Friends of Economic Development
Foundation For Economic Development
Facilitating broad based economic growth in India
Dear Friend of Economic Development,
This month, I had the privilege to speak to one of India's finest thinkers on public policy – Ajay Shah . He covers a topic that is both important and complex – why private sector investment is flagging and what role ‘industrial policy’ – government promotion of industry – should play in India’s growth story. In his characteristic style, Ajay came up with an impromptu four-pillar framework to examine the justifications for industrial policy and went through them in remarkable depth, also covering the various ‘successes’ of industrial policy – Japan, South Korea, China – and what lessons India should (and should not) learn from them. I was captivated throughout, and highly recommend the conversation.
For anyone interested in learning more about public policy, his book with Vijay Kelkar, In Service of the Republic, is a fantastic entry point into thinking sensibly about the topic.
In our data story this week, FED's Yuvraj Khetan looks at how much of the increase in employment in India in the past five years has come from self-employment, and the implications this has for productivity and wages.?
We also highlight our op-ed in the Economic Times on whether employment-linked incentives are enough for boosting India's apparel exports (they're not!), and as always, we end with a few interesting things we read or listened to this past month.
If you like what we share, do follow us on Twitter and LinkedIn.?
Warm regards,
Founding Director, FED
FED Dialogues??? With Ajay Shah
Ajay Shah , economist extraordinaire and author of the finest primer on public policy in India - 'In Service of the Republic' - believes everything is everything! It's more than just the 'catchy' name of his insightful podcast with Amit Varma. Ajay explained when he joined us for our own humble endeavour - FED Dialogues - that while the phrase is borrowed from Bruce Springsteen, it speaks to a deeper philosophy held by Ajay and Amit. "The whole world adds up to something together. We wanted to give a flavour of that interconnectedness about the world".?
His conversation with FED Director Rahul Ahluwalia was a lot like that — everything! They touched on a myriad of topics, from looking at the private sector's flagging appetite for investment to categorising industrial policy into four pillars (and why he's unenthusiastic about all four) to what we can learn and what we must not learn from the China and Japan growth stories.?
Read the edited excerpts below, but do watch the whole thing on YouTube.?
RA:?I’ve started this a few times by asking everyone about their personal connection to economic growth. What brought it home to you??
AS:?This is what I got from growing up with my father. My father walked the entire arc of the 20th century. He ran away from boarding school and came into Gandhiji's Quit India movement in 1942. He came ticketless from Karachi to Bombay and slept at the railway station — that sort of madness. Then, like all thinking people of the mid-20th century, he joined the Communist Party. He was a full-time party cadre till 1955. So, he fully knew that way of thinking. And then, through the years, he turned around and thought deeply about the world. He also understood how the Indian experiment with socialism was going terribly wrong. So these are all the stories I heard in my childhood that growth is the real story, and growth is built in the private sector and in firms. The Indian state is a cancer of central planning and lack of rule of law.?
My father was one of the few Indian economists who had an early understanding of how broken the central paradigm of socialism was. He died in 1984, but I got my formative years with him, and the books. So I read Milton Friedman's Free to Choose, Capitalism and Freedom, Essays in Positive Economics, and Hayek's ‘The Fatal Conceit'. These are the things I read when I was in my half-pants.?
RA:?What is, according to you, the road to growth? What is the most important thing that India should be doing, should have been doing to grow??
AS:?The closest I get to a bumper sticker is that what is wrong with India is too much central planning and too little rule of law. The government is meddling in the economy in thousands of details. Government meddling is characterised by arbitrary power in the hands of a few people. When you put these two together, we have created too much of a risk of expropriation in the eyes of the private sector. And that has given us a collapse of investment.?
I do not talk much about building public goods and state capability. It's all true and it's needed. But I always want to remind all of us that when India had a great growth episode, from 1991 to 2011, it wasn't like there was any state capability, or much rule of law. It was a pretty horrible Indian state. So we should not have rosy visions about becoming Norway, and then you will get growth. Growth has to be ignited in a poor country with a ramshackle and shambolic capability of the state, and you will get to Norway later.
There was a miraculous growth episode for 20 years, and it behoves us as a community to think deeply about that and wonder how we can recreate the conditions for another 20 years.?
RA:?Right now, there is a very prominent narrative about industrial policy, about the government taking a more active role in promoting certain industries. How do your ideas square with that vision??
AS:?There's a spectrum of possibilities around industrial policy. The government may like to give subsidies to certain industries, which they believe are good for the country. It can be an explicit payment of a subsidy, say 50% of the money required to build a semiconductor fab, or it can be like a production-linked incentive (PLI), or it can be tax breaks. There are different ways to do it. I classify all of this under 'subsidies' – we take hard-won taxpayer resources and put them into a few chosen industries. Or it can include protectionism, where we go anti-foreigner, and we start saying that foreigners are bad.
Then, you get into the concept of defining an Indian firm. If Sundar Pichai is the CEO of Google, does it make it an Indian firm? You get into a racist view, which is pillar two, where you say we will support Indian firms.
Then, pillar three is that the government will control the technology. We will tell you how something has to be done. It often originates under the guise of technical standards. There is more than a whiff of central planning in pillar three. Finally, pillar four is a government that will build monopolies. So, they'll build an Air India.
These are the four levers that are in play all over the world. Pillar one is subsidies; pillar two is protection of national champions and a certain definition of ethno-nationalistic values; pillar three is technical standards – the government will tell you about technology, whether they believe diesel is good or green hydrogen is good; finally, the fourth is a government which says, let's skip this whole pretence of a market economy - we'll build the company ourselves. So, these are the four forms of industrial policy. And I’m unenthusiastic about all four.?
Click HERE to watch the full episode on YouTube
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Data Story????
Rise?In?Employment Driven By Self-Employment
130 million additional people have started working in the last five years, which is a good thing. However, about 77%, or 100 million, of those are self-employed, which may not be a good thing. In India, self-employment is often linked to low-productivity sectors like agriculture, where 83% of workers are self-employed. These workers typically earn only two-thirds of what salaried employees make. Coupled with the fact that real earnings for self-employed workers have stagnated over the past five years, the gap is only set to worsen.?
As India’s workforce grows, there is an urgent need to create more jobs. To its credit, the government is cognisant, and in this year's Union Budget introduced several schemes for workers and employers focused on job creation, such as Employment-linked Incentives. To get traction from these efforts, the government should also urgently prioritise and refocus on fostering an environment that encourages business growth by reducing regulatory cholesterol - unnecessary regulations and compliances that hinder expansion and job creation.
Listen to this podcast with Manish Sabharwal of TeamLease for more on this.?
In-Focus????
Can Employment-linked Incentives?Boost?Apparel Exports?
India has set itself a bold target of $100 Bn of exports in Textiles and Apparel by 2030. This is absolutely the right move. The Government has also backed its vision with some fiscal action, as it launched the Employment-linked Incentive (ELI) scheme in the Union Budget 2024. However, India's gap with competitors such as Bangladesh and Vietnam is unlikely to be bridged through this scheme.
Mihir Parekh , Associate Partner, Garments, at FED,?and Nitya Srinath , Programme Associate,?unpack the cost disability of an Indian garment manufacturer, and why the Indian garment industry needs more than fiscal support, in this piece for ET Government.??
Read the full article here.
Good Stuff We Read/Listened To ?????
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