Look beyond manufacturing, services

Dr S Narayan

CHENNAI: Recent discussions on alternate development models have focused on the skill levels at which fresh employment needs to be created in the economy. Former RBI governor Raghuram Rajan, in his recent book, has argued that higher skilled, higher value added, development initiatives are needed, and that we should focus on skilling. Others, like the former chief economic advisor, Arvind Subramanian, have argued that mass, low-skilled, high employment potential manufacturing activity is needed, as it provides large-scale employment opportunities. He has also argued that as multinationals look for alternatives to China, there is an opportunity for India to enlarge manufacturing. There is agreement that both approaches are necessary – first to provide large-scale employment for the low-skilled, and second to provide high value output for the global markets.

There appears to be yet another narrative that is unfolding simultaneously – one that is not captured by the above arguments. To understand this, it is necessary to look at the financial markets. Investments in SIPs or systematic investment plans are in excess of Rs 10,000 crores every month, and the mutual fund industry has crossed Rs 50 lakh crores. There are 4.2 crore investors. This industry is chasing equity, debt and other market combinations pushing equity prices and commodity futures. There are also a very large number of small retail players in the equity markets, and people who are investing around Rs 10,000 has exceeded 3 crores. Given expectations of P/E (price earning ratio) that are linked to economic fundamentals, these funds are contributing to higher velocities in trade as well as fluctuations in market prices. In short, real money is being made by crores of investors, which is resulting in a value chain of aggregators, advisers, brokers, mutual fund managers as well as investors. That is a lot of employment.

Another feature is the rapid urbanisation that is following good economic growth. In Tamil Nadu, for example, land prices in expanding urban areas have doubled in the last two years, and land holders are monetising some of their assets. The resultant construction boom is pushing housing and real estate prices rapidly, and leading to increased activity in all the related industries—steel, cement, household requirements like joinery and furniture, paints and furnishings. The asset monetisation is leading to higher consumption, primarily luxury goods, high-end cars, and travel. The trajectory of travel industry is yet another industry’s growth indicator.

Aspirants, who want to be part of this story, are borrowing- credit card outstandings have doubled in a year, housing loan demand is growing at double digits, and even travel is being funded through EMIs. This is not just a consumption story. It is linked to asset monetisation through land sales, and, in the earlier narrative, through market pricing of financial assets. These two are leading to enormous activity and employment, a lot of it in the informal sector, which is not measured accurately. A recent market report points out that by 2037, Indians with an income of over $10,000 per annum will exceed 100 million. This class is expanding at a compounded rate of 12% per annum. To put it in perspective, there are only 14 countries with a population of 100 million plus. Such income growths will lead to multiplier effects for economic activity and growth.

The question is, whether at all there is an opportunity for policy intervention, and if so, of what kind. But it is certainly a large chunk of economic activity that is not adequately tracked, and cannot be ignored.

(The author is former union finance secretary and member, Economic Advisory Council, TN)