10 Aug 2020 12:59 IST

Industry consolidation will enhance productivity: Arvind Panagariya

In his talk at IIMB, the economist calls for job creation in labour-intensive fields for rapid growth

When Covid-19 hit India, the country’s economy was already under stress and on a weak footing, said Arvind Panagariya, Professor of Economics, School of International and Public Affairs, Columbia University. “However, I think the government has handled it pretty well with its focus on ensuring that people had the basic necessities sorted — food and shelter. A big stimulus, contrary to some views, could never have given a supply response. The government was also correct in announcing measures to create a guaranteed fund and ensure cash flows,” he added, while addressing the Post-Graduate Programme in Public Policy and Management students in the public policy talk series hosted by IIMB.

Road ahead


In the virtual lecture, ‘Rebuilding India’s economy post-Covid-19,’ Panagariya said that one must recognise that even with relatively restrained fiscal policy, fiscal deficit would rise to 13 per cent. “NPAs will rise dramatically and there will have to be another big round of recapitalisation by banks. So, the government will have to bite the bullet and announce privatisation of banks.” This was mentioned in reference to government announcements of policy reforms in the agriculture sector, PSUs, coal and mining, electricity, rental housing and the MSME sector by liberalising the definition of MSMEs.

Pointing out that the pandemic remains the principal challenge not just on the public health front but also for the economy, he said: “Once medical recovery happens, economic recovery will happen. I am optimistic about that.” In the process of development, India has created too many tiny units of economies. “We need to become modern and urban in order to speed up the process of transformation. and to do this we should recognise that tiny units slow down the process in the long run.”

Go big on service sector

The fragmented nature of the agriculture sector will never allow it to become a high-productivity oriented sector, he explained. “The only way ahead is to go big on industries and services — consolidation will enhance productivity. About 42 per cent of the total workforce in India works in companies that have less than 20 workers. Dominantly, most of this workforce is in ‘own-account enterprises,’which do not employ hired workers, where, again, the productivity is low. Small and medium sized enterprises in China and Taiwan are productive, but these countries also have large enterprises. The problem with India is that we mostly only have small enterprises.”

Remarking that India has been focusing only on the ‘micro’ in the MSMEs, forgetting the medium enterprises, he said: “We need a policy framework to address this as a problem. If more medium and large enterprises begin to emerge in the labour-intensive sectors, they will begin to draw labour from small enterprises, turning some small enterprises into ancillaries and encouraging competition and growth.”

Shifting focus

“We think our IT sector will do wonders. But can you bring farmers or domestic workers into IT and finance sectors? If you want to speed up growth, you need scaling up of labour-intensive industries. The near absence of large and medium enterprises has slowed our growth.”

To create high productivity jobs, he said, “the focus should be on labour-intensive industries, such as, apparel, footwear, furniture, electrical and electronic goods, and so on.” What India needs is a dramatic transformation in employment share — a rapid sectoral shift in employment like South Korea, he added.