In terms of job creation, Union Budget has little to offer

From WION column.

Amidst the clamour of commentary around the Union Budget yesterday and today, one issue is conspicuous by its absence: jobs.

Of the big three issues I had flagged in my pre-budget analysis, viz. rural distress, jobs, and stimulating private investment, the first has found a prominent place and the third somewhat less so, but the second issue has been given short shrift. Even MGNREGA finds itself with a stagnant budget in nominal terms (constant at INR 55,000 crores), which will mean a decrease in real spending. This is contrary to expectations in many quarters that this budget would see a big push on job creation.

Before we look at what little the budget does offer on jobs, let us look at the big announcements; an increase in the minimum support price for all crops to 150% of the costs of production and a new national health insurance program.

The revised MSP was a long-expected announcement and, politically speaking, this is the right time to make it. However, there is no clear budgetary allocation for it. Is it to come from the additional INR 7000 crore allocated to agriculture? If so, is this increase enough? Further, what does “cost of production” mean?

Will the government take into consideration paid out costs plus family labour (called A2 + FL) or the above plus imputed rent of land and capital owned (called C2)? Until several such details become clear it is impossible to tell whether this can actually improve farm incomes and, thereby, stimulate the rural economy. Add to this the well-known fact that MSPs rarely function as effective price floors (as they are supposed to) because of very poor implementation, forcing farmers regularly sell for less than MSP. All said though, an announcement is better than no announcement. Since this is a big election year, this is the opportunity to press the government on delivering the promise in a proper manner.

Now let us come to the second big announcement, a National Health Protection Scheme, with up to INR 5 lakh annual coverage for 10 crore families. This has been hailed as a big move and it is. The question is, who stands to benefit from it? The FM mentioned that it would create “lakhs of jobs, particularly for women.” But in the absence of details it is not clear how this will happen.

The newspaper accounts of the scheme do not mention the jobs angle much. Rather, there are mentions of this huge government-funded programme (some say the largest such in the world) being a boost for the insurance and healthcare sector. Assuming that the NITI Aayog wants to design this scheme to benefit the poor, maximally, it would be useful to keep a few things centre-stage so that the scheme does not become a giveaway from the government to the insurance and pharmaceutical companies, and hospitals.

First, either improve public delivery of healthcare or find a way to keep prices of drugs, treatment etc. tightly under control. Given the current inflation in healthcare costs and declining medical ethics and standards, this programme runs the risk of funneling a huge amount of public money to private hands while delivering poor quality healthcare to the poor.

Second, make job creation in the healthcare sector an integral part of the scheme by expanding public healthcare coverage. In fact, the public expansion option has two advantages, it keeps costs under control, the government will only be paying itself, not third parties, and it creates jobs. Of course, this will need more than the INR 1473 crore allocated to this program.

Jobs and employment are directly addressed only in a small and uninspiring section under MSMEs and Employment. There are no big ideas here commensurate with the magnitude of the challenge or with this government prior commitment to the issue. The government is proposing to pay 12% of EPF costs for new employees for up to three years, to create incentives for firms to hire new workers. This extends the scope of the previous policy.

There are also some policies specifically to create incentives for women to participate in the workforce, such as maternity leave and creches. While most of these are welcome measures, they stop far short of what needs to be done on the jobs front. Sadly, the FM also cites the same flawed study cited by the PM in a recent interview, that 70 lakh formal jobs will be created in the current year. The problems with this have been widely discussed in the media already.

The second pro-jobs measure mentioned in the budget is the reduced tax rate (from 30% to 25%) for firms with turnovers of INR 250 crores and less. This is again a disappointingly supply-side view of job creation. Lowering taxes to create jobs will only work if some other key conditions are satisfied. Most importantly, firms need to see strong demand in the economy, particularly in the vast rural sector.

On the whole, there is a large missed opportunity here to go big on the employment front by proposing a range of direct public employment measures, a potential expansion of MGNREGA to more occupations, payment of wage subsidies for jobs where the minimum wage is far below a living wage, and so on. All of these have long been on the policy wish-list.

