India: A Systemic Crisis in Industry & Agriculture

August 22, 2018


[A mammoth and unprecedented ‘Mazdoor-Kisan Sangharsh Rally’ is going to take place in Delhi on 5 September demanding an end to the anti-people policies of the Modi govt. Issues being highlighted through this protest include unemployment, agrarian crisis, changes in labour laws, stagnating wages, privatisation and attempts to break the unity of the working people through communalism. We are publishing a series of articles in the context of this historic protest march throwing light on the demands of India’s working people.]

The Indian economy today faces an industrial crisis, which is intimately connected with the employment and agrarian crises. The crisis of industrialisation that has always afflicted Indian economy is becoming ever deeper, putting the country firmly on the path of deindustrialisation.

Indian agriculture today faces a deep-rooted crisis. Revenue generated from the produce of land, after deducting the costs incurred, is not sufficient to sustain most agrarian households. Even households which have some land need to find work outside agriculture. Because of mechanisation, agricultural workers, who have no land, get very few days of work in a year in agriculture. At the same time, the number of landless is continuously swelling because more and more peasants are being forced to give up their land. Thus, today, the number of those seeking wage work in agriculture or outside agriculture, has surpassed the number of cultivators.

Meanwhile, the last seven years have been one of the worst periods of industrial stagnation since Independence. Growth of industrial production has remained in the range of around 3-4 percent per year since the beginning of the current decade. The unorganised sector has been hit the most because of the increased policy bias in favour of large corporate units. Along with the slowdown in output growth there is stagnation in investment in manufacturing production, even in the large-scale organised sector. Investment stagnation means that the increase in production capacity of the manufacturing sector is very slow. This is not because the private corporate sector has no resources to expand production. The corporate sector is not ready to invest more because it does not see any profit in doing so. As a result, there is no significant employment generation in the manufacturing sector.

Construction was one of the fastest growing sectors of the economy between the mid-1990s and 2011-12 when it grew at an average rate of around 9 per cent per annum. It also was the sector of the maximum increase in employment, from less than 15 million in 1993-94 to 50 million by 2011-12. But construction too was hit by stagnation in this decade and its average growth rate has slipped to around 3 per cent per annum since 2011-12.

Services sector accounts for the largest share in the GDP. While its growth has been relatively better, in India this sector has always had a considerably lower share in employment than its share in output. It is also experiencing increased mechanisation and use of IT instead of people. So, employment growth even in services is limited in magnitude. Some increase in employment in apparently new services like online retail is also at the cost of displacing even larger employment in the units (often unorganised) which traditionally provided these services.

Shrinking Employment Opportunities

Thus, the grim situation in India today is one where incomes and employment are shrinking very rapidly in agriculture while there is nothing close to compensatory expansion of employment in non-agricultural activities.

This current scenario of multiple crises is the result of the long-term failure of India’s post-Independence industrialisation process which has been further aggravated by the neoliberal policies of the last few decades. The critical failure of the Indian State after Independence was the non-implementation of comprehensive land reforms. This blocked the full unleashing of the productive forces in agriculture; it has also prevented the agricultural sector from supporting the country’s industrial development and expansion. It also meant that opportunities for moving out of agriculture languished. Thus, a larger and larger population had to find means of livelihood in agriculture which faced constraint of land and whose productivity growth was held down. Even as these possibilities were reaching limits, neoliberal policies since the early 1990s aggravated the agrarian crisis. This in turn gave rise to a trend towards deindustrialisation for the second time in Indian history.

Industrialisation and Agriculture

The experience of several countries has shown beyond doubt that industrialisation has always been an essential element in the process of economic growth and development. Industrialisation is characterised by rapid growth of per capita output and income as well as an increase in the share of the industrial sector in the total output and employment in the economy.

A declining relative importance of agriculture in the economy is more or less inherent to the process of rapid growth. Experience from other countries shows that while the non-agricultural sectors become correspondingly more important over time, the leading non-agricultural sector driving this process tends to be different in different phases. Initially it is the industrial sector which drives this process so that its share increases in output and employment. This is the period of industrialisation. This is followed by a subsequent post-industrialisation stage where it is the services sector that increases its share, particularly in employment. As an economy achieves higher levels of industrialisation and average income, employment in several services sectors – transport, communication, trade, repair services, education, health care, banking and insurance, etc. tends to increase. Large numbers of people have to be employed in such services if the benefit of these has to be also provided to a large number of people.

The industrial sector produces a diverse range of products to satisfy the demand that grows and diversifies with increasing income levels. It produces the tools, equipment, machines, materials and inputs used to increase production and productivity, and diversification of production not only within the industrial sector itself but also in the other sectors of the economy.

