The voter is not going to be thankful for digitisation, benign inflation … these are hygiene factors that can be washed away if joblessness persists. (Image: Reuters)
V Kumaraswamy
Ask any shopkeeper, or lonely looking private security guards, unemployed youth in urban slums or interior towns, or taxi drivers what is the main issue they face, and pat comes the reply: berozgari (unemployment). Not many expected Vajpayee to lose 2004 with the groundswell of nationalism over Kargil, Golden Quadrilateral, relative peace in domestic scenario, great government finances, and the political networking he cultivated. Yet he lost. The voter at the booth is not going to be thankful for how much wholesale corruption has come down (retail is still alive and throbbing), degree of digitisation India has achieved, how benign inflation is, etc. These are, at best, hygiene factors, which can easily be washed away if joblessness persists. Without a job, a stable one at that, he can’t proposer.
High manufacturing real interest rates
If more people have to be converted from being losers during the ongoing reforms to gainers, we need rapid job creation. The services sector (IT, BPO, call centres, telecom) created jobs by the buckets till about 2011-12, but have reached stagnation now and have even started becoming uncompetitive, threatening imminent job losses. The agricultural sector is simply incapable of creating further jobs; rather it would release lots that need to be absorbed.
Employment should come from only manufacturing, and here is where the real interest rates (RIRs) facing Indian industry are proving an insurmountable barrier, not just a hurdle. The accompanying chart compares RIRs between China and RIRs facing Indian manufacturing. Manufacturing RIRs are derived by deducting manufacturing inflation from the nominal interests facing the manufacturing sector. For over a decade, Indian manufacturing RIR is about 7.21% versus China’s 2.92% (i.e. 4.29% over China’s)—a huge hole for anyone to be interested in investing in Indian manufacturing.
It is a mistake to compare the general RIR, which is just 2.04% over China—the country with which we have maximum non-oil trade deficit. The general inflation is contaminated by fuel oil, food which have no bearing whatsoever for studying manufacturing investment competitiveness.
Why has it become important?
But for one year, Indian manufacturing RIRs have been higher than China’s since 1991. So why has it started affecting investment sentiments now. Starting January 2014, duties for imports from ASEAN have become virtually zero (South Korea is not far behind), making India’s trade borders open. China (even with import duties) has cost structures lower than ASEAN for several commodities. India’s capital account has also been steadily opening up, and for practical purposes, it is completely open. Even the per annum limits on debt are periodically reviewed and enhanced without waiting for the year turns.
With open trade and capital flows, one has to be sharply competitive. Added to this is 25-30% overall surplus capacity in industry. Who would dare to invest with a huge handicap on interest rates and surplus capacities. It is better to source goods from China or set up facilities there and sell in India, which exports jobs.
Sources of competitiveness
Agriculture and services look spent forces as far as employment creation goes. It rests on manufacturing to create jobs, for which it needs to be competitive, which has to come from any of the four factors of production or natural resource endowments (part of land).
India has tied itself up in knots where land is concerned. Our socialistic mindset has made a grand back-door re-entry through LARR and a plethora of court rulings, restriction on land transfer and change in usage, etc. An acquisition takes five years—far beyond the patience time for an entrepreneur to keep waiting with his ideas. India has 375 people per sq km, while China has 142 (2015), increasing the pressure on land. So, land as a source of competitive strength is ruled out.
Labour can be a source of strength given the current wage levels. But for that to happen, we need to re-purpose our education. Instead of (or perhaps along with) BE (Mechanical) and BTech (Chemical), we need 8th Std (textile printing), 10th Std (BPO assistant), 12th Std (source coders), etc, i.e. fit-for-purpose specialisation kicking in at far younger ages. This can perhaps reduce capital invested for turning an unemployed into a productive force as well as supply the skills that would increase productivity. Such increased productivity can make the labour cheap per output unit.
That leaves interest rates. Even enterprise is a function of interest rates beyond a point, where it translates entrepreneurism into investments. With excess capacities and high manufacturing RIRs, no one will feel tempted to invest in India.
High RIRs (when the rest of the world is under-performing) and an increasingly politically stable India is attracting excess of dollars that cannot be absorbed by a stalling investment economy. Oversupply/unutilised dollars in the forex market cause its prices to decrease. With it, it brings down import prices and makes our exports non-remunerative. This causes imports to flare up. Sure, we are also gaining in petrol, prices of Chinese goods, goods from ASEAN, etc, but then the jobs in making them are happening overseas. What’s more important now—employment or lower inflation?
People who are gloating at low inflation are looking at just one side of the equation. In the last 6-7 years, our monetary economists have been failing their equilibrium mathematics exams, with their highly out-of-context imported monetary theories. But the political student to be detained may be Narendra Modi’s government in 2019.
Writer of the story is CFO/Head, Strategy, JK Paper. Author of Making Growth Happen in India.