One last comment on the third front I had highlighted in my pre-budget analysis, viz. private investment. The Economic Survey chapter on Savings and Investment ends by saying “`animal spirits’ need to be conjured back.” This refers to John Maynard Keynes’ famous characterisation of the behaviour of the owners of capital to be moved to action on the basis of mood swings of optimism and pessimism rather than calculations of risks and rewards. The measures suggested are, addressing the problem of stressed assets on bank and firm balance sheets, lowering taxes, easing the costs of doing business, etc. The budget more-or-less confirms to this approach. And no doubt, these measures are important.

But the list leaves out the obvious driver of “animal spirits” in the Keynesian tradition, viz. aggregate demand. The thinking is almost purely supply-side, whether discussing an incentivising investment by big business or by small and medium industries. Time and again we have seen, and even industry leaders have said, that a revival of demand in the economy, an increase in spending across the income distribution, is a strong determinant of private investment.

In sum, while the budget seems to deliver strongly on “ease of doing business”, on the “ease of living” front, much remains unclear. Pressure should be kept up in this election year to hold the government accountable for the proper implementation of the revised MSP formula and the new health insurance scheme.

Few jobs, rural hardship, weak investment weak spots of Union Budget

From WION column.

The upcoming Union Budget is the last full budget of the present government before the 2019 general election. As expected the question doing rounds is, will the finance minister present a “populist” budget with a view to the elections or “stay the course” of fiscal consolidation and related reforms.

The question is made sharper by the likelihood of the central government exceeding its expenditure target for 2017-2018. The prime minister’s recent comments that he does not believe the “common man” wants “freebies and sops” have been interpreted as indicating a non-populist budget.

It is very unfortunate that the “populist” versus “reform” frame continues to dominate discussions on the budget. Such a framing is useless for any real analysis because both the magnitude and the direction of government spending are equally crucial as are the magnitude and sources of government revenue. There may be good and bad reasons for exceeding the expenditure targets for the year, as well as good and bad reasons for falling short of revenue targets. Hence, creating more fiscal room in the budget by revising the deficit target upwards is not in and of itself either good or bad. If it is done with a clear path to raising future incomes for the vast majority, it is very welcome and will pay for itself in the future.

Let me illustrate by taking the three main issues that are of widespread concern leading into the budget: rural distress, lack of jobs, and weak private investment.

First, consider rural distress, an issue that is, sadly, on the agenda nearly every year. The recent Gujarat elections have given a much needed political boost to the issue since it is cited as one of the reasons behind the BJP’s reduced majority. The rural sector “wish-list”, at a minimum would include,

* Implementation of the Swaminathan Commission recommendation of minimum support prices equal to 50% in excess of the costs of cultivation.

* Complete rural electrification in substantive terms. That is, not the token delivery of power, but adequate and timely power supply on par with that available in urban areas.

* Increased overall public investment in agriculture, particularly in irrigation, sustainable practices, and so on. It is noteworthy that investment in agriculture which was around 3.8 percent of GDP in the early 1990s has steadily fallen since then.

* Strong push for the non-farm sector, which is obviously the future of sustainable employment in the rural economy. This is also where the rural distress issue meets the jobs crisis squarely.

Second, take the jobs crisis. In his recent interview, the prime minister has, unfortunately, chosen to trivialise the issue by equating low-paying informal livelihoods, such as selling tea and pakoras with secure, well-paying employment. The demand is for the latter, the former already exist in great numbers. He has rightly been criticised for this.

The prime minister also claimed a large increase in formal employment based on a recent study of data from the Employee Provident Fund Organisation and other similar institutions (such as ESIC and NPF). The study is a novel attempt to use administrative payroll data from such agencies to estimate employment. Its main conclusion is that an estimated 7 million new accounts were added into the system in FY 2017-2018. This is welcome news.

