set to weave history
[ WEDNESDAY, DECEMBER 29, 2004 01:04:03 AM]
labour laws to end fragmentation in the textile industry and grab the
historic but short-lived opportunity, which will come up this weekend as
the quotas go.
Behind the fog of the populist expenditure packages floated daily, the ray
of hope for the proponents of reforms remains the prime minister himself.
True, progress on reforms has been slow but the blame for that goes to the
anti-reform wing of the Congress that is reasserting after being
underground for 15 years.
Thus, it is Dr Singh, who called for an end to the small-scale industry (SSI)
reservation in a speech to the Small Industries Development Organisation
some months ago. He is also the one to have called for an end to the
export subsidies that risk being countervailed abroad. And he also shares
the credit with commerce minister Kamal Nath for transforming India's
image from an obstructionist to a constructive player at the WTO.
But potentially the most promising initiative by Dr Singh is his recent
directive to the textiles ministry to prepare a strategy paper outlining
the measures needed to attract investments, generate employment and boost
exports in this sector. So well timed is this intervention and so urgent
the need for action that for the first time in five years since I started
writing this monthly column, I feel compelled to visit the same subject
twice in a row.
In the present-day world, India must race to prosperity on two legs:
information technology (IT) and manufacturing. The IT sector does not
merely generate gainful employment for the educated, it is also the key to
faster productivity growth in virtually all sectors of the economy, as the
recent research on the US experience demonstrates. Luckily, India has had
a head start in this sector and the ingenuity and initiative of our
private entrepreneurs can be counted on to deliver as much as 20% per
annum sustained growth in it. The key area in which reforms would benefit
this sector is higher education. But that is a subject for another day.
The subject of immediate concern is manufacturing, which alone can
generate well-paid jobs for the vast pool of unskilled, uneducated labour
force that currently toils on the farm at subsistence wages or worse. The
creation of such jobs also promises to reduce the population pressure on
the farmland. But at 6.6%, the manufacturing growth during even the
high-growth period of 1987-04 has been hopelessly inadequate to transform
India from primarily agricultural into a modern society. The share of the
sector in the GDP has risen barely from 16% to 17% during this period
The good news, however, is that India stands on the threshold of a
historic opportunity to accelerate the growth of manufacturing. Textiles
and clothing account for nearly 40% of India's manufacturing output. And
the time for giving this highly labour-intensive sector a major push has
never been better. There are three reasons why.
First, the country-by-country quotas on imports imposed by the US and the
EU on key textiles and clothing products are slated to end on January 1,
2005. For products whose exports are currently constrained by the quotas,
rapid expansion of exports can now be expected. But even for products in
which quotas are not binding, the regime change ensures that future
exports cannot be constrained by quotas.
Second, China, which would be our most fierce competitor under normal
circumstances, faces the prospects of continued quotas under its WTO entry
conditions if it expands its market share rapidly. Already, the US has
imposed quotas on the Chinese socks, knit fabric, brassieres, and dressing
gowns for the year 2005.
Finally, Indian economy is currently on the upswing of the business cycle,
which makes fast growth of investment feasible.
But this window of opportunity is narrow: the tight restraints on China
will last only until 2008 and even milder restraints will disappear in
2013 bringing China at par with other WTO members. Likewise, the upswing
in the business cycle will not last more than a few years.
If one takes into account the available opportunity and the vast
inefficiencies that currently plague the textiles and clothing industry, a
15-20% per annum growth in the sector can scarcely be ruled out. The key
source of inefficiency in the sector, especially apparel, is its
fragmented nature. Whereas thousands of workers work under a single roof
in China, even the larger firms in India employ only 50 tailors. India has
also failed to become a part of any global production chains that are
sweeping across the world today. Therefore, the prime minister must focus
his efforts on eliminating the sources of fragmentation in the sector.
It was first thought that the SSI reservation was the main reason behind
the fragmentation. But the removal of this restriction on the
export-oriented units several years ago did not produce large units. It
turned out that another policy might have produced this outcome: our
export-quota allocation policy did not give additional quota to the
existing firms so that entrepreneurs had to create another firm to secure
additional quota allocation!
But even this explanation begs the question why large firms did not emerge
to export to the non-quota markets. The explanation that the vertically
integrated firms faced higher tax liability than a group of firms
performing the same tasks separately also fails because the firms have
chosen not to expand even horizontally. The search for the culprit
inevitably points to the well-known suspect: archaic labour laws.
If Dr Singh genuinely wants to create massive gainful employment, he must
cure the fragmentation in the textiles and apparel industry. And in this,
he cannot afford to go piecemeal addressing one regulation at a time, only
to find that yet another regulation required removal before larger firms
would emerge. The best politically feasible solution may be to create
genuine China-style Special Economic Zones that cover vast areas and
provide good infrastructure, reliable power, business-friendly environment
and flexible labour markets. The current fragmented SEZs, principally an
instrument of distributing largess, will simply not deliver.