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 Indophobia: Facts versus Fiction

Arvind Panagariya

FEAR has big eyes. So goes a Russian proverb. The truth of the proverb is nowhere more apparent than in the American fears that Indians (and Chinese) are coming in large hordes to take away American jobs. US academics, journalists and entrepreneurs as also visiting senior officials from India have consciously or unconsciously contributed to these fears.

Harvard Professor Richard Freeman writes that had India, China and the former Soviet Union not entered the world economy in the 1980s and 1990s, the global workforce in 2000 would have been only 1.46 billion. The entry of these countries has added 1.47 billion workers and, thus, cut the global capital-labour ratio to 55 to 60% of what it would have been otherwise. Freeman concludes that this means substantially lower wages for American workers the next thirty years.

Journalist Thomas Friedman of the New York Times uses the metaphor “flat world” to make the point that free flows of technology and capital have levelled the global playing field. He extensively and expansively quotes Nandan Nilekani of Infosys who proudly says that India can produce anything America can.

The Intel CEO Craig Barrett sees 300 million highly educated Chinese, Indians and Russians entering the labour force to take away skilled American jobs. And the visiting Indian policy makers love to tell their US hosts about the looming demographic change that is about to produce a massive and younger labour force in India while it does the opposite in the United States and Europe.

A careful look at reality offers little basis for these fearful and fear-inducing assertions, however; at least not as far as India is concerned. Thus, begin by asking where the Indian workers are, where they are heading and in what numbers. Astonishingly, most analysts are unaware that as many as 79.3% of the Indian workers were in the rural areas as late as 1991. This matters because few rural workers participate directly in the global economy — surely not as producers of manufactures or services that would compete with and pose a threat to the wages of American workers.
 
You might think that perhaps the rapid growth of the 1990s led to a dramatic decline in the rural population and increase in industrial employment in India. But this too is wrong. According to the 2001 census, 77.2% Indian workers were still in the rural areas, isolated from the global market place.

Indeed, the support for Freeman type of argument is even weaker. Inclusive of population growth, the number of urban workers in India rose from 65 million in 1991 to 91 million in 2001. Therefore, India added at the most 26 million workers to the global work force in the 1990s. If we then also take into account the contribution of India to the global capital stock, it is not inconceivable that the country’s net contribution to the capital-labour ratio was actually positive!

But even these numbers overstate the impact of the opening up of India on the global labour force. The bulk of the urban labour force in India was and remains employed in internationally non-traded informal services. The best available measure of the Indian labour force relevant to the global economy is the number of workers employed in the organised sector.

By definition, organised sector in India includes all factories and establishments with 10 or more workers if using power and 20 or more workers if not using power. The total employment in this sector was 26.7 million in 1991. It rose gradually to peak at 28.3 million in 1997 and fell again to 27 million in 2003.

These figures include both private and public organised sectors. If we confine ourselves to private organised sector, employment rose from 7.5 million in 1991 to peak at 8.7 million in 1998 and fell to 8.4 million in 2003. Thus, no matter how we measure it, the Indian labour force participating in the global economy was tiny and remains tiny.
 What about the world turning flat then? Here Friedman’s mistake is to confuse technical capability with economic capability. Arguably, India does have the technical capability to produce anything the United States can produce. But the economically meaningful question is whether it has the capability to mass-produce all these products to significantly challenge the American (and other) producers in the global market place. If one goes by the observation that India’s share in the world exports remains well below 1% despite relatively rapid growth of its exports since 1991, the answer to the latter question is unambiguously in the negative.

The same argument also undermines the claims based on the larger younger population in the future. A larger younger population does not automatically translate into a larger productive population. A depressing thought for an Indian is that if the current trend holds, ten years from now, India will still be employing less than 10 million workers in the organised private sector.

Craig Barrett expresses the India-China fear thus: “If you look at India, China and Russia, they all have strong education heritages. Even if you discount 90% of the people there as uneducated farmers, you still end up with about 300 million people who are educated. That’s bigger than the US work force.” But Barrett too is seeing through big eyes. Applying his formula, India should have had 103 million educated workers in 2001. But according to the 2001 census, it had only 37.6 million workers with undergraduate or higher degrees. Of these, only 25.4 million were in urban areas and of the latter, a tiny 3.6 million had technical degrees.

The implication for the United States is that the process of India’s transformation will be gradual, taking several decades. The implication for India is that it better speed up reforms to make it attractive for the organised industry to expand more rapidly than in the past if it wants to make the emerging younger labour force more productive.

Economic Times July 27, 2005

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