A new economics for inclusive growth 

1. Challenges in India's Growth Trajectory

The Leapfrogging Illusion

Around two decades ago, during the era termed "India Shining," economists believed that India had taken a unique path in its development trajectory by seemingly leapfrogging the conventional progression from agriculture to manufacturing and then to services. This traditional ladder of development, witnessed notably in other nations, particularly China, involved a mass transition from agrarian economies to a flourishing manufacturing sector, eventually leading to a robust services industry. China's success in lifting millions out of poverty was attributed to its strategic focus on building a formidable manufacturing base, earning the title of the world's factory and subsequently fostering technological champions.

Investments in High-End Skills

India, however, took a different route by investing in world-class institutions of science and engineering approximately seven decades ago. The establishment of the Indian Institutes of Technology (IITs) propelled India's software industry to global competitiveness and produced leaders for multinational corporations, especially in the United States. Simultaneously, India's space program demonstrated remarkable achievements at a fraction of the costs incurred by the National Aeronautics and Space Administration (NASA).

High-End Skills and Job Creation

Despite these strides in high-end skills, India faces a pressing issue—the mismatch between the type of skills developed and the generation of adequate decent jobs for its vast population. The growth pattern, characterized by investments in advanced skills, has not translated into a commensurate increase in employment opportunities for the masses.

The Danger of Simplified Economic Models

In his 2010 Lionel Robbins Memorial Lectures, British economist Adair Turner emphasized the need to incorporate more reality into economic models. He critiqued the tendency of economists to overlook crucial aspects, pointing out the danger posed by policymakers who adhere to simplified versions of prevailing economic beliefs. This caution echoes John Maynard Keynes' observation that practical individuals are often influenced by outdated economic theories. Turner's warning is particularly relevant for policymakers in central banks and governments who might gravitate towards simplified economic models that might not fully capture the complexities of the real world.

The rapid advancement of the Indian economy has undeniable merits, but a critical barrier thwarts its full potential: the disconnect between skills, jobs, and incomes. This mismatch impedes growth and undermines development for a significant portion of the population.

The Mismatch

• Skills: India invests heavily in high-end education, producing talented engineers, scientists, and software professionals. But these skills don't necessarily translate into readily available jobs for the vast majority.
• Jobs: The economy generates insufficient decent jobs for the masses, particularly in sectors that leverage existing skills and capabilities. The informal sector is, often characterized by low wages and precarious conditions.
• Incomes: Stagnant incomes, even within employed segments, limit purchasing power and constrain overall economic growth. The benefits of progress fail to reach those who need it most, widening the inequality gap.

Consequences

• Limited Growth: The mismatch limits the pool of skilled labour readily available for industries, hindering expansion and economic diversification.
• Social Unrest: Frustration and discontent among those excluded from the economic boom can lead to social unrest and hinder long-term stability.
• Human Potential Undervalued: Untapped talent and untapped capabilities represent a massive waste of human potential, hampering overall progress and social mobility.

3. The Overlooked Realities of Economic Growth

The complexities of economic realities often elude the conventional economic theories grounded in numerical analysis. A crucial oversight in many economic frameworks is the inadequate understanding of the transformative process of "learning," which lies at the core of true "development." This process involves citizens acquiring new skills, enhancing their incomes, and nations gaining capabilities previously beyond their reach.

Challenges for Agricultural Workers

Agricultural workers, integral to the economic fabric, face a unique challenge in the learning process. While their willingness to apply intelligence and labour to new jobs is evident, the constraints of time and earning necessitate that the transition to a new skill set must be gradual. The key lies in ensuring that the subsequent job, though distinct, aligns closely with their existing capabilities, facilitating a seamless leap and continual skill enhancement on the job. Proximity to their current habitation is crucial, not only for ease of transition but also to save on living costs. Therefore, fostering "adjacencies" in both work and location within rural areas emerges as a strategic approach to ascending the skill-income ladder and fostering vibrant economic ecosystems.

Rural Renaissance

Contrary to the prevalent notion of manufacturing and value-added services being confined to large, capital-intensive facilities, there exists untapped potential in rural landscapes. Small, labour-intensive enterprises in proximity to farms can play a pivotal role in processing agricultural produce and facilitating local transportation and sales. This decentralized approach not only adds value to agricultural commodities locally but also minimizes the need for transporting them to distant, large-scale processing centres.

Inclusive and Sustainable Growth

Attaining ambitious GDP targets requires a fundamental shift in the pattern of economic growth towards inclusivity and sustainability. The focus must turn towards generating more employment opportunities, enabling individuals to earn, learn, and subsequently contribute to expanding the market for producers. The small-scale and informal manufacturing sector, often overlooked, emerges as a critical component that cannot be neglected any longer. India's vast pool of human resources contrasts with the challenges faced by large, capital-intensive factories, which demand more land and financial capital—a scarcity in the Indian context.

4. Building Locally for Global Impact

Investing in education and skills for "high-end" manufacturing and services is crucial, but its impact on the masses depends on effective employment generation. Rather than focusing solely on participating in complex international supply chains amid rising barriers, fostering richness in local economic activity within interconnected networks can pave the way for more sustainable growth.

Local Webs for Sustainable Growth

The key to sustainable growth lies in cultivating local economic webs that resonate with the unique needs of communities. Policies emphasizing participation in extensive international supply chains may not yield optimal outcomes, especially when global barriers are on the rise. Recognizing the limited financial capacity of the Indian state, the approach of reducing taxes and duties or offering incentives to investors must be reevaluated. The expectation that benefits will automatically cascade down to the masses needs scrutiny, as mere imports do not translate into increased well-being without corresponding income growth.

Critical Role of Employment and Incomes

While education and skills development are essential, the focus must broaden to ensure tangible employment outcomes. The Indian state's financial constraints underscore the need for prudent spending and targeted policies that directly impact job creation and income growth. Foreign direct investment, while beneficial, must align with the imperative of increasing employment in the near term to stimulate substantial growth.

Reimagining India's Growth Path

The rigid mould that shaped economic thinking in the latter part of the 20th century needs to be shattered. Policymakers must embark on a journey of reimagining India's growth trajectory, rooted in the fundamentals of inclusive economic growth. The realization that there are no shortcuts to achieving this goal necessitates a departure from conventional approaches.

Making More for India in India

In an era where the global economy diverges from the patterns seen during China's ascent as the world's factory, India stands as an attractive market with unmet needs. Policymakers must capitalize on this opportune moment to foster local production that caters to Indian demands. By strategically making more for India in India, the nation can unlock the potential for simultaneous job and income growth, aligning with the aspirations of its vast population.

5. Conclusion

As India navigates the complexities of a changing global landscape, a holistic vision for economic growth becomes imperative. Shifting the focus towards local empowerment, employment, and income generation presents a nuanced and sustainable approach that can propel India towards becoming a global economic force. There are no quick fixes, but a strategic and inclusive reorientation holds the promise of lasting prosperity for the masses.