Industrialisation involves increasing use of several natural resources which are not available in unlimited quantity. It also involves use of products of the agricultural sector – like cotton, sugarcane, oilseeds, etc. – whose availability cannot be increased very rapidly. Several industries and their products also have the potential for doing great damage to the natural environment because of the pollution resulting from them. Whenever one talks of sustainable industrialisation, therefore, it is important to keep this side of the process in mind too. Industrialisation is necessary, but everything done in its name is not.

Successful Industrialisation Depends on Improving Agriculture

Improvement in agriculture is critically important to successful industrialisation. In the case of agriculture, fewer people being able to produce more on the same land is necessary for any sustained industrialisation process. Even in a highly industrialised society a small proportion of the workforce has to produce the food requirements of the entire society including those working outside agriculture. As long as a large number of people depend on agriculture for their livelihood, it also has to provide the market for the products of a rapidly growing industrial sector.

A low-productivity and backward agrarian economy cannot provide the springboard for industrialisation. Even if eventually the agriculture sector’s importance declines in the economy as its result, successful industrialisation depends on being able to make first a breakthrough in the agrarian sector. That is precisely what has not happened in India. India’s failure to industrialise therefore ultimately reflects the failure to realise the full potential of Indian agriculture – because those who labour in agriculture have never been provided the necessary support to achieve that result.

Failure of Land Reforms and Stunted Industrialisation

India was under colonial rule when the West experienced industrialisation and became the advanced or ‘developed’ economies of the world. India’s colonial master Britain were able to benefit from the exploitation of the colonies for resources, raw materials and food and also for markets. Thus, in addition to the resources generated within Britain, she benefitted from the forced unilateral ‘drain of wealth’ from India over nearly 200 years – primarily through an extraction from Indian agriculture. Britain’s factories were also able to take advantage of large market in India for industrial products like textiles but at the expense of destroying India’s own indigenous traditional manufacturing sector. India’s first de-industrialisation, like that of other colonised nations, thus supported industrialisation in the West. The growth of a modern factory industry did take place under colonial rule, but on a very limited scale – at Independence it accounted for barely 6 per cent of GDP and less than 3 per cent of employment.

Exploitation of other peoples and nations was not an option available to the newly independent countries of Asia, Africa and Latin America which tried to industrialise in the second half of the 20th century. Dealing with their agrarian situations was therefore even more critical for these countries. Among these, the countries that managed more comprehensive land reforms enjoyed greater success in industrialisation. India was not among these because India’s rulers succumbed to the power of the large landowners. Neither was the land taken from them and redistributed nor was the surplus in their hands taxed to finance productive public investment. Consequently, there was no decisive change in the agrarian structure which tended to keep agricultural productivity low and concentrated large part of the income in the hands of a small minority.

If India’s failed land reforms programme did not result in complete agricultural and economic stagnation like in the last half century of British rule, it was because of the effects of some other limited measures that were taken by the state in independent India. These included some public investment (irrigation), subsidies and institutional credit (high-yielding seeds, fertilisers, mechanisation) and control of trade (government procurement, MSPs, PDS). The scope of all these measures were limited by the shortage of public resources as the state proved incapable of taxing properly not only large landowners but also the corporate sector and those who concentrated in their hands non-agricultural wealth. This shortage of resources also meant that the strategy of using public sector development to foster industrialisation in practice was far more limited than it had been on paper.

The limits of the strategy after Independence meant at best a slow and fluctuating growth of agriculture combined with increasing fragmentation of land. It was unable to provide the conditions for sustained high levels of industrial growth. The advent of neo-liberalism has only aggravated the problem because it has hit at even the limited measures of supporting agriculture, industrialisation and employment generation.

Neo-liberalism, Agrarian Crisis and De-Industrialisation

Neo-liberal policies since the early 1990s have meant that the principal preoccupation of governments has been keeping taxes on the rich and the corporate sector low and limiting government borrowing (the fiscal deficit). Restraining public expenditure, privatisation of the economy and encouragement to big corporate sector and foreign capital have been the corresponding elements of neo-liberalism. With this, even the limited efforts of supporting agriculture and small-scale industries and public-sector development came under attack. This ultimately had disastrous consequences for both agriculture as well as industry.

The deepening agrarian crisis is a direct outcome of the cutback on support to agriculture. However, even as this meant a sharp rise in the number of people looking for work outside agriculture, the more employment-intensive small-scale industry was also hit by the increasing policy bias in favour of the large corporate sector. The entire corporate sector has actually benefited from this employment crisis of the people because this made available a large reservoir of cheap labour which could be drawn on and exploited intensively. This cheap labour was the foundation for earning exceptionally high profits, and the basis on which global competition was faced. The employment crisis and the large labour-reserve were maintained even as the corporate sector grew rapidly. Wages thus remained depressed while the share of profits in the income generated by the corporate sector increased immensely. Average real wages in organised sector have remained almost unchanged for two and a half decades. Even rural wage-rates were completely stagnant till the introduction of the MNREGA led to a temporary upward trend from 2008 which ended after 2014.

