India needs to see what type of manufacturing creates jobs and attract that kind of manufacturing, says Maira
Arun Maira was a part of the Tata Administrative Services for 25 years and has played a key role in the growth and development of the group. He has also worked extensively as a corporate consultant both in India and abroad and was the former India chairman of the Boston Consulting Group.
He became a member of the Planning Commission in 2009, where he was part of shaping policies and programmes related to industrialization and urbanization in the country. He also worked on recommendations to reform the Planning Commission during his tenure. He has authored several books including Redesigning The Aeroplane While Flying: Reforming Institutions and An Upstart in Government : Journeys of Change and Learning.
Edited excerpts from an interview:
What do you think went wrong with the second United Progressive Alliance (UPA) government’s manufacturing policy?
UPA 2’s manufacturing policy was understood by the cabinet as being limited to the creation of special investment and manufacturing zones (known as NIMZs), whereas the documented policy was about increasing jobs and manufacturing all across the country; special economic zones were only a piece of it.
How is Make in India different from UPA 2’s manufacturing policy?
The current government wants to implement the same policy in its entirety with hardly any emphasis on the special manufacturing zones.
Why is there less of an emphasis on NIMZs or SEZs now?
Firstly, any policy must be the instrument to produce the outcome that you want and the outcome that you want is widespread job creation all over India, not just in a few selected places.
Secondly, China can perhaps afford to say that we will get gross growth of the country and to do that we are going to create these zones which will have different rules applied to them. People need special permission to come and live and work there. The disparities between different parts of China are growing but they are not a democracy.
In India, we can’t create enclaves and shut some people out that easily. You can’t have areas where completely different sets of laws apply that are not in keeping with the Constitution of India. If you don’t have inclusive growth in the country, then you will have people banging on the doors of exclusive enclaves and asking “What about me?"
How far can the recent foreign direct investment (FDI) reforms go? Are they enough to bring in investment?
No. Indian industrialists are not investing in India, so why would foreigners buy into the advertisements? You can tell them that we have a billion-plus people who will buy more and more, but unless the systems are fixed, they know they will find it hard to make money in India. This is the feedback we have been getting.
Other than market investors—that is, people who are investing in the stock exchange and can take their money out anytime—long-term investors are not that impressed. They know how difficult it is to build and run a factory in India, so until you fix that, they are not going to come.
Our exports have been falling consistently and global demand is weak. Should the focus of policy shift from Make in India to Make for India? Is the distinction important?
Our goal should be that you make in India because it is easy to make in India. Then we should come to if you can make in India for India, you have got a huge advantage because you are very close to the market.
But to make for India, you have to discover what people can afford to buy and what they want to buy. Not simply hope that someday Indian incomes will come up to the levels when a lot of people can buy Mercedes cars!
We should also talk about how to use India as the base for innovation for developing those products and services which Indian people are going to buy at the income levels at which they currently are.
Companies like Philips and General Electric have set up innovation centres and found that Indians are very intelligent and the cost of innovation in India is one-tenth or one-hundredth in some cases as compared to cost of innovation at other places.
So, if you can use these people for innovation in India (and not take the talent to America where you have to pay them American salaries) you could be developing healthcare devices and engineering devices less expensively and sell them elsewhere and make huge profits, using the same innovation capability which is very low cost to produce products for India.
Take another example, McDonald’s. You bring a foreign hamburger design, figure out how to produce it at very low cost here, but then you find it doesn’t work in India. Now, what you do? You start innovating hamburger design, and also use more people in your outlets rather than more automation.
You go to a McDonald’s joint here and the number of people running around serving and cleaning after you doesn’t happen in the US. So, innovation is also happening in the service industry in India. Indian people, like the McDonald’s staff, are ready to work and highly trainable, and they will produce what you train them to produce.
So, the winning proposition is make in India, for India. India must be that place where you want to produce because you have discovered that it is the best strategy for your global enterprise. And to make money quickly in India, start making in India for a very big market in India, and also for the markets in the world that are similar markets (and there will also be niche markets in the US and Europe where you can sell the same things or similar things). And to make in India, use its people to your advantage.
So, the measure of a successful manufacturing policy of the country would be: are we creating more jobs in companies that are finding themselves to be globally competitive by operating here? And if so, you don’t need to subsidize these companies because they will find that lower costs of production in India is adequate subsidy by itself.
When it comes to making for India, is domestic demand not a concern? In your recent book, you talk about a policy focus shift from handouts to creating more jobs, but social sector spending cuts at a time when the rural wage growth has slowed drastically can and will impact rural demand.
