Nation and Automation

Dhiraj Nayyar is Chief Economist, Vedanta
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Catching up with the fourth industrial revolution

ONCE UPON A time an economic heavyweight, India has a long—two-and-a-half century old—habit of missing the bus of the most tectonic, prosperity enhancing, shifts in the global economy. When the First Industrial Revolution swept through Europe in the late 18th and early 19th centuries, mechanising the textile industry and unleashing the power of the steam engine, India was experiencing the slow demise of the Mughal Empire and the gradual emergence of a British Empire, neither of which would prepare it to join the bandwagon of prosperity. At the time of the Second Industrial Revolution at the beginning of the 20th century, characterised by a move to mass production and electric power, India was a colony (with no economic autonomy) on the verge of a mass movement against Empire. When the Third Industrial Revolution dawned in the 1980s, with the advent of modern PCs, the internet and digital technologies, India was in the last throes of socialism, a system which had over four decades denied it a chance to ‘catch up’ with leaders of the second industrial revolution, something countries in East Asia, like Korea, Taiwan and Singapore achieved and others like China, Malaysia and Thailand made significant strides in doing. Unsurprisingly, an over-protected India failed to make the most of the new opportunities in manufacturing (mobile phones, PCs, laptops, other digital electronics) that came with these new technologies.

The world is on the cusp of a fourth industrial revolution. Will India be at the station when the bus rolls in? Or is it destined to play catch up?

It is a fraught exercise to predict the future; only astrologers and economists hazard it. For nations, just like for individuals, there is a link between the past and the future, perhaps even a path dependency. There are some things we know well from India’s experience with the second and third industrial revolutions. First, the country has never excelled at manufacturing, not even to a level that the Soviet Union achieved before its collapse. Second, the Government has always believed that it knows the answers to the most vexed challenges, but invariably its interventions have been counter-productive, too intrusive in spheres where unnecessary (think labour laws, high taxes, the erstwhile Licence Raj) and too little in spheres which needed it most (think infrastructure). Third, remarkably India has managed to achieve a reasonable degree of progress and rate of growth, particularly in the last quarter of a century, despite those limitations, primarily driven by the services sector and entrepreneurs of outstanding talent. All of this is very relevant to India’s future economic trajectory.

The Fourth Industrial Revolution will be about a serious intensification of the trends seen in the Third Industrial Revolution. We are talking about artificial intelligence, robots, automation, 3D printing. In the end, whenever it materialises, whether in a decade or two from now, it will alter the world economy and indeed society in a way that the First Industrial Revolution did—at the roots, in the core. A lot of the commentary around the Fourth Industrial Revolution centres on the exciting technology that would usher it in but plenty also focuses on the potential job losses in all economies as a result of those technological breakthroughs. While it is true that many jobs as we know them today will be destroyed, there will be many new jobs that we may not know of today that will be created. Each industrial revolution is about creative destruction: old jobs and industries die, others rise. The trouble is that the new isn’t a like-for-like replacement of the old; hence those who found productive employment in the old order may not find it easily in the new order.

The Fourth Industrial Revolution will be about a serious intensification of the trends seen in the Third Industrial Revolution. We are talking about artificial intelligence, robots, automation, 3D printing. It will alter the world economy and indeed society at the roots, in the core

Elements of the forthcoming industrial revolution are already on display, most noticeably the rise in automation in different sectors. High-tech industries like aerospace engineering are already highly automated. But changes are happening elsewhere in the value chain. Adidas, for example, is experimenting with a completely automated factory for shoes in Germany where a traditional labour-intensive activity is being replaced by machines. Ultimately, the application of automation and artificial intelligence in real-world activities depends on the cost economics. In advanced countries like Germany where labour is scarce and expensive, it may be worth replacing people with machines. In developing and emerging economies like India, given the lower costs of human resources, the economics may not favour machines yet. The Fourth Industrial Revolution will be upon us when machines can operate at a scale and at a cost economical enough to replace human resources across the board even in countries like India. There is some time to go for that to happen.

But, already, it is clear that the opportunities for low skilled, semi-educated workers who traditionally find employment in labour-intensive industries may not exist in the near future. This may not be as bad for India as it sounds largely because India has failed to create factory jobs on a mass scale that China and other East Asian countries did or the US and Europe did before them.

If there’s one metric on which India’s economic performance has underwhelmed, even in periods of impressive growth, it is in the generation of jobs in the quantum necessary to productively employ the country’s workforce. The best statistic to sum it up is the one which tells that almost 50 per cent of India’s workforce is still employed in agriculture, producing just 14 per cent of total GDP. According to the theory of development economics, it is industry or manufacturing which performs the task of absorbing the excess workforce that exists in agriculture. And that is what has been seen in practice in much of East Asia and China as those economies have advanced. India has defied conventional wisdom. The share of industry in GDP and the share of manufacturing in employment has barely grown in the 25 years since India liberalised its economy and grew rapidly, touching near double-digits in the 2000s. Unlike in other emerging economies, the services sector has created more decent quality jobs in comparison to manufacturing.

