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Back to the Farm
The "Modi Miracle" Confronts Its Biggest Test Yet

About a quarter of a century ago, India and China had the same share of population living in cities versus rural areas. Over the years since then both Indians and Chinese have moved to cities in droves, seeking better-paying jobs and more opportunities than life on the family farm could provide. Between 2005 and 2012, as India’s industrial, services, and IT sectors thrived, farm employment shrank by 37 million jobs. But according to a must-read article in the Wall Street Journal, India’s urbanization process is reversing. By 2019, the paper reports, 12 million more people will be working on farms than in 2012.

China’s urbanization has helped the country become the economic powerhouse it is today, while India has mostly been unable to harness the potential of millions of workers moving to cities. India’s GDP growth rate, which peaked at 11.4 percent four years ago, slowed to just 4.7 percent in the last quarter of 2013. Just 32 percent of the population lives in cities, compared to 52 percent in China. “Because there won’t be enough job opportunities outside of agriculture, both in rural areas and in cities, people will remain stuck,” an Indian economist told the WSJ.

Indians are reluctant to leave the farm in part because of the generous subsidies and social welfare programs the government has organized to benefit the rural poor. The government provides poor families with access to discounted food products—at a staggering cost of $19 billion per year, or a little bit less than what the government spends on health and education combined, as the WSJ reports. And Delhi also guarantees at least a hundred days of paid, non-agricultural work in rural areas. These programs keep rural folks happy (and keep them voting for the Congress party), but they also discourage urbanization and economic growth, as Jagdish Bhagwati and Arvind Panagariya wrote in their recent book. Why move to a cramped apartment in the city and work in a tiny factory for low wages, when life on the farm isn’t so bad after all?

The result is that agriculture accounts for half of India’s employment but just a fifth of its GDP. It’s inefficient, too: India’s agricultural yield is a third of China’s by hectare. Manufacturing, on the other hand, has remained fairly constant at about 15 percent of GDP for decades, but this level is strikingly low compared to other countries in the region. The WSJ reports: “South Korea and Thailand surpassed this level of industrialization in the mid-1960s. In both countries, and in China, manufacturing today is nearly one-third of GDP.”

Manufacturing would appear to be the missing link in India’s economic story. Factories are by and large small, thanks to bureaucratic restrictions that discourage expansion. Furthermore they suffer from poor access to electricity, bad roads, and similar infrastructure constraints.

The consequences of failing to address these circumstances could be dire for the 90 million Indians (more than the entire population of Germany) who will be joining the country’s workforce over the next 15 years: “As long as India’s economy fails to create the kind of factory jobs that provide productive—and remunerative—employment for unskilled workers from villages, the rural majority will remain largely locked out of the benefits of growth.”

Many Indians and foreigners hope Narendra Modi will provide the answer to these thorny problems. Modi is widely credited with overseeing an economic “miracle” in his home state of Gujarat. Gujarat’s growth rate has outstripped the national average, and manufacturing companies there have more freedom than elsewhere in the country. As a result, the state is a booming industrial powerhouse, home to international companies like Ford, General Motors, Suzuki, and many others. Manufacturing employment grew 60 percent in the years between 2000 and 2012. If the rest of India did as well as Modi has done, Goldman Sachs wrote in a recent report, the country could create between 40 and 110 million new manufacturing jobs in the next ten years.

But is the Modi economic miracle everything he says it is? According to a few economists and journalists, it’s not. Gujarat’s economy was already growing faster than the national average when Modi took over the reins of government. Judging from many non-economic indicators of development, like education and the percentage of people who have access to clean water and toilets, Gujarat lags embarrassingly far behind other states.

But Modi might be the best option for India nonetheless. The current Congress-led government has proven unable to sustain the rip-roaring growth of a few years ago. Modi has an impressive track record as the leader of one of India’s fastest-growing states. The question is, can he do it on a national scale?

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  • Jim__L

    Did the Union Carbide / Bhopal disaster have anything to do with India’s view of industrialization?

    • El Gringo

      Not nearly as much as India’s half-century love affair with socialism.

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