Economy Nov 6, 2012
It's no secret that India has been drifting towards welfarism ever since the UPA government came to power in 2004. The question: is this doing more good than harm or is it the other way round?
The good done by the UPA is easily observable. Rural wages have gone up. Farm incomes have also gone up due to higher minimum support prices for foodgrain, though a chunk of this has been eaten up by rising labour and other costs. We also have huge food stocks piling up.
On the negative side of the ledger, we have had high inflation, caused partly by global commodity spikes, but mostly by the government's inability to contain its budget deficits. India's inflation is now structural because the investments need to improve supplies are not being made. The budget deficits are also becoming structural, because welfare spends cannot be cut once they are started, but revenues are not growing in the wake of declining growth impulses.
In UPA-1, we had jobless growth. In UPA-2, both jobs and growth have taken a hit.
The problem is this: UPA poured money into rural welfare schemes that have had the negative effect of increasing demand without really creating jobs or assets for growth. We just got inflation.
There is now strong evidence that not only is the Indian economy not creating regular jobs, but it may also be destroying the quality of the jobs available.
Figures released by the World Bank yesterday tell a story. According to a report in BusinessLine, the share of informal jobs in the organised sector went up from 32 percent (i.e., 32 percent of a company's total workforce is casual workers) in 2000 to 68 percent in 2010. These figures are from the jobs report of the World Development Report 2013.
As for total jobs, we know that between 2000-05 and 2009-10, net job creation in the Indian economy dropped from 92.7 million to just 2.2 million, thanks to a sharp decline in self-employment. The creation of regular jobs in industry and services stagnated (see details below).
Why didn't jobs grow much in India under UPA?
Three reasons why.
#1: Rural make-work schemes like NREGA forced wages up, and also pushed farmers towards greater mechanisation. Thus real jobs that existed before NREGA were now fewer, even though wages went up. With NREGA being indexed to inflation, the UPA put inflation on a rural escalator.
#2: High rural incomes kept people back in rural areas, which, in turn pushed, urban wages up. Add the flow of cheap capital and booming stock markets, and the manufacturing sector found it more rewarding to invest in machinery rather than labour.
#3: A dynamic, job-creating economy needs a dynamic labour market. By simply refusing to adopt flexible labour laws, UPA (but here all previous governments are guilty, too) made employers reluctant to employ more permanent staff. No one today wants to employ one extra worker if he can avoid it. And thus, even the employment that is being created is of low value - casual, or part-time.
And these are not just bland assertions. Consider two bits of statistics.
Last year, Crisil conducted a study based on National Sample Survey Organisation (NSSO) data for the last two five-year periods and came up with dismal conclusions.
Looking at data for the period between 1999-00 and 2004-05 and between 2004-05 and 2009-10, this is what Crisil found: in the first period (broadly corresponding to NDA rule), even though GDP growth was lower, employment was robust - with the economy creating 92.7 million new jobs - 27.2 million regular jobs, and 65.5 million through self-employment. The slower growth may have goaded people to look harder for jobs.
During the next five-year period (from 2004-05 to 2009-10), the net addition to jobs was a measly 2.2 million. How did this happen? While normal job creation remained more or less the same (27.7 million), self-employed jobs crashed by 25.5 million, yielding a net job addition of just 2.2 million.
Clearly, a huge number of Indian abandoned self-employment when easier alternatives were at hand.
Two or three explanations are possible: rising general incomes meant more people were improving skills, or studying, and thus there were fewer people looking for jobs. Or higher incomes from make-work schemes may have allowed more women to stay at home for longer periods.
What is significant is the absence of growth in real jobs in the organised or unorganised sectors: between the NDA and UPA periods, jobs outside self-employment were stagnant. The number moved from 27.2 million to just 27.7 million.
A more significant thing is this: the UPA's welfare economics may have destroyed regular jobs and replaced them with casual ones, even though economic growth was booming during UPA-1 (See table below)
In 1999-00/2004-05, of the 27.2 million jobs created, 18.6 million were regular jobs, and 8.6 million casual. In the next five-year period, corresponding to UPA-1, the situation reversed: only 5.7 million regular jobs were created against 21.9 million casual jobs.
The inescapable conclusion: somewhere between 2004-05 and 2009-10, the economy stopped creating good jobs.
As the World Bank report released yesterday shows, quality jobs are disappearing from the organised sector. Anecdotal evidence is available to confirm this. Maruti's Manesar plant had more casual labour than permanent workers - and it was one reason for the industrial flare-up in July this year. The management is trying to correct this by improving the wages of casual workers. But the broader trend - of increased casualisation of labour - continues.
Kaushik Basu, Chief Economist of the World Bank, and till July the Chief Economic Advisor to the finance ministry, makes it clear that rigid labour laws are to blame. "India's labour market is over-regulated. India's rigid labour laws are hurting India's growth. Flexible labour laws will help both organised and unorganised sector."
If UPA wants to create more jobs, it should worry less about increasing rural job spends and change labour laws instead.
BusinessLine has another quote from Basu: "When workers move from low-to-high-productivity jobs, output increases and the economy becomes more efficient. Stringent regulations that obstruct such labour reallocation do not sit on the efficiency "plateau" and affect economic efficiency."
While labour law has always been rigid, under UPA the lopsided investment in rural make-work schemes like NREGA - which is really a low-value, part-time job scheme - may be disincentivising migration and movement to better jobs in urban areas.
People may be sliding from high productivity to low productivity work, because the money is easier.
The UPA's welfare economics may be good politics for the Congress, but it is making the economy more inefficient by retarding the creation of jobs, especially higher quality jobs.
Maybe, Sonia Gandhi and Rahul Gandhi would be better off helping the aam aadmi by reforming labour laws.
More From R Jagannathan.