I think I have to clarify that spending government money on health or building roads, for example, is not affecting the climate for investing in India. On the contrary, government spending creates demand, which is good for business.
What about spending on programmes like the MGNREGS?
It creates demand, which is good for business, so if any business person says that the government should not be doing this because it makes it difficult for business, I don’t know what they are talking about.
Remember, when the MGNREGS was introduced, all the consumer marketing companies in the country said that there has been a big increase in demand in rural markets and they had to adjust their distribution systems in order to fulfil that demand.
They were also innovating packaging and marketing to meet rural demand.
Exactly. In the US, in the 1990s, when they were looking to catch up with Japan, many states were attracting foreign companies by saying, look we are the friendliest state, come and we will give you all these incentives, just like it’s happening in India today.
So, several states would be competing for the same company and offer what states can immediately give such as saying you will be exempted from paying education tax. There was a very good study done by The New York Times five years ago about the effect that this method of attracting investors had on the actual situation of the businesses.
Now, those companies, be it Samsung or BMW, weren’t producing for those states alone, they were producing for the whole of the US. The most interesting point of the study was that in the southern states, which had given the most, such as Oklahoma and Tennessee, the companies said that we don’t find skilled people anymore.
Mind you, they weren’t looking for high skill necessarily, but even good high school-level people were hard to find because the school system had collapsed and the community colleges were out of business. So, government investment in social and physical infrastructure is good for industry in the longer run, not just in immediate demand creation.
We need to create about 100 million jobs in 10 years in order to reap the promised demographic dividend. However, we have been creating fewer jobs per unit growth of GDP than most other comparable countries. Why is this?
Again, policy is an instrument to get an outcome. Unless you define your outcome as creating jobs all over the country, the policy you devise is unlikely to produce that. If you define your outcome as I want more manufacturing GDP, then you will find methods to get that.
And to get that if I attract someone to say put up a huge petroleum refinery somewhere in India—tell them bring your billions of dollars and we will make it tax free for you to bring your inputs and you can send whatever you produce out, and also you can sell some of it in India, etc.
For example, the Reliance refinery adds significantly to India’s GDP, but how many jobs are created in that refinery? We are also very proud about it being the most productive refinery, meaning you can put billions of dollars and work with fewer people. But then it’s doing nothing for the jobs.
So, we need to see what type of manufacturing creates jobs and attract that kind of manufacturing and if we find that smaller enterprises create more jobs (and they require less capital also, by the way, which we are scarce of), then I should be encouraging more smaller enterprises and not running from country to country trying to sign up big deals for large investments worth billions of dollars and making that the scorecard of the success of my policy.
If one were to ask, tell me how many jobs this promised investment is going to create, you are going to find your answers wanting. It is the smaller companies spread over the country that will create jobs and they are more likely to produce products that people will buy locally because their reach is local and they have to satisfy local customer or they will be shut down. That is what needs encouragement.
A new start-up policy has been announced recently. How far can a focused policy that targets a specific group of start-ups go while larger reforms remain pending?
See, if you have a start-up which itself is not producing anything, but which is just enabling people to buy things which someone else is producing, say in China, this start-up may in some generic way be contributing to the circulation of things and that is good, but it will not help create jobs in India. (Large online retail platforms do this.)
The more important thing is to enable people to have incomes. Our policy in India since the 1991 reforms was to open up the country to imports. Consumers were happy that they could buy different cars, TVs, clothes which they couldn’t buy earlier.
But at some point, incomes and markets must grow too. And the market won’t grow unless people have jobs here and to do this the start-ups we need are the start-ups that are producing things here, not the start-ups that are enabling people to buy things.
If they are enabling Indian small enterprises to be able to market their products, that’s good because manufacturing enterprises have difficulty with marketing. But the platform owner will say: “I want to compete with other platforms and if I don’t offer everything then I will lose my business and so I must allow people to buy from anywhere in the world."
So, unless you put job creation as a policy objective, you will get the sort of “jobless" growth while GDP is increasing, which India has been suffering from with its form of economic reforms.
A key concern with creating jobs is skilling workers. Is the Skill India programme a step in the right direction? Given how dynamic work processes and technological shifts are in manufacturing, how important is flexibility when drafting a policy in this regard?
The whole world is struggling with this question, even the US and Germany. The World Bank’s latest human development report is about the future of work, as is the UNDP’s 2015 report, and the ILO is doing a two-year project on it.
