A fresh template for GDP growth

Where is India’s GDP coming from? Official statistics do not reveal the entire picture, and a closer look at the ground level is necessary in order to recognise the reality and to respond to it in the context of the government’s “Make in India” framework.

It is well known that the micro, small, and medium enterprises (MSME) sector is growing in terms of output, employment, energy, and visibility over the last five decades. But the actual contribution of this sector has not been sufficiently highlighted—and the contribution is huge.

The Organization for Economic Cooperation and Development (OECD) estimates that 65% of all employment in the manufacturing sector in India is in firms with less than 10 employees.[1] This makes the MSME sector the most labour-intensive industrial segment in the country. In 2005, India had 42 million enterprises but less than a million companies, according to the Economic Census. [2]

A 2013 Credit Suisse report states that 90% of India’s workforce is engaged in the informal economy, mostly in rural areas. [3] About half of India’s GDP is informal—it is not generated by incorporated enterprises. Productivity growth, the report argues, has been the most dramatic on the informal side of the economy.

But why are these sources of half of India’s GDP, which engage the majority of the country’s workforce, not reflected in growth numbers? They remain “invisible” because the definitions used by official data collection systems to identify economic enterprises tend to exclude informal sector activities. The gaps in how data is collected and evaluated mask the reality on the ground.

Another report by Credit Suisse[4] states that between 1999 and 2009, 75% of all new factories came up in rural India, and 70% of all manufacturing jobs were created there. The average employee count of these 42 million enterprises was 2.4 per unit.

The small enterprises sectors, in addition to contributing to GDP, are also increasing their share of exports. According to the Small and Medium Business Development Chamber of India,^[5] they contribute approximately 40% to the total exports and 45% of the industrial output, creating one million jobs every year.

In the handloom sector, for example, exports rose by 32% in 2010-11 as compared to the previous year.[6] According to the National Handloom Census (2009-10) of the Ministry of Textiles, the handloom sector provides employment to about 4 million persons who are engaged in weaving and allied activities; of these, more than 75% are women.^[7]

In the handicrafts sector, output has been growing steadily even during the economic downturn. In 2000-01, India exported handicrafts worth Rs. 9,270.56 crores; by 2010-11, despite the preceding worldwide slowdown, steps taken by the government had increased the total exports to Rs. 13,526.70 crores. The handicrafts sector employed 7 million persons in 2011-12, of which 48% were women. This sector accounts for 15-20% of the country’s manufacturing workforce, and contributes 8% of the GDP in manufacturing.[8]

In the khadi village industries sector the total cumulative employment, according to estimates of the Ministry of Micro, Small and Medium Enterprises, increased to 14 million persons in 2013-14 from 12.5 million in the previous year. ^[9]

It is also worth noting that this vast workforce includes not only a high proportion of women, but also a high proportion of workers from the scheduled castes and scheduled tribes. Of the 4 million employed in the handloom sector, 11% are from the scheduled castes, 19% are scheduled tribes, and 45% belong to other backward classes. A majority of 87% are located in rural areas. Of the 7 million engaged in the handicrafts sector in 2011-12, 25% are from the scheduled castes, 5% are scheduled tribes, and 23% belong to minority groups.[10]

However, it is well known that this workforce earns its livelihood in the most unjust, exploitative conditions of low wages, harsh working conditions, and no legal protection. The self-employed need support to build organisations as well as marketplaces for vending, and they need credit. Home-based workers, often women, who are a part of the value chain, require the government’s intervention to ensure that the companies that promote the value chain provide better support, both legal and financial.

Strengthening this supply chain in the manufacturing sector can contribute enormously to revitalising the Indian economy, generating higher and a more steady demand, reducing the dependence of the national economy on international finance, and insulating India from financial crises. 

Mahatma Gandhi’s charkha programme during the campaign for freedom from the British was based on the principle of ensuring that every household in India had a means to earn a wage every day. Gandhi spoke of backward and forward linkages—now considered essential in manufacturing—and the Khadi and Village Industries Commission was set up in 1956 to help distribute products all over the country.

Millions of such wage earners, Gandhi reasoned, would provide the fuel for the engines of production—the demand for goods and services by Indians. Many modern economists put forth a similar argument—effective domestic demand is a much more efficient way to maintain GDP growth. It is more secure than an over-dependence on exports and international demand. Gandhi called the purchasing power of these workers the economic vote, which will lead to “economic democracy.”

These sectors provide wages even in times of hardship, and generate the broadest field for livelihood and employment. By focussing on these sectors, India can generate wage-led growth instead of capital-led growth. This paradigm shift from current priorities will be a suitable growth model for India, one that fits the reality on the ground.

Devaki Jain graduated in economics from Oxford University, UK, and then taught the honours course in economics at Miranda House, Delhi University. She was awarded the Padma Bhushan (2006) for her work on the advancement of women. She is one of 28 eminent economists who formed the South Commission (1987-1990), chaired by Julius Nyerere. Her work focuses on development  economics and public policy.

Smriti Sharma is a recent graduate from the Jindal School of Government and Public Policy, Sonipat.

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