But it cannot be used straightforwardly to draw conclusions about job creation for two reasons. First, the approach measures new PF, insurance, and pension accounts. Not new jobs. As Jairam Ramesh has pointed out, some of the new accounts may be existing jobs without benefits being converted into jobs with benefits. A welcome development, but not to be confused with an increase in employment. The authors partly correct this problem by excluding those accounts that were created during the PF amnesty period. But this does not address all the problems arising out of demonetisation and GST implementation raised by Ramesh.

Second, even assuming that new accounts mean new jobs, to say something about the employment situation we need to know how many jobs were lost during the same period. The study does not address this. If recent work based on Labour Bureau annual household surveys is to be believed, the Indian economy has been losing jobs on a net basis. Even if payroll data adds another dimension to our knowledge on employment, taking both this factors into account, the net new jobs created may be far less than 7 million. Using this data uncritically to support job creation claims is jumping the gun.

On a more optimistic note, a National Employment Policy has been widely reported to be on the cards for this year’s budget. But there are no details on what such a policy would entail. One hopes to see more direct job creation say via public investment in services. There is likely to be some focus on public investments in infrastructure for job creation. But a broader approach to public job creation would be welcome in the policy. Particularly creating jobs to improve the quality and delivery of services the government is already committed to providing, such as health, education, housing, and transport.

I have also chosen these as examples deliberately because data show that these are the largest part of the household budget (except food). Indeed, there is evidence that poor households are cutting back on food consumption to pay for health, education, housing, and commuting expenses. Recently, NITI Aayog VC Rajiv Kumar has also observed that low-cost or free provisioning of such services would go a long way in raising real incomes.

There are legitimate concerns here, of course, to do with the quality of public service provisioning. Do we really want the government spending more money on schools and hospitals when the quality is so bad that anyone with sufficient resources chooses to exit the system? In fact, as I mention above, exiting the public system and “going private” has its costs. The obvious solution is to repair the system, not abandon it.

Third, take the weak private investment climate. This is not a long-run structural issue like rural distress or the jobs crisis. But nevertheless, it is important in the short-run. Here too the fiscal implications are straightforward. An increase in public investment will most likely “crowd-in” private investment. That is, when the government spends in such a way that incomes rise, this creates demand that will bring forth private investment. In the face of lack of demand, as is the case right now, no amount of tax or other incentives really work to stimulate investment.

Obviously making a serious dent in any of these problems requires fiscal resources, both in the sense of increased spending and possibly foregone tax revenue. But if all the above make additional demands on the fiscal, all also have the potential to pay back many times over with increased incomes and increased demand. This brings me to my original point about the nature of government spending and revenue generation.

Failing to meet the fiscal deficit target due to increased public investment in agriculture or healthcare is not the same as failing to meet it due to foregone tax revenues on highly profitable large corporations or high net-worth individuals, both of which are increasing rapidly in India. Conversely, insisting on meeting the target at the cost of raising incomes and demand is not sound economic policy.

Did Demonetisation and GST create jobs in 2017?

From WION column.

It is safe to say that the issue of job creation was among the top economic issues of 2017, along with demonetisation and GST. And as a long-term issue, its importance definitely exceeds the other two, which though severe are likely to be short-term shocks. Further, riding on the youth vote in 2014, the Narendra Modi government has consistently made jobs its central plank, ensuring that the issue always remains in the news.

The year began with the question of whether demonetisation had negatively affected job growth, especially in the informal sector. Unfortunately, like most questions about demonetisation and its impact on the informal economy, this one too suffers from lack of data to answer it. The government has doggedly refused to address the question directly by failing to conduct the necessary surveys at a national level. But anecdotal evidence, as well as survey evidence from a few sectors, does indicate that the severe contraction in economic activity caused by demonetisation did eliminate informal jobs on a large-scale.

The long-run question is, however, what it has always been. Can the Indian economy generate employment in the required numbers to provide gainful, meaningful work to the millions of youth who enter the labour market each year?

On this, 2017 will be known more as a year of confusion and backpedaling on promises mixed with some welcome developments on the data front.

