HOW GOOD IS THE 2015 INDIAN ECONOMIC SURVEY? VIEW THROUGH A CHAPTER ON "MAKE IN INDIA".

For those not familiar with the report, the background material is given after my critique.

Summary Review
     This chapter is noteworthy for its poor preparation, lack of credible content, and absence of even a semblance of novelty.  Given the importance of the topic as an agenda of the new government of India,  this chapter should be viewed as an embarrassment to the government and to India for the poor quality of its content and presentation.  This evaluation is based on the following and will be elaborated on below: (a) the document gives an impression of having been put together in a hurry and abounds in grammatical and semantic errors which even make some key sentences unintelligible; (b) the chapter rests mostly on a crank-through with a "one shoe fits all" attitude of the Rodrik model which is more descriptive than prescriptive; (c) to cite two inaccessible and unvetted working papers (with A. Amirapu) to provide support for key ideas should be unacceptable in a document of this importance; (d) this is IMF-think slightly modified, and ignores many challenges and opportunities specific to India.

Conceptual Criticism
     I will divide my criticism into two parts - those at a fundamental conceptual level, and those at stylistic and presentation levels.  The latter are certainly less important, but only relatively so since no new idea can succeed without it being sold successfully to stakeholders by creating a good understanding of it.

    First and foremost, "Make in India" is a means to some ends and not an end by itself.  What are those ends?  The primary goals of "Make in India," and the parameters within which one can operate have not been articulated.  Is it mainly to increase exports and shore up the rupee?  Is it to achieve greater economic security for the masses?  Is it to decrease dependence on foreign technology and products, particularly in key areas like defense procurement?  What can give, and by how much, in areas such as environment, foreign ownership? Should one not spell out the goals and constraints as the first order of business given that you may not get there if you don't even know what "there" is?

     The Rodrik model [the main analysis tool of the chapter] is at best descriptive serving to provide one of many explanations of the economic history of some developing economies.  It is not prescriptive by any means and does not say how to effect a transformation.  Like all equations and models, it is subject to the major problem of "Garbage In, Garbage Out" in terms of data quality.  Technically, estimation of derivatives (rates of growth) is the hardest and subject to a lot of data problems.  The model predictions are not very illuminating without detailed sensitivity analysis that will shed light on how it is affected by minor perturbations of its assumptions or input.  Can the future of 1.25 billion humans be hung on cranking that one model, however much it may be adored by certain segments of the economics community?

     Is labor productivity the only metric of concern?  Many economies have increased this at the expense of the health and well being of labor in environments resembling indenture.  Shouldn't  "Make in India" occur with a balanced approach, and if so what is it?

     The disparity in labor productivity in the subsectors of manufacturing  cannot all be attributed to skill levels alone.   There are many more important factors like lower idle times through better organized procurement of orders, possibly better quality of life of labor, more mechanization and use of power tools, etc., that are more common in the registered manufacturing, for example, as compared to the unregistered.  Why is no attention paid to identifying the specific factors that account for the advantage of those sectors of manufacturing that have done well, and to see if in some way these factors could be manipulated in the other sectors?  The success of the dairy industry in India happened as a result of such innovative thinking, did it not?

     Is export the only focus or the main focus ?  What about the vast internal market? In many areas, it operates as a sellers market providing no incentive for quality and productive improvements to facilitate speedy convergence.  Should we not be adding more to the supply to change that?  Should we not increase the overall demand side by spreading the benefits of economic growth to larger segments of the population so that the overall economy is driven to higher gear?  Should we continue the status quo where wealth accumulates with only a few and gets spent on foreign luxury goods, gold ornaments, etc. at the expense of precious foreign exchange reserves and national strength?

    One must disagree very strongly with the assessment that "focus must be exclusively on registered manufacturing."  Even in a highly developed economy like the USA, a very large set of providers of employment is the small business sector and not the large multinational (which is busy downsizing and outsourcing to increase profits and reducing labor by all means of automation).   Betting on big multinationals has an inherent risk; as labor costs go up, as they indeed will in a growing economy, there is no guarantee that they won't flee to where cheap labor is more plenty and that India's growth becomes but a flash in the pan and not sustained.  The success of Gujarat (and Gujarati NRIs) did not come from participation as labor in the registered manufacturing sector, but as entrepreneurs and businessmen.  In the USA, the row of millionnairs has a large share of small business owners like laundraumat owners (see the book "The Millionnaire Next Door"), and the bulk of the middle class is made up of blue collar workers.  Unfortuantely, policies are made in India by white collared babus who probably have poor appreciation of the potential at the other end of the spectrum and the bottom of pyramid.

     Skill building is viewed from the traditional Indian white collared point of view or as generating employees for large businesses only.  If there is one thing that has kept India backward, it is the retention of the Macaulay model of school education which was certainly good for turning out clerks for the Raj but not for building a modern India.  Its "one shoe fits all" philosophy has thrust upon all a set of curricula relegating many to low paying jobs albeit a high school diploma, while those very people as entrepreneurs or small businessmen on their own would have done a lot better if only they had been redirected and trained to be so based on their aptitudes and ability.  A system that enables many entering jobs as electricians and plumbers and other workers to become better trained not only technically but in terms of the rudiments of running a small business would make a marked change in the lives of millions, and that too in a relatively short period.  Indian problems need Indian solutions, and the assessment of Indian strengths need the involvement of not only ivory tower researchers and white collared babus but also some real "chaiwallas" if some great opportunities are not to be missed.

    There is little given in the paper on the service sector except that it compares favorably, and some sub-parts even more so, with the registered manufacturing sector.  One issue glaringly not addressed is whether the most profitable part of that sector comprising of IT and BPO are reaching a plateau and how they can move forward.  Also, as the current US experience shows, can an economy prosper for long only as a service economy relegating all manufacturing to others?

