Why India hasn’t matched the success of other Asian powerhouses

In A Sixth of Humanity, a book by Devesh Kapur and Arvind Subramanian, the authors posit this development paradox in a poignant and perceptive way: “Every successful case of growth surge and success in the post war period in Asia has been associated with dramatic surges (about 20% or more) in clothing and footwear exports.” Korea, for example, saw annualized growth rates of 30% in apparel and 70% for leather and footwear in the two decades after 1962, its year of economic take-off.

The comparable figures for India after 1980 are 12.7% annualized growth in apparel and a relatively measly 5.4% in leather and footwear.

The whimsy of ‘what if-ery’ often overlooks that both these East Asian countries had achieved much more in education and health, as well as relative gender equity, which boosted their world-beating growth. In addition to being blessed with a government supportive of small business, China also had a more entrepreneurial diaspora, heading firms in Taiwan and Hong Kong, which had long been superlative exporters.

As Kapur and Subramanian point out, “The more the low-skilled labour force a country possesses, the cheaper the wages and the more competitive its products ought to be in global markets. Instead, India’s share of global exports is 4.5% when its endowment of people ought to have taken that share to about 22.5%.”

This is a book that teems with telling statistics; these numbers are sometimes followed by more that deliver a boot in the solar plexus to any witness of what the authors refer to as India’s ‘stunted and premature deindustrialisation’: “It is as if the potential of that 18% of India’s workforce (about 100 million people) has been left unfulfilled, even wasted.”

The reasons are well known. Successive governments have ducked the challenge of making the case that more flexibility for employers to reduce their workforce without government permission would mean more hiring. Designating certain industries as reserved for small-scale units has been similarly self-defeating. Uncertain power supply from state-owned power distributors and expensive electricity for industry have also taken a toll. (When I was covering Foxconn’s plant in Shenzhen for a few years from 2010, I was amazed that it employed as many as 250,000 workers.)

To these handicaps, the authors add what they label as “India’s most valuable lottery”: Tens of millions of Indians who compete for 500,000 government jobs annually. “With a pass rate of 0.2-0.3%, this hefty mass of youth often wastes 2-5 years of prime age and forgoes alternative employment for the infinitesimal prospect of gaining entry into lucrative government jobs.”

If this were all not Naipaulian enough in dashing one’s hopes, there is more. The authors blame inflated salaries for lower-level government employees for crowding out companies seeking to hire people for labour-intensive factories. Garment exporters often complain that labour is much less expensive in Bangladesh. As a result, its clothing exports are now three times India’s.

As companies around the world looked for alternatives to manufacturing in China, one might have expected India to seize a higher share. While China started losing market share in clothing exports after 2010, as its minimum wage was dramatically increased by the government of the industrial province of Guangdong (and other) after a spate of suicides at Foxconn, “India’s share remained stagnant at 3% while that of Vietnam and Bangladesh rose by 3.5 to 4.5 percentage points.”

The contrast with our booming service exports and high-skilled manufacturing exports, which the authors calculate saw growth rates twice as high as those of low-skilled exports, could not be starker. “It was as if India was a high-wage economy and only skilled labour could benefit from the (post-1991) dynamism. It had converted its physically abundant unskilled workforce into an economically expensive resource, penalising its use.”

Add to all this the non-tariff barriers our small and medium exporters face, some circumstantial but others self-inflicted, and the erratic management of India’s currency. This must seem quixotic from the perspective of our labour-intensive exporters who compete with China and others in Asia where central-bank policy seeks to undervalue the currency.

By contrast, the Reserve Bank of India has intervened time and again, purportedly to smoothen exchange-rate volatility, but largely keeping the currency stronger than it would otherwise have been.

Further, our business press obsesses over rupee depreciation against the dollar and lionizes startups while ignoring even large garment exporters. For years, my bellwether of change in the tough business conditions faced by apparel companies has been the Epic Group, a large clothing business based in Hong Kong and run by Ranjan Mahtani, who left Mumbai in his late teens.

The company employs close to 50,000 people in factories owned directly or through joint ventures in Bangladesh, Jordan and Ethiopia. In March, Epic will open a factory in Bhubaneswar, employing 10,000 workers. If our demographic dividend is to be encashed even partially, we need many more new factories of this scale.

The author is a former Financial Times foreign correspondent