Edward Luce

In Spite of the Gods

Less than 10 percent of India's dauntingly large labor force is employed in the formal economy, which Indians call the 'organized sector.' That means that fewer than 40 million people, out of a total of 470 million workers, have job security in any meaningful sense. It means that only about 35 million Indians pay any kind of income tax, a low proportion by the standards of other developing countries. The rest, in more senses than one, are in the 'unorganized economy.' They are milking the family cow; making up the seasonal armies of mobile casual farmworkers; running small shops or street-side stalls; making incense sticks and bidis; driving rickshaws, working as maids, gardeners, and nightwatchmen; and bashing metal as mechanics in small-town repair shops.

Of the roughly 35 million Indians with formal sector jobs, which are, to some extent or other, registered, monitored, measured, and audited, 21 million are direct employees of the government. These are the civil servants, the teachers, the postal workers, the tea makers and sweepers, the oil sector workers, the soldiers, the coal miners, and the ticket collectors of the Indian government's lumbering network of offices, railway stations, factories, and schools.

This leaves just 14 million people working in the private 'organized' sector. Of these, fewer than 1 million—that is, less than a quarter of 1 percent of India's total pool of labor—are employed in information technology, software, back-office processing, and call centers. Software is clearly helping to transform India's self-confidence and the health of its balance of payments situation with the rest of the world. But India's IT sector is not, and is never likely to be, an answer to the hopes of the majority of India's job-hungry masses. Nor do foreign companies employ large numbers of Indians—estimates vary between 1 and 2 million people, depending on the definition of a foreign company. The remainder in the organized sector are employees of Indian private sector companies.

Understanding the difference between organized and unorganized India is the key to understanding why India's economy is so peculiar: at once confident and booming yet unable to provide secure employment to the majority of its people. Contrary to much of conventional wisdom in the West, which often, quite wrongly, sees Indian employees of foreign multinationals as exploited sweatshop labor, the 14 million who work either for Indian or foreign private companies are the privileged few—India's aristocracy of labor. In 1983, as India was entering the twilight of its swadeshi phase, the average labor productivity of the worker in the private organized sector was six times that of his counterpart in the unorganized sector. By 2000 that gap had risen to nine times. The gap in earnings was similar. This is a world of difference. Crossing from one world to the other takes good education and skills, or a huge dose of luck. It does not happen often enough.

India's ability to provide a better bridge between the old world and the new depends a great deal on the extent to which it can provide jobs for low and semiskilled employees in its manufacturing sector. In terms of scale, India can only be measured against China. In 2005 India employed just 7 million people in the formal manufacturing sector, compared to more than 100 million in China. Given the large investment flows and the priority that Nehru gave to industrialization, many people find it puzzling that sixty years after independence India's manufacturing sector remains so small in terms of the number of people it employs. That is because Nehru's strategy was essentially capital-intensive—its priority was to develop India's technological capacity, rather than to employ the maximum number of people. But it does not follow that Indian manufacturing is correspondingly weak or uncompetitive. Measured by quality, if not quantity, many of India's homegrown private sector manufacturers are considerably more impressive than their counterparts in China. Again, India finds itself higher up on the ladder than one would expect it to be. It is just that most of its people are still sitting at the bottom.

This very Indian paradox is everywhere visible. But one of the best places to see it is in the impeccably maintained and clean-swept company town of Jamshedpur in the eastern state of Jharkhand, close to the isolated Himalayan kingdom of Nepal. Jamshedpur is almost a museum of India's industrial history from its nationalist beginnings in the late nineteenth century long before the British departed, to the India of the early twenty-first century that exports galvanized steel to China and auto components to America and Japan.

The town was established in 1902 by Sir Jamshed Tata, founder of the Tata Group, India's largest private sector company. At the beautifully kept park in the center of the town, fourth- and fifth-generation menial employees of the company can be seen leaving rice or flowers or offering puja (small prayers) beneath the imposing bearded statue of Jamshedji, as he is still known. The sight reminded me of Rudyard Kipling's description of lower-caste Hindus and Muslims worshiping at 'each other's wayside shrines with beautiful impartiality.' But the prayers are well deserved. For the poor, a job with Tata is a job worth having. With it comes access to high-quality company medical care, pukka (quality) housing with clean and drinkable tap water, and good schools in which to educate your children. But there are fewer and fewer jobs.

Like many large Indian manufacturing companies, Tata's balance sheet has gone from respectable in 1991, when a new world was opened up by Manmohan Singh's abolition of the industrial licensing system, to world-class today. Yet the company's payroll count has gone in the opposite direction. In 1991 the imposing steel mill in Jamshedpur turned out just 1 million tons of steel a year and employed 85,000 people. Now, in 2005, it is making 5 million tons a year and employs 44,000 people. Tata Steel's turnover has risen from $800 million to $4 billion over the same period. 'We could probably get the labor force down to 20,000 and move up to a production of 10 million tons,' said one of the Tata executives assigned to show me around.

Tata Steel's story, in which it transformed itself from a labor-intensive company that supplied low-cost steel to the domestic market in 1991 to a capital-intensive company that supplies world-beating automobile steel to Japan's shiniest car companies today, parallels that of other successful Indian manufacturers. Up until 1991, Tata Steel made everything it possibly could in its own backyard, since it was always too much of a struggle to import spare parts or new machinery under India's 'import substitution' regime. Naturally this need for bureaucratic approval was a distraction from what the company was supposed to be doing and added greatly to its labor force. The company also employed large numbers of lobbyists and 'gofers' who spent their time hanging around ministries and petitioning bureaucrats.

It was yet another questionable legacy of the well-meaning society Nehru wanted to build. Nehru gave India some of the strictest labor laws in the world, making it virtually impossible to sack an employee, even if the person you wanted to fire was a chronic absentee. Nehru gave India an industrial licensing system in which companies such as Tata needed the permission of bureaucrats for even the smallest investment decisions on what they could produce, when they should produce it, and where they should produce it.

Some parts of Nehru's model, such as the Orwellian 'License Raj,' have been dismantled. But some, such as the absurdly strict labor laws (which were made even stricter by Indira Gandhi in 1976), remain. This means that companies are reluctant to hire large numbers of people even when they are expanding since they fear being stuck with boom-era payrolls during the next recession, which would push them into bankruptcy and endanger everyone's job. But it also means companies prefer to outsource as much as possible of their work to small, unaudited outfits in the 'unorganized sector,' so they can escape the labor laws, which are unenforceable in India's labyrinthine informal economy. There are other legacies that have yet to be abolished, including the 'Inspector Raj' of constant inspections that plagues much of Indian business. As Gurcharan Das, former head of Procter & Gamble's India operations, wrote, 'In my thirty years in active business in India, I did not meet a single bureaucrat who really understood my business, yet he had the power to ruin it.'

There are also unintended consequences to another of Nehru's critical policies: the decision to pour as much money into English-language universities for the middle classes as he did into primary schools for the villages. The elite Indian IIT engineering graduates, some of whom are doing so well in Silicon Valley and Massachusetts, are also working for companies like Tata Steel and Reliance Industries. Because of its strong and large university system, India's scientific and technical capacity is ranked third in the world, behind the United States and Japan but ahead of China. In contrast to India, China has spent a much higher share of its budget on elementaryschools for people at the bottom of the ladder. India produces about 1 million engineering graduates every year, compared to fewer than 100,000 in both the United States and Europe. Yet India's literacy rate is only 65 percent. China's is almost 90 percent.