     Finally, there is no attention paid to innovation and intellectual property generation and protection. Without innovation in India increasing enormously both in size and quality, "Make in India" can degenerate easily into replicating the worst of the Chinese model in terms of low level jobs, high pollution, and social discontent.  From the individual post-doc going abroad as an intern to scientists at government laboratories on collaborative research, no systematic effort is made to secure the intellectual property benefits for those who create the intellectual property, and these get signed away as small print in some contract or the other often to a non-Indian entity.  India needs to not only generate more intellectual property and marketable innovations, but also move aggressively to reap the benefits of the intellectual property generated by Indians. 

Presentation Issues
     The chapter is unfortunately poorly and hastily written, pretentious, and incomplete.  Honestly, this would not merit a passing grade in a graduate course in a reputed university.

     The equation of Rodrik is given without even a simple explanation of the notion of the frontier. We view the inclusion of the equation and the greek as an attempt "to baffle with baloney" in the absence of an ability "to dazzle with brilliance" at least in the context of the topic of the present chapter.

     This chapter smacks of a monopoly of wisdom as resting only in one subset of developmental economists, and hangs too much on an unpublished working paper that cannot be accessed.

     In many places, the typographical errors and certain sentences make it hard to even understand what is intended.  Two examples are: (a) the footnote of page 1 of the chapter "They suggest and increased in the level" which probably should read "They suggest an increase in the level" ; (b) Page 3, 2A: "That is, productivity growth should be faster in richer than poorer parts.  Otherwise, severe within-country regional inequality may arise."

CONCLUSION: A topic of utmost national importance has been given a shallow and poor treatment.  The exclusive reliance on mostly the authors' work, some of which is unpublished, and of a small coterie of developmental economists who may not fully understand the opportunities in India and may see it from a purely "foreign" market/investment seeking optic compromises not only its merit as a scholarly document but its value as a basis for policy.

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BACKGROUND INFORMATION
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     The Government of India released recently The Economic Survey 2014-2015, a daunting document of 296 pages with a statistical appendix of yet another 148 pages, making it impressive certainly by its size if not by the quality of its content.  Though it is claimed to be written in the tone of an editorial or a blog as opposed to an academic economics paper, the digestion of such a document is nevertheless bound to be a daunting and time consuming task given the multitude of tables and the various economic theories that form the backbone of interpretations of data and evolution of policy.  

     But no sooner than the document is put out, news media is busy both showering bouquets and throwing bricks, and one wonders if either camp has a real basis of understanding for their hype and hysteria.  Given that the survey drives policy impacting 1.25 billion humans whose hopes have been raised very high, I have decided to embark on a careful reading and review of at least a few chapters. I start here with Chapter 7 (13 pages) titled "What to make in India?  Manufacturing or Services?" since that is one of the flagship initiatives of the new Prime Minister and since it also tickles my own imagination as an Indian.

     I have one axe to grind.  People like my grandfather gave almost all of theirs for the freedom of India.  Many others, like the heroes of Jalianwala Bagh, even gave their lives.  Almost 70 years have passed since we won independence, and India is still and forever only arriving.   I may not have a decade left and definitely not a decade of patience.  So, I want to do my part, and that is to be the court jester who will not shy from calling it the way it is.

My Synopsis of Chapter 7 

     It is well-known that structural transformation of an economy from low productivity to high productivity areas pays dividends that could be accelerated further by two additional facts: (a) the higher productivity difference becomes applicable to an increasing fraction of the labor force over time due to migration; (b) high productivity sectors move to optimal performance more quickly than the others.   (This is Rodrik demystified without the mumbo jumbo of an equation.)

     Structural change need not be into manufacturing (of physical goods) alone, but could be from agriculture and low efficiency manufacturing into the service sector (like insurance, IT services, etc.). It is appropriate to ask if one should not include transformation into the service sector as well or remain focused mainly on manufacturing.

     Structural transformation needs to be such that it absorbs resources (labor, specifically) so that benefits percolate to the masses.  For this, there should be congruence between skill requirements of the expanding sector and what is available or could be developed quickly.  Exports are a key to rapid growth.

    The Indian reality is that in manufacturing productivity is very low in general.  Unregistered manufacturing productivity is much lower than that of the registered. Indian industries converge (come up to international levels in productivity) at a slower rate than average.  Indian states have been unable to achieve more than 6.2% of employment from registered manufacturing over 30 years.  Secular growth is geographically spotty within India.  The sector to be pushed higher should be at least initially one that can absorb considerable amounts of unskilled labor, but the manufacturing entities that can be accelerated are also those that mostly use skilled labor.  Manufacturing thus fails to satisfy some critical desiderata for becoming the sole agent of transformation.

     Indian service industry - like transport, real estate and construction, IT -  have shown substantially faster employment growth and are becoming an important source of wealth.  But they have a limited capacity to use India's most abundant resource, namely, unskilled labor.

    In the area of manufacturing, India must concentrate transformation exclusively in the area of registered manufacturing.  However, registered manufacturing has nothing "distinctive or superior" when compared to certain service sub-sectors.  Both are skill intensive, however.  The construction sector, though not skill intensive, is not tradable [I interpret this as meaning that it does not support exports.]  "Skilling Inida" is therefore important.

     The challenge of India is either to make it possible to utilize its unlimited supply of unskilled labor or to make the supply of skilled labor more elastic in the sense of being able to adapt to demand and other conditions quickly.  The future trajectory of Indian economic development could depend on both.
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Dr. V. Ramaswami, the blogger, is the author of the book, "Innovation by India for India, the Need and the Challenge" widely available from Amazon and Flipkart.