A principal source of confusion has been the term “jobless growth.” Only last week two ex-policymakers argued that “India’s jobless growth is a myth.” Citing Labour Bureau survey data, the authors pointed out that India’s problem is not lack of jobs, but rather lack of “regular, productive, and well-paid jobs.” But this has always been the understanding among all observers of the Indian economy.

As I have also consistently pointed out in this column, jobless growth was never about the absence of jobs, it was about the failure of the formal sector to generate decent jobs, forcing the vast majority to work in the informal sector. The question is, why has growth mostly created “bad” jobs. And how can it create more “good” jobs? So it is rather late in the game to be resorting to such denial techniques and using clickbait headlines to boot.

Another source of confusion has been the lack of data. The most frequently used NSSO data has been available only every five years. India did not have a large-scale, high-frequency employment data collection system till 2010. The Labour Bureau experimented with annual surveys from 2010 to 2015, but these were not used much by academics or policy-makers for quality as well as availability reasons, and have now been discontinued.

Due to lack of reliable, high-frequency employment data, much poorly informed back and forth has been carried out in the op-ed pages. In mid-2017, a task-force was set up under then NITI Aayog Chairperson, Arvind Panagariya to prepare a report on how to improve the country’s employment statistics system. Admitting that the debate “has been taking place in the absence of accurate data or analysis”, the report made recommendations to collect “more reliable, timely and relevant labour market data”.

In this respect, a welcome development is that in 2017, the NSSO has started doing a Periodic Labour Force Survey (PLFS). This is an unprecedented (for India) continuous survey that will be conducted quarterly for urban areas and annually for rural and urban areas. So while 2017 passed with lack of adequate data to gauge what was happening to jobs, hopefully, 2018 will be different, creating the stage for an informed debate leading to the 2019 general election.

The government’s backpedalling on the jobs issue in 2017 has taken two forms. The first, after several weeks of bad press in mid-2017, BJP President Amit Shah issued a statement that it was not possible to provide formal sector jobs to everyone in a country of 125 crore people so self-employment was the answer. This was a clear admission of failure because it implied that the government did not think its policies were going to create formal jobs in the private sector in adequate numbers. Second, in order to make its performance in job creation seem better, the government proposed redefining what counts as a “formal” job. If we count all workers who are enrolled in some pension or provident fund scheme as “formal” then the picture looks better. While this may be understandable as a jobs accounting exercise, it hardly solves the actual problem of disguised unemployment plaguing millions.

We need to get serious about three distinct issues with regard to the Indian labour market. First, the continued problem of bad, low-paying jobs and disguised unemployment, which is most of our labourforce. Second, the relatively new and fast-growing problem of open unemployment among the educated youth. As a proportion of the total labourforce, this is a small number, but it is a high visibility issue as seen in the large rallies taken out all across India for reservations in government jobs. Third, the question of a low and falling labour force participation rate. Compared to other developing countries, India has a much lower ratio of those employed or seeking work in the population aged 15 and above (53% compared to Indonesia’s 66% or China’s 69% and the world average of 62%). This is usually explained by withdrawal of women from the labour force due to prosperity or education. But it needs to be investigated further because “discouraged workers”, those who have given up looking for work, may be a part of the story as well.

The final and potentially welcome development for this year is that the government is expected to announce a new National Employment Policy in the 2018 Union Budget. One hopes that such a policy will be adequately funded, and even more importantly will signal that the government places the interests of Indian workers before those of international investors or the global market.

Is Gujarat’s industrial performance spectacular?

From WION column.

Gujarat’s development model rests primarily on its industrial performance. Industrial output accounts for nearly 40 per cent of state domestic product as compared to an all-India average of around 30 per cent. Correspondingly 16 per cent of the Gujarat workforce is in manufacturing (which is the largest subset of the industrial sector) as compared to an all-India average of 10.5 per cent. This much of the story is well-known.

But can Gujarat’s industrial performance be a desirable model for the rest of the country? One way to address this question is to take a closer look at the way this sector has performed in Gujarat compared to the national average over the last few years.

