GOI’s job: Think of creating jobs

Longer version of article published in the Times of India, 24th Jan 2023.

The presentation of the Union Budget by the Finance Minister is an occasion to reflect on both short-term and long-term economic policy and prospects. India’s economy as well as the global economy have been through a very rough few years with the Covid-19 pandemic followed by the war in Ukraine. In India, as per CMIE data, neither employment nor incomes have recovered completely in aggregate terms, from the Covid shock (see Chart). The workforce participation rate for men remains, on average, 5 percentage points below the pre-Covid level, while household incomes are at 90% of their pre-Covid average in real terms, which was a low INR 6000 per person per month to begin with. In addition, household financial savings are at historic lows. On the other hand, the K-shaped recovery has meant historically high profit rates for the corporate sector. But high profits and low corporate taxes have failed to translate into higher investment rates. With households under duress and private investment not picking up, the burden of creating demand has fallen on the public sector, taking largely the form of capital expenditure on infrastructural projects. It is not clear yet if this strategy is working as envisioned.

Even prior to the onset of the pandemic, the Indian economy was experiencing a severe growth slowdown. The growth rate of gross value added adjusted for inflation fell from 8% in 2016-17 to 6% in 2017-18 and further to 4% by 2019-20, on the eve of the pandemic. If we leave out the Covid-induced base effect which resulted in large bounce-back growth rates in 2021-22, and assume a real growth rate of 7% for the current financial year, we see that the economy will have grown at a compounded annual growth rate of just under 3% between 2019-20 and 2022-23. These are worrying numbers.

More pertinent to the ordinary person’s concerns, while growth may pick up again, what the recovery will do to help our long standing jobs problem is an open question. Creating good quality, productive jobs has proved difficult for many countries, not just India. But, across the developing world, India stands out for its particularly poor performance in linking growth to jobs. Cross-country data show that GDP growth is usually positively related to employment growth – i.e. in years in which the economy grows faster, more jobs are also created. For India, on the other hand, this relationship is almost non-existent. That is, over the past 30 years, there is no correlation between GDP growth in a given year and employment growth in that year. Of course, this does not mean that employment has not risen over this period. But it does mean that we cannot bank on raising GDP growth to promote employment growth. We need a separate policy focus on employment itself.

Even the employment that the economy has managed to create in sectors other than agriculture has been largely of the precarious kind, mostly in construction and a few other services. Despite many years of concerted policy efforts via Make in India and more recently the Production Linked Incentives scheme, the shares of the manufacturing sector in GDP and in employment have remained stuck around 17% and 11% respectively. While India is not much worse than many other developing countries in this respect, that is not solace to uneducated workers who are struggling to find remunerative work or parents hoping for good formal jobs for their educated children. The last point is particularly worrisome. The rate of open unemployment among educated youth in India has reach alarming levels, and this does not even take into account women who tend to drop out of the labour force entirely thereby not showing up in the unemployment numbers.

So what is the way forward? Naturally, there is no failsafe recipe that anyone can offer. Solutions need to come from many quarters, grassroots and think-tanks, national and international. I offer a few thoughts here. First, even though the pandemic itself may be receding from our memory, its economic effects linger on. Thus continued support for social safety measures such as MGNREGA remains essential to help vulnerable household cope with employment and income losses. MGNREGA outlays have been reduced to pre-Covid levels since the last budget. But, our surveys show that the programme it making a vital difference and demand for work far exceeds its supply, so raising the programme budget is imperative. However, MGNREGA only operates in rural areas. Hence, it worth considering an employment guarantee programme for urban areas, as many states like Rajasthan, Tamil Nadu, Odisha and others are experimenting with.

Such programmes are vital social safety nets but they cannot be expected to provide sustainable solutions to the challenge of employment. Public infrastruture spending can be part of the solution since it not only creates direct and indirect jobs but also improves ease of doing business, helping the private sector to create jobs. But to really make a difference for micro and small businesses, investment is needed in local infrastructure in thousands of small towns and cities across the country, not in a few mega projects or metro areas.

Unfortunately, given large fiscal deficits which are a legacy of the pandemic, there is pressure on the Union government to control expenditures. How is it possible to spend on policies for job creation while keeping the deficit and public debt under control. The answer lies, at least in part, in restructuring the revenue side. The pandemic has been good for larger firms and richer households. Reducing tax exemptions on these is called for, thereby increasing reliance on direct taxes at the expense of indirect taxes, which tend to be regressive. In this context, recall that cutting corporate taxes did not boost private investment.

Ultimately the budget in an exercise in balancing many interests, often at odds with each other. We must make sure that the interest of the majority of workers in the unorganised sector and the micro and small enterprises are not forgotten in the bargain.

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