Harish Anand

Expanding economic activities in the hinterland will increase the value of marginal assets in the rural areas and encourage entrepreneurship by using local resources to create wealth and jobs for others too. — G. R. N. Somashekar

THE World Bank Quarterly Update on China (August 2005) has some interesting facts that throw light on China's experience in pursuing rapid economic growth while ensuring social upliftment, especially in the rural areas.

The report mentions that in spite of the slowdown on the domestic front, China's GDP grew 9.5 per cent in the first half of 2005, is expected to log 9 per cent for the full year and achieve 8 per cent growth in 2006. The external sector, which recorded a growth rate of 33 per cent during the same period, is expected to push exports and foreign exchange reserves to $1,000 billion each next year.

The report also notes that the fast pace of growth in foreign trade is in spite of the expected slowdown in world trade from 12 per cent in 2005 to 4 per cent in 2006. On the domestic front, investments, which were the target of belt-tightening measures that included dear money policy, remained robust and grew 25.4 per cent in nominal terms in the first half of the year, while inflation remained low, at 1.8 per cent in July 2005 against 5 per cent in August 2004.

Analysing how China marries high investments with low inflation, the report concludes that the surge in investments led to high capacity creation and increased supply of manufactured goods, which resulted in a supply-push deflation kind of situation.

Along with increased capacities, higher investment led to increase in labour productivity (per capita capital stock) sufficient to neutralise the adverse impact of the rise in oil prices to a considerable extent. The World Bank report has identified China's industry sector as a propeller and notes that the share of industry grew from 50 per cent to 59 per cent of GDP in the first six months of this year. Within industry, the manufacturing sector, on the back of cost advantage and entrepreneurial drive, has played a prominent role by foraying into areas not restricted to standardised electronics, textiles and apparel products, and so on, but has also got into specialised products for China's emerging markets.

This outward-oriented manufacturing sector-led growth has made China one of the largest globally integrated economies, as is evident from the fact that trade in goods and services jointly account for about 75 per cent of the country's GDP, against 25-30 per cent for India, Japan, Brazil and the US.

Now, is similar manufacturing-led growth possible in India, especially at this juncture, when we are experimenting with schemes such as the National Rural Employment Guarantee Scheme (REGS) to create employment and lift the rural masses out of abject poverty?

Is the REGS, as it has been conceptualised, the right way to go about correcting the social imbalance or are there better ways of achieving the same objective? This issue has taken centre-stage in almost all forums of intellectual discussion and debate on the country's economic growth.

The share of the services sector in the growth story, at more than 50 per cent of GDP, has overtaken that of the industry sector. Though such a growth may boost GDP as well as India's image as a favourite outsourcing destination but it will hardly make a difference to the lives of the economically weaker sections, which can only benefit from expansion of commerce and trade activities, especially in the rural areas. Such inferences are buttressed by the fact that manufacturing accounts for just 15 per cent of India's GDP, against 40 per cent of China's.

Assuming a GDP growth rate of 6 per cent for next 10 years, and a jump in the share of manufacturing to about 25 per cent by that time, the manufacturing sector would grow from the present $90 billion to about $300 billion, and its impact on income generation and employment can well be imagined. Besides, expansion of economic activities in the hinterland will also provide the rural areas/small towns with capital gain in the form of increased value of their marginal assets, including skills, and would facilitate some of them becoming entrepreneurs by using local resources to create wealth and jobs for others too.

Now, if such manufacturing success is achievable, what are the implications for a rapidly globally integrating economy? In the past, our experience of reserving some sectors for the small-scale industry to achieve various objectives not only failed to bring the desired results but their viability was also threatened due to the lower level of protection in the form of reduced Customs duties. Therefore, the manufacturing sector, should be capable of competing at the global level. But do we have the competence for world-class manufacturing? Some critics have written the obituary of India's manufacturing sector. But one has only to look at the success stories to counter such prophets of doom.

For instance, the automobile sector has several interesting stories: The success of the Indica, designed and built in India and exported to a region that leads the world in automobile designing. Brakes India, Mahindra and Mahindra, Rane Brake Lining and Sona Koyo Steering Systems winning the prestigious Deming prize in total quality management. And Toyota's plan of using India as a source for transmission parts.

Examples from the pharma industry, with such majors as Ranbaxy, Dr Reddy's Lab, Orchid and Wockhardt competing on an equal footing on the global stage, hardly need re-emphasising.

Apart from technical competence is the attractive investment climate and the focus on creation of physical and social infrastructure.Without timely action on this front, long-term growth in manufacturing cannot be envisaged. In spite of urgency duly acknowledged by all political parties, labour law reforms are still on the back-burner. Similarly, the Electricity Act, 2003 has been passed but the States are dithering and delaying implementing the power sector reforms.

Therefore, apart from fiscal policy corrections and creation of physical infrastructure, a social movement emphasising the positive dynamics of change in various forms — and inviting a more rational and responsible response to it at various levels — needs to be launched to accelerate the reform process.

(The author is an economist working with a leading textile company.)

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