The shape of work is changing. They are worried because patterns of employment are changing because of technology. We should also worry about that because technology is coming here too and we want technology to come here. There is no saying what jobs are going to look like five or 10 years from now.
So, if you have got a skill development strategy which says let’s find out how many workers of a certain type are going to be required in India 10 years from today, or let’s find out how many machine operators are going to be required for some types of machines five years from today, and then let’s work backwards to set up a five- or 10-year-long process at the end of which we have the number of people required with these particular skills, we will have a problem. What if by the end of this process these skills are no longer required?
This method of skill development will not produce “employable" people. People have to be put into an environment where they learn to learn. And learning/training systems must be modular with many different institutions fitting into them—from schools to industries.
Industries will have to keep providing shorter courses to their own people so as to keep upgrading their skills with the changing requirements of their industries, and not just put the onus on the government to provide skilled labour. Industry knows best what new machines it is buying and how jobs are likely to change.
The whole mindset about skill development has to, therefore, change. It is the job of the employer and the employee to develop skills. So, in the workplace you create an environment for skill development. In addition, training institutions outside the industries should provide more short-term, modular programmes for training, rather than lock people into a long programme.
And what should the government’s role be?
It should be to encourage and create this ecosystem (or network) of many institutions and many programmes. You can’t keep measuring only how many skilled people have you produced. You have to ask: “How many institutions have we produced that people are finding useful to learn from?" Like with the manufacturing policy, it comes down to setting the right objective before designing policy.
Currently, the approach is, we need to have 500 million skilled people—roughly, say, 200 million will be in the retail industry, 200 million will be in manufacturing and a 100 million in other subsectors. We have 28 sectors training people. Each has a numerical goal. So, yes, you have set up factories to produce these people, but you cannot guarantee they will find jobs at the end of it.
There is a broad consensus on the need for labour law reforms, but less clarity on what they should be. You have written about how the ease of firing is not necessarily the answer to labour law issues and how worsening industrial relations can impede growth. What do you make of the recent reforms in states like Rajasthan?
Firstly, encouraging the states to do the reforms, not just labour reforms, is the right thing to do. The problem that investors have is that things don’t work on the ground, so institutions have to be developed in states and districts, etc. Each state must do this because conditions in the north-east, for example, will not apply in Rajasthan. This is the wisdom incorporated into the Indian Constitution.
In Rajasthan’s case, the direction is right in terms of what has to be changed. An enterprise should be able to adjust the size of the workforce when it can no longer afford to pay for that workforce. It is ultimately good for the economy and workers that there are no sick enterprises which are not able to employ any more and in which capital is locked up.
However, the people who are affected by the change must also be considered. Not just the employer but also the employees. If you can easily fire people and they don’t get social security, what are they going to do? This is the reason we need social security and safety nets. The pace at which you allow employers to adjust the size of the workforce must go hand in hand with the pace at which you improve the systems for people having social security.
The best people to help you understand what you need to do for the people side are the employees themselves and their unions. Don’t just listen to the employers, who say unless you make it easier for me to fire, I will not invest. Until there is an atmosphere where employees feel respected and want to do their best, you are not creating a productive and sustainably growing enterprise.
It comes back to good industrial relations—employees are as much of an asset as your capital. In fact, my thesis is that they are the only appreciating assets in your enterprise. We got Bain to do a study that showed that where employers care more about their work culture and practices—about creating conditions for developing and retaining good workers, and not firing at will—the profit growth of the firm is larger and more sustained.
On the one hand, we need uniformity of laws that the GST (goods and services tax) promises. On the other hand, like you have written, two-thirds of the issues faced in doing business are state-related, and therefore it’s a better idea for the state to solve these issues. What sort of challenges do you see in the smooth functioning of cooperative federalism?
You mentioned GST—yes there should be simplicity of the rules that apply to everybody so that they know how to relate to each other. But the conditions of the states are different—so, if you make a uniform rule, it should be fair to all people.
Secondly, in order to arrive at a uniform rule, different kinds of adjustments are needed in every state. Globally, where climate change is concerned for example, we are recognizing differentiated responsibilities. In the same way, cooperative federalism requires that there is cooperation in the developing of the rules, and the processes by which people will get to the common rules.
There has to be an understanding of each other—if someone is being given some leeway because he is further behind, then all of us are agreeing to give him that leeway.
The problem in having the centre trying to be the arbiter this is that it gives rise to accusations of favouring one over the other. The process of being a cooperative—a federal system where every part is responsible for itself and collectively responsible for the whole, is the key. The conduct of the discussions and good listening to each other in that process are the keys.
