By Invitation: Discussions en route the Knowledge Economy

The Brooding Dude Can’t Help Thinking about many things, including on the knowledge economy. This guest post is a summary of a series of articles he posted on his blog recently.

Services may be India’s only chance

The Brooding Dude

The rise and rise of the IT industry in India, has led to a lot of talk on its potential to alter the economic landscape of the country. “China may have caught the last bus to being an industrialized country, but India would be the first to become a knowledge economy” summarizes this view pretty well.

The ‘knowledge’ economy refers to an advanced stage in a tertiary occupation- or services-based economy. With the phenomenal growth of services such as in IT, R&D and banking & finance, it may only be a matter of time before the sector becomes bigger than agriculture and manufacturing.

Though it has never happened before, there are reasons to believe it could happen in India, though the existing and resultant social inequity related problems pose a significant challenge.

Critics of the “utopia-through-services” story suggest India should take the China route and use manufacturing to uplift the poverty-stricken masses. However major flaws with this argument imply that services could be India’s only chance, and not just one of many options. Understanding the transitions of the economy are vital to surmounting of the social equity related problems. The optimistic view would be that the primary and secondary occupations would grow with the tertiary economy, initially at least to support it, and then to even eradicate mass poverty. A generation down the line India would be at a crossroads – the uplifted masses could either provide the manpower to transition into a services-based future, or manufacturing fired by the developments in the knowledge sector could takeover the economy on its own strengths.

The Brooding Dude Can’t Help Thinking about many things, including on the knowledge economy. This guest post is a summary of a series of articles he posted on his blog recently.

6 thoughts on “By Invitation: Discussions en route the Knowledge Economy”

  1. The Brooding Dude’s arguments against India becoming a manufacturing hub went as follows.

    “1. Infrastructure: The sections of the National Quadrilateral project that are complete do not compete with the Chinese or Western roads. You do not travel below 100 kmph on those roads, here you cannot go about 120. This is one of a zillion examples you can find.”

    This isn’t an insurmountable hurdle, if the government takes the right steps regarding public and private-sector infrastructure investment. China’s infrastructure didn’t look that great 15 years ago.

    “2. Banking: Our banks are in far better condition – because they give far fewer loans. China is floating on bad debt (which is very dangerous) but they finance it via their great savings rate (ours is far lower).”

    India’s savings rate is still higher than many Western countries. The current account surplus demonstrates that it’s not India’s savings rate that’s holding the country up right now when it comes to investment. Also, a big reason why the savings rate is so much lower than China’s is because India’s per capita income is about 50% lower. Many people simply can’t afford to save much. As per capita income rises, the savings rate should improve.

    “3. FDI: Shanghai alone gets 50% more than all of India. China totally gets more than 10 times of what we get”

    The problems here are infrastructure (which, as I said, can be fixed), senseless FDI limits, an excess of red tape, and socialist labor laws. If the government has the political will to enact needed reforms, India can draw in enormous amounts of FDI as well.

    The bottom line for India is that if it wants to become a developed country, it has no choice but to become a powerhouse in manufacturing as well as services. A country the size of Vietnam or the Philippines might be able to reach developed-nation status on the back of a services industry alone, but a country the size of India simply can’t do it. The manufacturing sector has to play a large role as well. And if the government ever gets serious about making the necessary reforms and investments, India can pull it off.

  2. Eric,
    Thanks for your comments. Let me clarify a few things here.

    1. The key is political will. I make that point again – if we only had the political will we could have had the land reforms in place which is all that we would have been needed for a second green revolution. For infrastructure, we need political will for two things
      1. Land acquisition and related aspects
      2. Rationalization of the regulations – stuff like single window clearance.
      Consider the Bangalore International Airport. The Tatas walked out in 1998 saying the clearance was taking too long. It has been over 6 years now. This is not the kind of political apathy that I would say can be conquered, unless there is a miracle.
    2. Secondly, manufacturing is a vital cog in the wheel that will ensure us a future – even a services based future – which is a point I have made in my later links. I only said that a services-growth-based push for manufacturing would require relatively little effort from the Govt in the form of subtle protectionism in the early stages, which is far more realistic than China-style reforms.
    3. The Golden Quad was only an example. In fact I believe the speed aspect is related to the concretizing of the road (to reduce maintenance costs). Asphalt over the concrete will allow far higher speeds. But the point is our leadership has not shown that it has the willpower to beat China in the infrastructure game.
    4. As I mentioned earlier, Govt regulations are a key (political will is required to solve this). For manufacturing based growth we need huge investments – this money will not come from the Govt. In China, the banks freely give loans (to the politically connected at least). The bad loans are financed by the savings of others. We currently do not have those savings, so we cannot afford risking too many bad debts. (Chicken-and-egg situation?) And neither are we getting the right amounts of FDI. I would tend to blame this on the regulations. In fact there is enough money in the country if only we had the right regulations (again the main argument against using Foreign reserves for this).
    5. Our intrinsic strengths in manufacturing are second to none – not even China. I only doubt the ability(again read political will) to convert that potential into reality.
  3. Kiran, I agree with a lot of what you wrote here. Like Fareed Zakaria said, whereas China’s success has come because of its government, India’s success (to the extent that it has succeeded) has come in spite of its government. And that makes for a pretty damning indictment of Indian democracy. One can hope that as many of the older politicians and bureaucrats who have caused so much damage retire and are replaced by younger ones who weren’t reared in a socialist mindset, and are held accountable to a wealthier and more educated populace, the country will get a sea change in governance. But that’s the kind of thing that could take a couple of decades to fully happen.

    When you talk about India’s strengths in manufacturing, are you talking about the entreprenurial culture and relative lack of cronyism? Or is there something else you had in mind? Thanks.

  4. Bloomberg’s William Pesek Jr filed this report which supports The Brooding Dude’s view.

    Yet what worries observers like Stephen Roach, chief economist at Morgan Stanley, is that “a new India still aspires to do it the old way — the manufacturing way.”

    Roach, like many economists, has been visiting India more and more this year, and he has big concerns about India achieving a manufacturing-led solution to its daunting unemployment and poverty problems.

    In today’s intensely competitive world, manufacturing success is all about high productivity. It’s an intrinsically laborsaving endeavor; services, meanwhile, remain labor-intensive, especially in the case of the knowledge-based activities driving growth in India’s most vibrant service companies.

    The `Next Step’

    Squeezing high productivity out of a laborsaving operation requires huge scale, something that’s working for China. Given India’s deficiencies in infrastructure and foreign direct investment, achieving that kind of scale is a huge challenge. Labor-intensive services, by contrast, need less scale to create large numbers of jobs.

    India shouldn’t turn away from manufacturing, but it may be best to view it as a complement to the economy’s other strengths – – not as a primary focus. The trick, Roach says, is creating enough job opportunities to narrow the income gap between the haves and the have-nots without stifling India’s thriving service industries.

    That’s quite a feat in any economy, never mind one shackled with such high levels of inefficiency. Thankfully, today’s growth — 7.4 percent in the second quarter –“gives India time to ponder the next step,” Roach says. “But that next step is a big one, with enormous strategic implications. Largely for that reason, the manufacturing fixation disturbs me.”[Bloomberg]

  5. Eric,
    Primarily it is the entreprenurial culture, and also the fact that in the early days of the industrial revolution, India actually led the World till the Brits had to consciously destroy local industry (according to Noam Chomsky). That apart if you look around today, we see that despite the abysmal levels of FDI, the poor infrastrucuture and all the red-tape, Indian companies are actually doing reasonably well and in certain areas even competing with the Chinese. It pains me to think of just what we could achieve given the same conditions.

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