The inability of the large majority of Indians to find steady and gainful employment with reasonable wages, however, had another side to it. It meant that they were unable to provide a growing market for industrial consumer goods. A small section of population which swallowed the benefits of growth certainly increased its consumption levels and also purchased assets like real estate with their growing incomes. This narrow base of demand resulting from sharpening inequality is, however, not sufficient to sustain industrial growth or of real estate construction activity. There are limits to how much they can buy and some part of that demand also leads to significant increases in imports of products directly purchased or of the products needed to manufacture them in India.

Little Basis for Rapid Industrialisation 

The narrowness of the market for industry has also meant that investment in the industrial sector cannot be sustained because it creates excess capacity. Private investment in infrastructure, which does not easily yield quick profits, on the other hand, has proved to be unsustainable and resulted in large NPAs of banks. In most countries, such infrastructure is built by governments but the curbs on public investment have meant that governments spend too little on this. With both industry and infrastructure facing this situation, investment growth in the economy has collapsed as these are the two major outlets for investment. The collapse of investment has further aggravated the problem of industrial demand because a large part of investment expenditure is spent on industrial products.

Experience has also shown that trying to generate large exports of industrial products on the foundation of cheap labour and poor infrastructure doesn’t work – because it limits the productivity of the labour and increases other costs. Exports have thus not been able to provide a solution to the demand problem – exemplified by the stagnation in exports since the launch of the ‘Make in India’ programme by the Modi Government. On the other hand, cheaper imports have been a source of perpetual threat to domestic industry, organised as well as unorganised.

Thus, there is little basis for rapid industrialisation of the Indian economy. As a result, the relative importance of the industrial sector in the economy is declining even before full industrialisation had been achieved – a case of premature de-industrialisation.

The slowdown in industrial growth and that of construction and the related aggravating employment crisis are self-reproducing in nature. The inability of millions of Indians to find decent and gainful employment is both a principle reason for as well as the effect of lack of demand. It doesn’t allow the average Indian to even eat enough and eat nutritiously, let alone provide a growing and large market for industry. The potential of India’s working population is thus being doubly wasted – it is not being fully utilised to produce and thus its ability to provide a large market is also remaining unused.

Is there a Solution?

Yes, there is. It lies in reversing the cycle. If the government were willing to spend more, it could create the conditions for increasing agricultural incomes of the large majority of agrarian households by reducing their costs, increasing their price realisations and providing better infrastructure support. Increases in agricultural incomes would directly increase demand for industrial products and at the same time raise the level of wages in non-agricultural activities. If the government were willing to spend more, it could also increase and improve the availability of services like health and education which would simultaneously create employment directly and also indirectly by expanding demand in the economy. The same multiplier effects would result from stepping up of public investment on infrastructure in general. Improved health, education and infrastructure would further enhance the productive potential of the working population – and might also improve export prospects. The general widening of the market would also enable more employment to be created in services.

The question is, can the government spend more? Yes, it can. India has one of the lowest tax-GDP ratios in the world – at around 17 per cent compared to levels between 35 and 50 per cent in several countries. Further, the proportion within purview of indirect taxes – which are also paid by the poor – is much higher than that of direct taxes on the rich – the opposite of what is the norm in several countries. If government was willing to tax the rich and the corporate sector to the extent they can and should be, it can easily spend much more. That requires addressing three problems – the low level of tax rates; the range of tax concessions which reduce the effective tax rates; and the large-scale evasion of direct taxes by the rich and the corporate sector. Even the Central government’s own calculations show that concessions in direct taxes (corporate and personal income tax) alone resulted in a revenue loss of over Rs.1,65,000 crores in 2017-18 or 1 per cent of GDP.

Corporate Greed vs People’s Resistance

The industrial and employment crisis exists because powerful corporate and international financial interests stand in the way of the solution, and governments succumb to them. They do not want wages to increase because it would hurt their profits. They do not want to pay higher taxes because they want the resources for themselves. They do not want public investment and expenditure on public services to increase because they want to reserve all possible opportunities for making profits for themselves. For them, the ‘solution’ to the crisis – which is exclusively about increasing their profits - lies in lowering wages further and reducing the share of wages even more; cutting taxes even further; and directing of limited public expenditure towards building the infrastructure they want and not towards areas that people need. We need more and more economic ‘reforms’ is their cry in response to the crisis. The crisis of industrialisation and employment will only become worse if such ‘reforms’ are what governments will deliver - and the Modi government has nothing else but these reforms on its agenda. Changing the priorities of government is necessary – and when this has to be achieved against the resistance of those who have concentrated in their hands most of the wealth and money, struggle is the only weapon for the people.

The ‘Mazdoor Kisan Sangharsh Rally’ on 5th September 2018 is one such struggle to change the priorities of the governments. It is to demand reversal of the neoliberal policies and pave the path for further stronger struggles of the workers, peasants and agricultural workers to achieve policies that would promote sustainable industrialisation and decent employment generation.