Job growth is driven primarily by small businesses, and India is no different than other countries, developed or less developed. Small business entry and exit must be made smooth to create a churn in the job market to develop conditions for economic growth. Prime Minister Modi understands the importance of small business enterprises in economic growth, and I hope he understand the importance of manufacturing and agriculture sector in India’s future.
Aidan Healy reported, January 16, 2016 (www.quora.com), that Prime Minister Modi has started an initiative, “Start-Up-India”, to promote entrepreneurship in India, a very encouraging signal for new business formations. A 10,000 crore rupees (100 billion ruppees) fund has been created for financial and non-financial assistance for new businesses. It appears that this plan will provide further boost to the service sector (especially in Hi-Tech), which grew at the rate of 10 percent per year in 2015-2016 (www.business-standard.com).
The service sector share in the global trade is almost twice the share of the merchandize trade. It contributes slightly more than fifty percent of 2 India’s Gross Domestic Product (GDP), more than three times the contributions of manufacturing and agriculture sectors. Using World Bank data on registered new businesses in India, computation shows that the average growth rate of 9 percent per year during 2004-14; data may be overstated because of archaic closure laws and local politics. Exit barriers tie up capital into unprofitable companies.
Modi’s government has also budgeted funds (though not enough) to boost agriculture and manufacturing sectors. The Times of India, February 26, 2016, reported that Economic Survey 2016 estimated capital requirement of 1.8 trillion rupees in manufacturing sector by 2018-19. Expansion of these sectors would be essential to absorb most of the labor force. Technology and other service sectors should primarily complement these sectors.
The following policy actions may assist in the process of business entry and growth:
1) Development of skills to match new technologies and labor demands of manufacturing firms. The Wall Street Journal, August 10, 2016, reported that the country is facing skill shortages to meet the multibillion parts orders of foreign companies for helicopters, aircrafts, trains, etc. The report claims that 80 percent of engineers in India are “unemployable”. Obviously, education standards are lacking and hence must be strengthened.
To succeed in startups under the new plan, develop vibrant manufacturing sector and attract foreign investment, the government must address this shortage. The technology of artificial intelligence and 3D printers in product manufacturing is moving fast. Hence, India must prepare itself to meet the challenges posed by these new technologies.
2) Develop and modernize infrastructure, including information technology and speedy broadband networks, aside from bridges and interstate highways. Akamai Q3 2015, reports (www.akamai.com) that India had the slowest average peak connection Internet speed among 15 Asian countries and ranks 116 globally. In partnership with private industry, the government could also establish startup incubator technology labs as part of the curriculum in flagship universities, supported by support services to facilitate business formations.
3) Decrease corporate tax rates (around 15%) to stimulate both local and foreign private investment. Personal taxes should be lowered to stimulate local demand for goods and services. Passing GST (Goods and Service Tax) is a good start. However, it has to be implemented to minimize leakage of revenues and red tape for businesses. Perhaps India could learn from the value added tax in Western Europe.
4) The Economist reports June 4, 2016, that a network of 27 listed state-owned banks control 70 percent of the assets of the banking industry. Bank reforms are needed to reduce the number of State Banks and encourage formations of private banks.
State Banks are a liability and are inefficient vehicles to encourage deposits, loans for private investment and investment banking. State Banks are subject to political favors and mainly concentrate their loans to major conglomerates. The Times of India reported February 6, 2016, that Economic Survey 2016 recommended selling of non-financial companies to inject capital in state-owned banks. This should be a signal to expedite privatization process to foster competition, improve services, financial innovations and restore profitability in the industry.
5) According to Labour Bureau of India (www.labourbureau.gov.in) there were to 16,154 registered trade unions with average membership of only 1919. Even though only the formal manufacturing sector (which is rather small as compared to the informal sector) is primarily unionized, labor laws must be reformed to reduce the number of Unions and absenteeism. Their ties to political parties should be severed, because it poses conflicts in the collective bargaining process.
It would be more rewarding if the budget increase for 2016-17 for the agriculture and allied sector also encourages new startup technologies aimed at boosting productivity in agriculture. In order to feed more than a billion people, India must plan for large farm sizes, extensive use of capital-intensive methods of production, new seed technologies, efficient use of water supplies and fertilizer. Small farms belong to the bygone era. Labor force released from the agriculture sector could be absorbed in the expanding manufacturing sector.
India faces many challenges. It can meet those challenges if the political and industrial institutions are willing to adapt. Since the wealth of a nation is its people, India must make every effort to harness the ingenuity of its people in order to innovate, grow and prosper.
Vijay Mathur, Guest Editor – Indiaspark
Vijay Mathur is former chair and professor of economics, and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, UT.