The most commonly used nationally comparable dataset on the organised manufacturing is the Annual Survey of Industries (ASI) conducted by the Central Statistics Office, which provides data on employment, value added, and other key variables for the “factory sector.” Note that, this does not include the vast number of micro and small enterprises that are not required to register under the Factories Act.

Indian manufacturing has become more and more capital intensive over the years.

Here, I take a brief look at what these data reveal for Gujarat. I am looking at the period from 1983 to 2013, but I also examine if the trends in the past fifteen years are any different from the preceding fifteen. At the national level, ASI data show that Indian manufacturing has become more and more capital intensive over the years.

That is, the number of people employed per rupee of fixed capital used has been falling steadily. This trend has been commented on widely in the economics literature as well as the popular press, in the context of “jobless growth”. Together with this rise in capital intensity, and partly as a consequence of it, has come increasing labour productivity and a falling share of value-added going to labour in the form of wages and salaries.

Gujarat does not stand out as far as employment generation is concerned and if anything does a bit worse than the national average.

The trends for Gujarat are similar to the rest of India. However, some interesting and instructive differences also emerge. First, the general trend towards increasing capital intensity is much sharper for Gujarat compared to the all India average or comparable states like Karnataka. So, while in 1983, 63 jobs were created per rupee of fixed capital, by 2014 this was down to less than 5 jobs.

The comparable numbers for India are 59 and 8, and for Karnataka are 70 and 8. Most of the increase in capital intensity has happened in the 1980s and 1990s, with the trend being relatively flat in the 2000s. This has happened nationally. So, Gujarat does not stand out as far as employment generation is concerned and if anything does a bit worse than the national average.

Second, likely as a result of the increasing capital intensity there has been an increasing divergence of labour productivity on the one hand, and wages and salaries on the other hand. Labour productivity refers to value added per employee. The relationship between productivity and employee wages and salaries tells us how much ordinary people have benefited from increases in productivity.

While in 1983, 63 jobs were created per rupee of fixed capital, by 2014 this was down to less than 5 jobs.

In the case of Gujarat, adjusting for inflation, annual emoluments (wages and salaries) per person went from ~ INR 47,000 in 1983 to ~ INR 96,000 in 2014 while productivity went from ~ INR 91,000 to ~ INR 750,000 in the same thirty-year period (amounts are in 2004-05 rupee values). That is productivity increased eight-fold while earnings of labour only doubled. This divergence has accelerated over time, particularly during the BJP’s tenure.

This divergence between productivity and earnings is observed all over India but is much higher for Gujarat than the national average. Another measure of how much industrial growth and development have benefited ordinary people is the labour share of value-added, i.e. the proportion of value-added accruing to workers in the form of wages and salaries. The nature of changes occurring in the manufacturing sector in India, particularly the increasing capital intensity of production, has meant a steadily falling labour share.

In Gujarat while productivity increased eight-fold, earnings of labour only doubled.

In Gujarat, the labour share has fallen from 36 per cent in 1982-83 to 18 per cent in 2015. The national average trend is from 40 per cent to 25 per cent. For Karnataka, the numbers are 38 per cent to 30 per cent. This again shows that Gujarat’s industrial development has been much more anti-labour than the all-India average.

One possible counter-point is to say that even if the labour share is lower in Gujarat, the level of wages may be higher due to higher productivity. But here too the story is not as clean. In 2014- 2015, the latest year for which data are available, annual emoluments per person employed in Gujarat were INR 229,868 per year (in current rupees) while the national average was INR 221,000 and the Karnataka figure is INR 246,222. So while Gujarat does a little better than the national average, it is by no means a star performer.

Thus, both in terms of job creation, as well as earnings of industrial workers and employees Gujarat, performs either worse than or only slightly better than the national average. At least as far the organised manufacturing sector is concerned, development in Gujarat has benefited capitalists far more than ordinary people

Deconstructing development in Gujarat

From WION column.

