Commentary: 'Bangalore bug' may hurt Indian industry
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Andy Mukherjee is a columnist for Bloomberg News. The opinions expressed are his own.
Bangalore Squeezes India's Low-Skill Hinterland: Andy Mukherjee
Feb. 7 (Bloomberg) -- Windfall gains are seldom an unalloyed blessing for an economy, and very often a curse.
Economists call it the ``Dutch Disease,'' a reference to the deindustrialization that took place in the Netherlands after natural gas was discovered in the North Sea in the 1960s.
A variant of the disease -- the ``Bangalore Bug'' -- now threatens India, Kalpana Kochchar and other researchers at the International Monetary Fund warn in a new study.
The bug may spread as the current surge in India's software and call-center industries pushes up the price of skilled workers to a point where textile, furniture or footwear makers, which have small profit margins, can't find supervisors and managers.
If that prevents labor-intensive manufacturing from expanding, employment may suffer because growth in India's services has created few jobs and too many of the country's workers are still eking out a living from farmland.
``The advanced skill-intensive part of the Indian economy may be bidding up scarce skills in such a way as to slow the growth of labor-intensive manufacture and the exit of surplus labor from agriculture,'' the study says.
The fast-growing western and southern Indian states of Karnataka (of which Bangalore is the capital), Maharashtra, Tamil Nadu and Andhra Pradesh are narrowing the skills -- and wage -- gap with rich nations. These states, whose population growth has already slowed because of rising literacy and falling fertility, are luring away skilled workers from their poorer northern rivals.
This may be most detrimental to Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh, which are often referred to as the four ``sick'' states of the country.
Laggards
As much as 60 percent of India's population increase by 2051 is expected to take place in these northern and central Indian states, which are laggards in economic growth and on most social indicators. For instance in Bihar, a state more populous than Germany, two out of three women can't read or write.
In Uttar Pradesh, whose population exceeds the U.K., France and Spain put together, seven out of 10 children don't receive full immunization.
In these states, there's little scope for skills-based industries to take root because the infrastructure needed to support them -- assured industrial power, good roads and law and order -- are largely absent.
These landlocked states, already at a disadvantage because of their distance from ports, are most at risk from the Bangalore Bug because the current pace of 15 percent to 20 percent annual inflation in skilled workers' pay makes it difficult for them to hire and retain technicians and managers.
Containing the Bug
That, in turn, undermines their only chance to escape poverty by replicating Chinese-style, large-scale, labor- intensive manufacturing.
India's service industries employ about 30 percent of the nation's workers, a figure that has barely moved in 10 years.
That stagnation has occurred even as the share of banking, telecommunications, software, tourism, transportation, health, education, entertainment and trade has grown to more than half of the $693 billion economy, compensating for the full decline in agriculture, which shrank to 20 percent of gross domestic product in 2005, from 31 percent in 1991. The share of manufacturing has been little changed at 16 percent of GDP.
Stifling Bangalore's growth is not the solution to containing the bug. A much better way would be to ease the emerging skilled-worker shortage by freeing higher education from the clutches of state controls.
World-Class Engineers
If the supply of technical and managerial manpower keeps pace with the burgeoning demand, the price for skilled labor will remain within reach of what laggard states can afford to pay to create globally competitive labor-intensive factories.
``From a policy perspective, the irony is that in order to promote unskilled labor-intensive activities in the future, a great deal of attention may need to be paid to fostering the supply of skilled labor,'' Kochchar and her colleagues conclude.
India's success in skill-based industries has been an unintended outcome of state policy.
The windfall accrued because, soon after independence in 1947, Soviet-inspired economic planners decided to make in state- owned factories all the heavy equipment that most other poor countries with surplus labor might have preferred to import.
The emphasis, therefore, was on producing world-class engineers even at the cost of scrimping on blackboards in village schools. In 2000, India spent 86 percent of per capita gross domestic product on university training of each student. It allocated 14 percent to primary schooling. By contrast, China only spent 11 percent of its per capita GDP in university education.
Hinterland
When the Indian economy started opening to the world in 1991, the country had a ready pool of engineers. These engineers could, thanks to the plunge in telecommunications costs, design computer chips for Intel Corp. and aircraft engines for General Electric Co. without having to leave Bangalore.
Now is the time to take economic growth to the Indian hinterland by improving the business climate in slow-growing states so that it starts making business sense to employ thousands of low-skilled workers.
That would be the surest defense against the Bangalore bonus degenerating into a resource curse.
To contact the writer of this column:
Andy Mukherjee in Singapore amukherjee@bloomberg.net.Last Updated: February 6, 2006 15:06 EST
