Even as a child, Mullaram Kharida knew he would eventually have to migrate to a city to find work. So, in 1979, he left his father’s small farm and made the 70-kilometre trip to New Delhi in search of a job as a driver.
The first year was hard. As an apprentice, he worked virtually for free, earning a few rupees by washing cars and assisting other drivers. Eventually, he landed a job driving a taxi and, several years later, one chauffeuring private tourist cars.
"I work very hard. I am not afraid of work," said Kharida, 48. But his choice of work is limited. "I am not an educated man. I am not a graduate."
Unlike the educated classes that have powered India’s outsourcing story and can virtually pick the job they like best, Kharida’s choices were driving, the army or farming.
Although slightly better educated, his children will soon have to make a similar decision of going to a city or stagnating in a village that seems stalled in time.
His two daughters, 18 and 16, will most likely marry and live wherever their husbands choose but his son, now 14, will probably retrace his father’s steps and make the trip to Delhi.
Unfortunately, he may not have many more employment choices. Although economists and India watchers constantly clamor for industry and manufacturing, some 60% of the 500 million-strong labor force is still employed in agriculture.
Demolishing the walls
Unlike China and just about every other Asia tiger, India’s growth to date has been powered by the service sector, which employs relatively few people, and some heavy industry. Then there is domestic consumption of goods that are, by and large, built abroad – even when the final assembly is done in India to get around customs duties.
But India’s development model of a strong domestic market surrounded by tall walls to protect firms from foreign competition is being dismantled.
A higher savings rate is providing ample fuel for investment, and import tariffs have been drastically reduced. For growth to continue at the current level of 9% or more, though, light manufacturing – the sort that can provide millions of people with low skill jobs – has to come online. India needs sweatshops.
"The favorite topic you get, especially from India observers, is that India is different. India is going to grow its own path. It’s going to be driven by productivity. It’s going to be driven by services. We don’t need to have these sweatshops and manufacturing to have this growth story," said Jonathan Anderson, chief Asian economist for investment bank UBS, during a talk in Hong Kong.
"From a purely macroeconomic point of view, my answer has to be: hogwash. Look at the IT sector. Maybe two million [people] in the long run… That’s about it. Then you reach the end of the story."
Services are insufficient
While it is true that India’s service sector was responsible for 53% of GDP in 2004 and 54% in 2005, according to the World Bank, it is also true that it employed less than a 25% of the population.
Services in China, by comparison, accounted for just 41% of GDP in 2004 , a figure that has changed little since 2001. But China’s exports weighed in with 34% to India’s 19%. Tellingly, high technology exports made up 30% of China’s total exports compared to just 5% in India.
"Services alone are not going to drive the story. A manufacturing sector is of crucial importance," said Anderson. "Therefore liberalizing [small] manufacturing , labor intensive goods, if you will, sweatshops but low end export-oriented manufacturing is a necessary part of life."
The government knows that India needs to develop manufacturing and it also knows that manufacturing needs clusters of people with good infrastructure. Creating these, or spreading the growth to existing urban centers that have yet to benefit from it, is a top priority.
"We have 800 cities with a 50,000-plus population. Our growth to date is confined to less than 200 of them," said Ajay Dua, India’s secretary for industry. "More than 600 cities have not seen growth. We must develop smaller cities."
By contrast, millions of rural peasants have crowded into the handful of cities that have grown. Fifty years ago only 16% of the country’s population lived in cities but today the figure stands at 30%.
"If the rate of growth slows we would be fine but it looks like it will be much faster," Dua said.
India’s challenge is to create new manufacturing clusters away from the likes of Delhi and Mumbai that have become overcrowded due to their success.
"We need to keep people in rural areas but away from the farms," said Dua. "Rural industries must develop rather than people coming into the cities and living in squatter settlements."
The government already has schemes to address this. It plans to boost its investment in infrastructure, currently less than 5% of GDP and is encouraging business to invest in rural areas. At the same time, it is offering incentives to collectives that set up businesses in rural areas, especially village-based manufacturing enterprises.
This is all part of the push to give migrants like Kharida more choice of work near their homes and, hopefully, keep them from migrating to the cities where they live in urban squalor.
"The rural areas have not grown with the younger generation," said Supriya Banerji, head of international development at the Confederation of Indian Industry. "Until infrastructure, sanitation, health and education develop there we are [still] going to have desperate poverty levels."
Looking to the east
Most of India’s 784 cities with 50,000-plus populations are more like towns than cities and less than 200 have shown any tangible growth. Of these 784, only 22 have more than one million people
By comparison, China has almost 250 with more than 200,000 people. The country’s 515 million-strong urban population is spread across 666 cities.
From Guangzhou to Beijing, China’s migrant workers often live in sub-standard conditions but most can find work. Those in the manufacturing hubs of the Pearl or Yangtze river deltas can even choose between several opportunities.
Plentiful labor, combined with aggressive investment in capacity expansion thanks to high domestic savings and unprecedented levels of foreign direct investment, has been the key to China’s 10%-plus growth. In most macroeconomic respects, economic development has followed a similar path in South Korea and Taiwan, albeit on a larger scale.
"Manufacturing for us is only 17% of GDP. It must grow faster, faster than agriculture, faster than all around GDP," said Dua.
"Roughly, in India, for every one job created in manufacturing there are three jobs created outside. [It is] the trickle down effect: logistics, marketing, research. So if we create a million jobs in industry, there are three million jobs elsewhere."
But India’s manufacturing is hampered by poor transportation networks, bad infrastructure and much red tape. Outsourcing hubs rely on their own back up power and infrastructure. This means isolated centers like Gurgaon and Hyderabad are equipped with better infrastructure, but manufacturing setups remains unreliable and expensive.
Intel, for example, passed India up to set up shop in Vietnam due to a lack of reliable power and other services.
"Infrastructure is a concern – transportation time is much longer than in other countries," said Pranay Dhabbai, Director and COO of Haier India, the Chinese white goods producer. "In certain parts of India you need power back up. That goes for every type of industry."
He accepts that improvements in these areas would help bring down costs but the company won’t pay over the odds for a better return on its investment.
"The constraint is in the economies of scale. If your production base is large, you can spread the cost over a large production base," Dhabbai said.
The news is not all bleak, though. The country’s manufacturing sector is definitely on the rise. It grew virtually on par with GDP at 8.7% in 2004-05 and 9.2% in 2005-06. This year, the government expects the figure to be 11.3%.
But this growth is coming from a very low base and is being helped along by upward movement along the value chain of the older manufacturing bases like China. This movement creates a vacuum for lower end products that India could fill. As Anderson said, people in the US "have to get their T-shirts somewhere".
At the same time, the country’s infrastructure is slowly improving.
What’s more, said Dhabbai, there are more people willing and able to buy things which, in turn, gives manufacturers the motivation to take risks that would put them in competition with the rising inflow of foreign products.
The government’s economic focus over the last year, outlined during the February’s budget, pays a lot of attention to developing the rural areas and set up manufacturing centres outside the cities. It also looks to spread the wealth further into the population and create new jobs where now there are none.
"It is not an easy task to do those things in a democracy," said Dua. "But it does not mean that you have to give up the direction of your change."
"We need to get our infrastructure – physical and social infrastructure – once that happens, with equalization, we can talk about harmonious growth."