The spectre of de-industrialisation

By Prem Shankar Jha

There is an old saying that when there are two economists, there are three views. India has lived in this debaters' limbo for half a century while a surfeit of economists debated the ideological pros and cons of each and every policy and action even as the economy recorded one of the slowest growth rates in the world. But the time when a comfortable middle class could indulge itself in the luxury of endless ideological debate finally expired on April 1 this year. For on that date what was previously a negative threat - a failure to create enough jobs, turned into the positive threat of de-industrialisation.

The economy's failure to create jobs has been obvious for a decade. While the average annual growth of job seekers has risen from 2.3 per cent in the 1970s and the 1980s to 2.5 per cent, the average growth of employment in the organised sector has fallen from 2.1 per cent to 0.8 per cent in the 1990s. But this average is deceiving. While employment grew by 1.1 per cent per annum between 1993 and 1997, with the return of the Hindu rate of growth in 1997, its growth fell to 0.46 per cent in 1998, to 0.04 per cent in 1999, to minus 0.15 per cent in 2000. The average annual growth in these years was, thus, a paltry 0.11 per cent. In other words, one in 24 young job seekers is getting a job in the organised sector in the four year period. A 2.5 per cent rate of growth of job seekers in the sector means that 6.72 lakh people tried to get these jobs every year, but only 17,000 succeeded. In the last three years, therefore, India added almost exactly two million young people to the educated unemployed.

Worse to come

But what has happened so far could be a pallid foretaste of what is to come. The slowdown in the creation of jobs so far has taken place within a protected economy. Since April 1, when the last remaining quantitative restrictions on 714 imported products were lifted, India is no longer a protected economy. And every single indicator is pointing towards a sharp acceleration of the loss of jobs in the near future.

In the previous column, I had cited episodic evidence of the loss of jobs on account of trade liberalisation. Among the cases cited were that of Ajanta Clocks and Apollo Tyres. But evidence is accumulating steadily that this shift of procurement by marketing houses from Indian to East Asian sources is a far more general phenomenon. A survey by a financial daily showed that almost thousand Indian firms have been forced by the slump in domestic demand, the squeeze on profits, the high cost of investment and poor infrastructure in India to invest their funds in manufacturing ventures abroad. At least a hundred have done so specifically to produce goods more cheaply and of better quality for the Indian market. Virtually the entire household electric appliances industry has switched from buying from the Indian small scale sector to buying from Asia.

This trend first revealed itself last year when the import of 47 consumer goods on thich QRs had been lifted in April 2000 jumped by 40 per cent. This was during a year when imports, other than oil, gold and silver, declined by almost 3 per cent. The trend strengthened in April this year, the first month of full import liberalisation. While total imports continued to shrink the increase of 'other' imports, a once-residual category that contains all consumer goods bought on private account, is a phenomenal 332 per cent in a single month alone!

The clinching evidence has come from a consumer survey carried out in May by a leading international securities firm. Its researchers spoke with six importers in western India and found to their own surprise that the scope for imports was huge and "was going to create severe problems for the FMCG (fast moving consumer goods) companies in India. Unlike the past, when importers were no more than smugglers - small operators who ordered one or two containers and sold the goods in key smuggled goods markets - there was now an organised set of importers who were tying up directly with international companies and setting up their own distribution networks. Most were trying to become exclusive importers for one company. More importantly, they were importing goods openly with an MRP (minimum retail price) tag and not trying to underinvoice their products.

Penetration of smaller towns

The survey found that, contrary to general belief, imports were penetrating not only the elite shops in the main metros, but the smaller towns as well. The six importers who were interviewed had already established a presence in six or seven States. They reported that sales were exceptionally good in the smaller towns because of the greater novelty of imported goods. In Mumbai, one exporter reported that his goods were being sold in no fewer than 6,000 shops.

Another disturbing development was that retailers were giving these imports prime shelf space because the retail profit margins on them were higher than on domestically produced goods (15 to 20 per cent against the industry average of 8 to 10 per cent). The fastest moving items, the survey found, were coffee, soaps, toiletries, and various food products.

According to the six respondents in the survey, Indian manufacturers had made it exceptionally easy for imports to penetrate the domestic market by grossly overpricing their products. This had made it possible for them to fix prices on a par with their Indian competitors and then offer much larger wholesale and retail margins to their distributors. Many of the most seriously affected products such as coffee and toiletries are produced by not the small scale sector but large firms such as Nestle and Hindustan Lever which have grown used to fleecing Indian consumers in a closed market. So no tears need be shed over them. But import penetration will not remain confined to these products and very soon will start hitting the core of the small scale sector.

This poses a deadly danger to them that has no parallel in the mature industrialised countries. Three decades ago, the reservation of no fewer than 800 products for this sector in a misguided effort to create employment, separated the manufacture of most consumer goods from their marketing. The so-called manufacturers, whose brands we are familiar with, are, therefore, only traders who procure their goods from the small-scale sector and put their logos on them. As a result, they do not have the incentive of genuine manufacturers to fight competition by remodelling their products, lowering their prices or improving their reliability, that a genuine manufacturer has. The actual manufacturers, on the other hand, are fighting competition blind. Lacking direct knowledge of the market, they do not know how to respond to the loss of orders. They therefore stand to lose not only most of their market, but also their marketing agencies. This is something many of them will not be able to withstand.

Impact on jobs

The impact on employment could be frightful. In 1998-99, the small scale industrial sector employed 17.16 million workers directly, produced goods worth Rs. 527,510 crores, and exported roughly a tenth of its output (which accounted for 35 per cent of India's total exports). This suggests that at most one in ten jobs - those in the export sector - remains secure. The fate of the rest will depend on the degree of export penetration that occurs in the consumer goods market. And that will depend on whether private consumption recovers from its present slump and starts growing again and on the extent of protection these industries are able to get legitimately through permissible tariffs and a devaluation of the exchange rate.

No one knows, therefore, how many of the 15 million remaining jobs are at risk today. The number could be high if the Government continues to play ostrich. It can come down substantially if the Government can spark an economic recovery, and indigenous producers receive timely infusions of technology and capital to expand and modernise their output. But the prospect of as many as three to five million jobs being lost or foregone ( through stagnation of this sector) remains real.

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