The most prominent of India’s vast services sector industry is Information Technology. It is the one services industry where India has produced world-class companies which operate on a global scale and which has created millions of jobs for India’s educated middle-class. However, it isn’t infotech services alone, which has created well-paid jobs. Less glamorous sectors like hotels and restaurants and real estate have generated millions of jobs for those at the bottom end of the skill spectrum, absorbing at least some of the labour force exiting agriculture.

In India, less glamorous services sectors like hotels and restaurants and real estate have generated millions of jobs for those at the bottom end of the skill spectrum, absorbing at least some of the labour force exiting agriculture

Development economists have been sceptical about a services- led strategy for catch up, emphasising a manufacturing- led strategy instead. They have good reasons for that. For one, every country that has advanced in the course of history since the industrial revolution has developed a strong manufacturing base before moving to a more service-oriented economy once high-income status has been achieved. Also, services were not traditionally seen as being able to generate export earnings since a large number of them were not tradeable. And, in general, the potential for productivity growth in manufacturing outstripped services. India may yet defy the conventional wisdom. In many ways, it already has, growing rapidly without a strong labour-intensive manufacturing base. But the nature of services has changed. Infotech services, for example, are highly exportable. Services like education and health have tremendous potential to earn foreign exchange through medical tourism and people abroad seeking educational opportunities in India. India has performed woefully in attracting tourists when tourism is one of the most labour-intensive and potentially foreign exchange earning sectors of the economy. Needless to say, India’s potential for tourism of all kinds—heritage, nature, adventure— is huge.

What is more significant, looking into the future, is the fact that automation is less likely to take over some of the labour-intensive services sectors— such as tourism—than manufacturing.

India definitely has a services-advantage. And it could be argued that the manufacturing-first pathway that worked for Europe or East Asia may not work for India, especially if commercially viable automation and artificial intelligence arrive in the next decade. On the other hand, the line between manufacturing and services may blur as technology evolves. Consider a product like Apple’s iPhone. The real value added is not so much in the manufacturing part which happens in China, but in the design and innovation part (which could also qualify as services) which happens in the US. In the final analysis, it is perhaps best, therefore, to be agnostic about which sector of the economy will lead growth and development.

THERE ARE TWO big trends—one positive and one negative— that policymakers and other stakeholders should hold on to tightly as the future unravels. The good news first. India’s limited global success stories have come in knowledge-intensive industries. Apart from infotech, India has built a globally competitive generic pharmaceuticals industry and a reasonably robust automobile engineering industry. In what is an exception more than the rule, India’s space programme has done remarkably well despite being under Government control. Autonomy in operations and distance from Delhi may have helped ISRO achieve what other public organisations have not. In short, India has already shown the ability to leapfrog the traditional path of labour-intensive manufacturing to high-tech manufacturing and services. This is a positive trend as the world heads towards an ever greater knowledge-based economy. Just like the setting up of the IITs and Indian Institute of Science shortly after independence laid the foundation for India’s infotech boom decades later, a strong foundation of knowledge industries will yield high returns in a world driven more and more by technology in a decade or two from now.

Second is the role performed by the Government, which has been negative on balance even in recent decades. Despite the steps taken to liberalise the economy over the last 25 years, India’s state apparatus hasn’t given up its tendency to dabble in economic activity where unnecessary (via Public Sector businesses or over-regulation) and to be absent, or present in a most inefficient fashion, in areas where its role is necessary: in building, or at least financing, physical and social infrastructure. The big challenge for India is to move beyond islands of excellence to a general prosperity for all. And there remains a role for the Government in that.

The overarching goal of the Centre’s economic policy should be only one: the promotion and unleashing of entrepreneurship. Governments do not do a good job of picking winners. It is impossible to say with certainty for any bureaucrat or politician whether manufacturing or services or whether sector A or B will be the dominant force of the future. The job of discovering that is best left to risk-taking capitalists. But for that to happen, the Government needs to clear the messy web of over-regulation that chokes enterprise at birth. What the Government also needs to focus on is the hardware (roads, power, airports and so on) and software (education, health, skills) that will encourage entrepreneurship. The Government also needs to be ready for periods of possible disruptions in certain industries and jobs. It needs to lay out a reasonable, affordable safety net and re-skilling programmes for those who are bound to be affected by major technological shifts.

There is nothing spectacular in any of this, but the Government in India needs to retreat decisively from the frontlines of the economy to focus on building its backbone.

If the Government fails to lay the foundation, India will be ill-prepared to shake the hand of the Fourth Industrial Revolution when it does arrive in force. It may then be very long before India gets another chance to board the bus of prosperity for all.