India’s political narratives have thrived and it has consolidated its position as the largest democracy in the world. However, our economic strategies have failed by seeking to address the symptoms of poverty rather than its root cause: low productivity. This failure stems from a mistrust of decentralisation (believing strong states weaken the nation), disregard for institutions (viewing corruption and informality as cultural), and undermining competition (favouring public sector entities and monopolies). The 1955 Avadi resolution led to poor phone services, prioritised colleges over schools, overextended the public sector, and stunted capital markets. These decisions harmed our productivity, to the extent that we have only 52 cities with over a million residents, half of our labour force continues to work in agriculture, and only 25% of the labour force has formal wage employment. Other characteristic factors of our economy that highlight the problems endemic to stunted productivity include poor quality of education where 43% of 14-18-year-olds can solve basic division problems, and a small fraction of 500,000 out of 30 million students receive apprenticeships. Only 7 million out of 63 million enterprises are registered for indirect taxes pre-GST, and a mere 1.5% of the population pays income taxes. Poverty in India stems from low productivity, not cultural factors.
People in first-world countries are not inherently smarter than us, yet they are wealthier due to higher productivity embedded in their institutions, infrastructure, and human capital. Improving our infrastructure of opportunity—India’s 3Es of education, employability, and employment—is crucial to boost productivity and eradicate poverty. Contrary to popular belief, India does not have a jobs problem and the official 5% unemployment rate is accurate. Everyone who wants a job has one, but wages are insufficient. Understanding that the heart of the problem is wages rather than jobs will lead to different solutions such as focusing on formalisation, urbanisation, industrialization, financialization, and human capital.
Formalization: Unlocking India’s Entrepreneurial Potential
India’s entrepreneurial ecosystem seems healthy on the surface, with 50% of the labour force self-employed and one enterprise per four non-farm workers. However, most enterprises are small and unproductive. Only 11% of manufacturing companies employ more than 200 people, compared to 52% in China, and there’s a significant productivity gap among firms. Forty percent of our labour force comprises the working poor. Out of 6.3 crore enterprises, 1.2 crore lack an office, 1.2 crore operate from home, only 70 lakh had tax registrations pre-GST, only 14 lakh pay mandatory social security, and only 10 lakh are incorporated. Tragically, only 17,500 companies have a paid-up capital of over Rs. 10 crore. GST has been a game-changer, increasing indirect tax registrations by 50%. Improving the ease of doing business could spark a massive increase in productivity. This requires rethinking the MSME Ministry, improving access to non-collateral credit, eliminating labour and tax inspector raj, simplifying GST, growing the venture capital industry, and adopting the India stack for all employer-employee and employer-government interactions by moving all laws to Paperless, Presenceless, and Cashless.
Urbanisation: Creating Job Magnets for Sustainable Growth
The challenge is whether to bring jobs to people or people to jobs. Politically, it’s about taking jobs to people, but developmentally, it’s about bringing people to jobs. Unlike China, India lacks a mass migration event like the Chinese New Year, where millions travel home. With only 52 cities having more than a million people compared to China’s 375, and 600,000 villages, of which 200,000 have less than 200 people, job creation is challenging. Low urbanisation has caused a massive wage divergence in big cities. We should create new job hubs near major cities rather than overcrowding existing ones. The real challenge lies in governance, as cities lack proper leadership. Our cities need real mayors to become smart cities.
Industrialization: Boosting Manufacturing and Reducing Self-Employment
India has too many people in agriculture (50% of the labour force), too many self-employed (50%), and too few in manufacturing (11%). The lack of non-farm jobs hinders migration from farms, and the poor resort to self-employment. The high self-employment rate reflects people’s inability to find wage employment. Increasing formal wage and manufacturing employment is crucial to end self-exploitation in agriculture and self-employment.
Financialization: Transforming Savings and Investment Patterns
Traditionally, Indians have saved in physical assets like land and real estate and relied on nationalised banks for enterprise capital, leading to real estate mispricing and a lack of a bond market. Demonetization disrupted this trend, creating new lending capacity, increasing digital transactions, boosting financial savings, lowering interest rates, and changing the perception of the rule of law.
Human Capital: Revamping Education and Employability
India needs a radical restructuring of its education and employability regime to balance quality, quantity, and inclusiveness. With rapid changes in technology and the job market, the focus should shift from knowing to learning. The three Rs (reading, writing, arithmetic) are foundational and soft skills are essential. Metrics should focus on outcomes rather than inputs.
Historically, policies around education, employment, and employability have aimed to avoid failure rather than pursue success, often blaming external factors. As Ghalib noted, we often clean the mirror instead of addressing the dirt on our faces. India’s low productivity and poverty have multiple causes, but we now have a strategy involving formalisation, urbanisation, industrialization, financialization, and human capital to transform the nation. As Karl Marx stated, “The philosophers have only interpreted the world in various ways; the point, however, is to change it.”
