The outsourcing shoe is on the other foot in India now
Technological innovation has, once again, laid the ground for outsourcing. However, this will be within India, in its service sector. Those at the helm of these disruptive technologies will be the clear winners, but the losers will outnumber them
Disruption in learning, both in schools and colleges, has been among the worst outcomes of the pandemic in India. The finance minister did mention this problem in her Budget speech. However, the solution she offered was very different from what people would have expected. “We recognise the need to impart supplementary teaching and to build a resilient mechanism for education delivery. For this purpose, ‘one class-one TV channel’ programme of PM eVIDYA will be expanded from 12 to 200 TV channels. This will enable all states to provide supplementary education in regional languages for classes 1-12”, the Budget speech said. The budgetary allocation for this initiative is just ₹1 lakh according to a report.
A conventional response to the problem of overcoming learning losses would have included hiring more teachers or introducing extra lectures or bridge courses in educational institutions. This comparison is not to point fingers at the specific problem and the policy response to it. Rather, it seeks to draw attention towards what might be a larger shift in the Indian economy, namely, the substitution of erstwhile labour-intensive services with technology-driven very low labour intensity models.
The beginning of this shift can actually be described as the reversal of outsourcing driven tailwinds for upward mobility in the Indian economy into headwinds for employment growth.
If people were asked to list the biggest positive change India has had in the 30 years since it embraced large scale economic reforms in 1991, an overwhelming majority will (rightly) agree that it is the growth of the information technology (IT) sector. Not only did it create value for businesses, but it also created millions of high paying jobs. These IT sector employees, through their demand for consumer goods and capital goods, even assets (such as houses) have played an important role in delivering the trickle-down benefits of growth in India.
However, there is an element of truth to the claim that the gains India experienced in its IT sector also created pain in labour markets in advanced countries. This outsourcing, which benefitted India, was made possible because of the advent of technology which made it possible to deploy India’s relatively cheap skilled workers on these jobs without shifting them physically in advanced country markets.
The second round of this technological innovation, via the mobile phone internet revolution route, has actually laid the ground for yet another round of outsourcing — this time in the domestic markets — in India’s service sector.
The latest outsourcing model, to be sure, is slightly different. It is not cheap labour which is replacing better-paid labour necessarily. What seems to be happening is a massive technological disruption, where technology can drastically reduce the need for labour and petty capital. Big-capital (both domestic and foreign) is increasingly seeking such disruptive ideas in the hope of future profits. To be sure, the capital intensity in this wave is very different from the capital intensity in manufacturing, as what we see is not the creation of large-scale infrastructure such as factories but capital for “burning cash” in running such businesses till they become profitable (or simply fail).
Whether it is the government relying on TV channels instead of recruiting thousands of teachers or Ed-tech companies replacing hundreds of thousands of private tutors, or one giant hyperlocal grocery company replacing hundreds of small retailers or vegetable sellers, the disruptions can be felt everywhere. The logic of such a business model is simple. It seeks to exploit economies of scale by replacing numerous small businesses and making money.
What does this mean for the economy at large? It could translate into excellent business opportunities for those who are at the helm of such disruptive innovations. We are witnessing the emergence of a new class of very well-paid service sector elite in the startup economy.
But what about those whose businesses are being disrupted because of such technology-driven innovation? The grocery shop owner, the potential teacher who could have been hired to teach extra hours when schools reopened, or the extra doctors and paramedics who could have been hired if there were no telemedicine? It is not very difficult to see that a large number of such people would have to suffer an actual or potential employment loss.
This is exactly what outsourcing, or trade, entails. It creates a set of winners and another of losers, and there is often no mechanism to make sure that the overall gains can be redistributed so that no one is left worse off. In exploiting the gains from IT-driven outsourcing from the advanced countries, India was among the gainers of such as process. While there can be a debate on the extent of it, these gainers did offer some trickle-down benefits to the country’s economy. The second round of outsourcing, discussed above, will create gainers and losers within the country itself. The latter are bound to outnumber the former by a very large degree and there is no clear way of compensating the losers as of now.
What should be the policy response to this problem?
Development economics has had a very rich debate on this issue in the literature on choice of technique, which debated appropriate levels of capital and labour intensity as part of development strategies of countries. One of India’s greatest economists and public intellectuals, Amartya Sen, is among the most influential participants in this debate. Is there a case in India to mandate that certain service sector activities follow the labour-intensive route?
Writing in the pages of what is now the Economic and Political Weekly in 1956, Cambridge economist Joan Robinson had a perceptive take on the issue. “The dilemma of the choice of techniques is a real one and it is no good pretending that there is one obviously right answer to it… The technique with the larger wages bill is fattening up more people and getting them into the swim of economic development, it may be scattered over the country and does not require further overcrowding of city slums… On the other hand the more mechanised technique strengthens the highly developed part of the economy and fosters modern engineering and the technologist's outlook on life”. Robison was convinced that economics alone cannot decide this debate. “Anyone who has a prejudice for either side can find plenty of plausible arguments to support it...It is obvious enough where political considerations come in, and there does not seem to be much hope that pure economic argument will be able to make head against the passions that it arouses”, she wrote.
It is high time that politicians in India start engaging with such issues rather than investing in counter-productive policies such as selling reservations as a silver bullet for every employment problem.
The views expressed are personal