Did you find this missing in the Planning Commission?
Yes, this was missing in the Planning Commission. The process was about the centre deciding for each state and the centre making some uniform policy. Naturally, some state would say this does not suit me.
Mamata Banerjee would come to the Planning Commission. Her party had decided to support the Congress party. As soon as she got elected, she showed up and made the case that she is not responsible for the 20 years of mess she has inherited and asked for a special package for West Bengal.
But there were concerns within the commission that tomorrow, the CM of Bihar or somewhere else will demand the same. Therefore, the centre will be accused of favouritism and its credibility is reduced. You will have to have the CMs talking to each other to help shape the rules of the game and you will have to facilitate that conversation.
That is the role of the NITI Aayog that has been mentioned in its charter in January 2015. It has a very important job to do: to create the institutional means—the processes for a cooperative federalism to function.
Our previous means could not have created a cooperative federalism. It was a competitive federalism with the centre wanting to be the sole power. The party in power in the centre would favour the states that were ruled by it or its friends. The other parties wait till their party comes to the centre. Thus you create distortion upon distortion.
Do you think the states are ready to talk to each other and cooperate to make decisions?
Obviously, the states are not ready because they have been operating under a different kind of system and their capabilities are geared for that. Every human, every institution adapts to what is required of it. States will have to learn how to govern themselves and to work as a cooperative with each other.
So, the development of these capabilities in the states and of the system is the task for India. This PM is certainly taking it on, and the next PM will have to take it further. It is not going to be done in five years, it will take 15-20 years. For the US to learn this, it took them a century perhaps. For the EU, it has taken 50 years. But this is the better way. The top likes to keep the power to itself, so it makes this excuse that others will make a mess of it, so I will do everything myself. NITI Aayog needs to change that mindset.
The Planning Commission was set up decades ago to be that thinking and institution-building body with the prime minister chairing it. And that is what it should have been—the government’s think tank, not a budget-making body.
There has been scepticism about whether a toothless body can command authority.
Why does it need power? Your power is that people respect your thoughts, your understanding and the advice and guidance that you give. When I was at the Planning Commission, I was told, “Oh, but you see, if we don’t have powers to provide the budgets, then people won’t come to us."
I said, “Very interesting, I have worked as a consultant in the corporate sector and very powerful chief executives, multinational firms, very smart men and women—they were paying me millions of dollars to take my advice. They were using my advice not because I gave them 10 million dollars. If you have to pay people to take your advice, it may not be the right advice."
This is what Modi used to say as a chief minister: “I don’t need your money. I am running a good state that produces enough surpluses. I need good advice and I don’t respect your advice, which is why I don’t want to come to you." Of course, he kept coming because of good discipline.
Jayalalithaa, on the contrary, said, “Why should I come to you to hear you tell me how to spend my money?" Mayawati would say, “You don’t understand the conditions in my state at all. I understand the dynamics of poverty and people and oppression and you are so out of touch".
To have institutions with powers but without capabilities is the most dangerous thing in a society. To people who have been writing recently that if the NITI Aayog does not have powers, then how can it be effective, I would say, first let the institution and its leaders build their capacity and generate respect for the quality of their ideas and advice. They may find that they do not then need money power so much to influence the development process.
NITI Aayog as it has been set up and as it has been performing, does it have the capacity to see this process of adaptation through?
See, I am an outsider now...
Precisely why I ask.
Firstly, they have a mandate that is a 180 degrees different from the previous commission. So, they have got to recognize that their job is to learn to do something which they may not at the moment know how to do. The leaders of the new institutions must have around them a bunch of people who are going to help them to learn from others, perhaps. They must learn from their customers, which are the states, and the ministries how to be more effective in guiding them.
If I see the leaders of the institution measuring their own pace of learning, and making visible what their learning agendas are, and very quickly coming back and reporting this is what we learned about how to improve processes of cooperative federalism, for example, and what we are doing about improving them, then I would say they are on the right track.
If these are the debates and discussions that NITI Aayog is engaging itself with in this institution-building phase, and taking people’s help in doing it, then I would feel more confident.
If, on the other hand, NITI Aayog is just being used for things like writing papers and chairing committees, then I am sceptical about the pace of change in building the new institutional capabilities it needs. As outsiders, we want to have confidence in an institution that it is changing. It has to be communicating the things that people want to hear about its own change and development process.
Orignally published in Live Mint.