Of Kolkata, beer and urban revival

It is industry and not services that is needed for urban revival

In an earlier vocation where I followed the vagaries of the stock market, I was taught that two of the best indices of changing levels of affluence are the demand for beer (alternatively the performance of beer company shares) and the number of new restaurants opening shop. I am unaware of the hard empirical evidence correlating the number of pints swilled or entrees eaten to turning points in a business cycle. But they seem like reasonably intuitive gauges that are fairly easy to measure, informally at least. Particularly when it comes to tracking the economic fortunes of a city.

Take Kolkata for instance. The media has suddenly woken up to the up-tick in the city's economy. However, the boom has been there for the last four or five years. The initial phase of the upswing saw an explosion of new pubs and restaurants. Shopping malls and cineplexes followed but the consensus among Kolkata watchers is that bars and eateries clearly led the boom. Thus, my affluence indices can hold their heads up high.

Based on what is euphemistically termed 'casual empiricism', I would hazard that restaurant openings and beer consumption in the city would have clocked the highest average rates of growth in the country in the last quinquennium. Which brings me to the question that I'm trying to answer here "" how is this affluence possible in a city where the industrial climate has grown visibly worse?

If it isn't industry, then almost tautologically, it has to be services growth that's doing the trick (I exclude agriculture since we are talking of an urban economy) Here I have some formal data, albeit at the aggregated state level. These are somewhat scrappy but prove the basic point. Service sector growth measured by the services component of the state's GDP picked up from an average annual rate of 8.4 per cent in the two years of 1997-98 and 1998-99 to 11.1 per cent in the two following years. The share of services for the triennium ending 1999-00 rose to 47.4 per cent from 42.7 per cent at the end of 92-93.The share of industry declined in the period from roughly 26 to 24 per cent.

What are some of the drivers of services growth? Quite contrary to popular perception, Kolkata has a fairly large software industry concentrated in its eastern suburb of Salt Lake. Private healthcare is also booming "" a crop of new hospitals serve not only the local market but attract a steady flow of care seekers from contiguous states as well as from Bangladesh. It is perhaps the only city where open heart surgeries are advertised on street-side hoardings with the same aggression as cell phones and Santros. Historically, the city has been the hub for all kinds of commodity trading and this appears to have expanded over the last few years and become more organised.

The boom in housing construction has also helped "" the marshes that surrounded the city until very recently are now a concrete jungle. This spurt in activity has also helped the economic boom, putting quick money in the hands of construction workers and fattening the wallets of builders and cement and steel merchants.

Thus, Kolkata seems to provide a formula for urban revival even in the absence of an industrial resurgence. The formula is apparently working elsewhere "" Mumbai's boom in the nineties (or at least its resilience to the manufacturing recession of western India) was largely due to the boom in services growth. In a recently published essay, economists Sudha and Lalit Deshpande argue that "Bombay was never an industrial city and Mumbai is much less likely to be one. Mumbai is much more a service city than was Bombay .... it has the resources of men and material to be a regional financial centre and a lower order global city." (from 'Bombay and Mumbai: The City in Transition' edited by Sujata Patel and Jim Masselos)

I have a suspicion that this formula has some fundamental flaws. The 'services' route to revival appears to be an attractive option for cities like Kolkata or Mumbai, beleaguered by decades of militant trade unionism and other ills associated with organised manufacturing. However, it is not a sustainable strategy in the medium term.

There are three problems with the formula. For one, these cities have a large industrial workforce that is currently unemployed or underemployed. This workforce cannot be absorbed by the services sector because of the complete mismatch in skill-sets. (Pardon me for being a tad facetious but would you seriously expect a lathe operator to peddle insurance from a call centre?) In any case, the capacity of the organised service sector to absorb labour is limited and even at very high growth rates, it would be incapable of absorbing any large flow into the labour market. Third, the housing construction will soon run its course. It will, however, leave in its wake a large body of migrant workers who worked on the construction sites and will stay on to look for other jobs.

The result will be a marked dualism where a thriving service economy coexists with a moribund industrial economy. The intermediate space will be a informal service economy consisting mainly of underpaid menial jobs which will absorb the bulk of labour supply. The affluent service economy will drive things like beer sales and the market for nouvelle cuisine. The industrial economy's exclusion from this affluence will breed social tensions that will over time lead to political strife.

A possible manifestation of these is increasing communalisation of the city's workforce. Darryl D'Monte (author of the brilliantly written 'Ripping the Fabric', an exploration of Mumbai's textile industry) comments on this phenomenon in Ahmedabad and Mumbai. Kolkata has a long history of sectarian violence .It will not be surprising if these resurface soon.

Those who find this characterisation a little simplistic need only to look at the inner cities of North America's industrial belt. The demands of comparative advantage has meant the demise of industries like steel leaving behind some of the worst instances of urban blight, breeding grounds for crime, violence and ethnic tension.Old British steel and mining towns have seen a similar problem. Only in their case, the much smaller population sizes make the problem manageable to a degree.That will certainly not be true of the Indian situation.

The bottomline is that a sustainable strategy for urban revival has to involve the industrial sector to a large extent. Cities are a microcosm of the larger economy. If something doesn't work for a large city, it is unlikely to work for the economy as a whole. I think that the smug belief among some policy makers and analysts that services will be the sole driver of India's affluence is a trifle misplaced. Unemployment and wide-spread social conflict are likely to be the corollaries of an exclusively service-based growth strategy. If India is to really 'shine', Indian manufacturing industry will have to shine as well.

abarua@crisil.com

(The writer is senior economist at the Crisil Centre for Economic Research)