Monday , 23 October 2017
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India’s real problem is a ‘Missing Middle’
The Prime Minister, Shri Narendra Modi releasing the logo at the inauguration of the “MAKE IN INDIA”, in New Delhi on September 25, 2014.

India’s real problem is a ‘Missing Middle’

Rajesh Mahapatra

The horrific tragedy at Mumbai’s Elphinstone Road station could have been averted if authorities had acted on earlier warnings that a stampede was waiting to happen on the foot overbridge at this important landmark on the city’s local rail network.

The overbridge was built 35 years ago and long declared unfit to handle the tens of thousands of Mumbaikars who use it to commute to Parel – now a major hub of commerce, finance and entertainment. Yet, no urgency was shown to build a new bridge, and when the inevitable happened, it took 22 precious lives.

Much like the tragedy in Mumbai, the Indian economy is fast sliding into a full-blown crisis because policy makers have either ignored or failed to address a major gap in its growth story – the ‘missing middle’ in manufacturing. In economic parlance, the missing middle refers to mid-sized firms that typically employ workers in the hundreds, with a turnover of $2 million to $100 million.

Historically, these mid-sized manufacturing units played a key role in the capitalist transformation of economies like the United States or in the rapid economic expansion of Asian economies such as Japan, South Korea and Taiwan. They not only drive productivity growth through innovation and efficient resource allocation but create new jobs and sustain a strong pool of middle-class consumers. In contrast, India’s manufacturing has thus far been the story of a limited number of large-sized firms and a preponderance of small, household enterprises, with a gaping hole in the middle.

About 50 per cent of manufacturing jobs are in firms that employ less than 50 employees and a quarter is accounted for firms with 500 or more workers (in most cases, these actually run in thousands). The former represents low-productivity, low-skilled manufacturing, which constrains the economy from growing faster, while the latter tends to lean on capital-intensive techniques and, therefore, creates commensurately lesser jobs with higher growth.

Ever since India switched from a mixed-economy to a market economy in the early 1990s, economists and experts have repeatedly pointed to the imminent risks associated with a failure to address the missing middle problem. The risks are now evident.

A Carnegie study titled ‘Can India Grow’, published last November, provides empirical evidence over how the Indian economy is hobbled by the missing middle, not just in manufacturing and farm production, but also in consumption and market fragmentation.

Citing a comparative study of 35-year-old firms in India, Mexico and the United States by the International Finance Corporation, the Carnegie paper termed the Indian experience as “deeply troubling”. The IFC study found that the size of Indian firms had declined by a fourth since the time of starting up, while in Mexico it doubled and in the US, grew 10-fold over the 35-year period.

“As firms age, they are expected to get larger and employ more people,” the Carnegie paper said. “Since India’s experience is orthogonal to this expectation, something in the Indian business ecosystem is badly broken.”

Indeed, the Indian ecosystem is badly broken and that shows. First, the competitiveness of Indian exports took a hit and lately, the smaller enterprises have found it difficult to keep the domestic consumers from embracing cheaper imports from Southeast Asia. This is reflected in output contraction or sluggish growth in areas such as manufacturing of food products, electronics and electrical goods.

As a result, after a five-year boom through 2004 to 2009, the Indian economy has steadily decelerated – a trend that has gotten worse in the past year, following policy misadventures as demonetisation and a messy implementation of GST. Inequality has widened amid jobless growth and what was once seen as a demographic dividend in a nation of youth is being viewed as a liability with serious political and social consequences.

The crisis has triggered a blame game within the ruling BJP and provided the opposition with fresh ammo to attack the government of Prime Minister Modi.

On his part, Modi can turn this crisis into an opportunity, if he chooses to focus on the missing middle. But make no mistake, there are no quick fixes. Building a robust class of mid-sized enterprises would require bold institutional reforms, scrapping outdated labour laws, targeted fiscal and monetary incentives, and above all a massive increase in investment in education to create highly skilled workers and trained entrepreneurs. Most importantly, such an effort should resist any temptation of immediate results or electoral dividends. Modi can ensure that, because he is confident of returning to power. He should also know that fixing the missing middle problem holds the key to his vision of a ‘new India’ by 2022.

 

(HT Media)

 

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