.
(The writer is Professor and Director, Raj Center on Indian Economic Policies, Columbia University, US)