A few weeks back the prime minister stirred up controversy in Karnataka by observing that the people of the state were “anxious to join the race for development.” With elections imminent in Gujarat and round the corner in Karnataka, the implication is of course obvious. The prime minister’s economic appeal rest to a large extent on his claim to have achieved above average outcomes in his native state.

Much has been written both in favour of and against the “Gujarat model.” Many observers have criticised it, focusing on the state’s less than convincing record on social protection, welfare outcomes, and of course, ensuring rights of Muslims and other minorities.

In a recent article well-known economist, Maitreesh Ghatak evaluated Gujarat’s performance on various economic indicators and found it to be middling to the poor performer on many. Others have pointed out that the state has historically been advanced both industrially and commercially with cities such as Surat and Ahmedabad topping the list. So it is not clear what Modi’s contribution has been to its relative success vis-a-vis other states.

Gujarat should be taken to be a role model, particularly for southern states that have managed to post high rates of growth while being more socially inclusive than many northern states.

In any case, development is a multifaceted process and it is always possible to pick indicators that make the point we wish to make. In the new “competitive federal” framework, wherein development is a “race” and states are encouraged to market themselves to foreign and domestic investors, this practice has become even more prevalent.

Modi and his supporters are very good at this game. And as befits a race, this year’s Economic Survey documented that in the post-reform period there have been strong divergences across Indian states. There is a clear sense in which globalisation has been pulling us apart rather than bringing us together. It has been the opposite in China.

So while Gujarat does perform better than many other states as well as better than the national average on some indicators, it is not clear that it should be taken to be a role model, particularly for southern states that have managed to post high rates of growth while being more socially inclusive than many northern states. In some ways, the incidental pre-poll comparison with Karnataka is instructive to evaluate further since both states are comparable in terms of population and basic health and education outcomes, as well as State Gross Domestic Product (SDP).

As per the latest available data from the Economic Survey, Gujarat has a state domestic product just about 6 per cent higher than Karnataka. The states are tied in terms of life expectancy (69 years) but Karnataka fares much better on infant mortality statistics (28 versus 33). While recent data are not available on poverty, as of 2011 Gujarat substantially outperformed Karnataka on this score (16.6 per cent versus 20.9 per cent).

Poverty in Gujarat is also substantially less than the national average of 21.9 per cent. In contrast, Gujarat fares much worse in terms of the sex ratio

Poverty in Gujarat is also substantially less than the national average of 21.9 per cent. In contrast, Gujarat fares much worse in terms of the sex ratio (919:1000 as opposed to Karnataka’s 973) and worse even than India as a whole (943:1000). Another indicator of the low status of women in the state is the female labour force participation rate (LFPR), or the percentage of women, 15 years and older, who participate in paid work.

To Karnataka’s 32.7 per cent and the national average of 23.7 per cent, Gujarat has a female LFPR of a mere 19.2 per cent, one of the lowest in the country. If a high level of women’s participation in paid market work is taken to be a sign of a mature economy, then Gujarat has much scope for improvement and is in no position to lecture Karnataka.

All in all the Gujarat experience is very much a mixed bag. But the most important way in which it is not that different from Karnataka or indeed the rest of the country is in the extent of what economists call “structural transformation”, or a shift in value-added as well as the workforce from agriculture to manufacturing and services.

Here, conforming to their respective images as industry- and service-led economies respectively, a substantially higher proportion of Gujarat’s state domestic product is account for by industry (40 per cent) compared to Karnataka (25 per cent) and reverse is true for services (Karnataka – 56 per cent, Gujarat – 34 per cent).

The Labour Bureau data reveal that the high level of industrialisation in the state has not really benefited the majority of the workforce.

However, and this is the key, these numbers do not match up with what is happening to the workers in either state. In both states, nearly half of the workforce is still in agriculture, indicating that development has not delivered the desired outcome in either place and indeed in India as a whole. One might say that it is unfair to expect Gujarat to buck what is clearly a national trend. But then again the Gujarat model rhetoric is one of Gujarati exceptionalism.

The Labour Bureau data reveal that the high level of industrialisation in the state has not really benefited the majority of the workforce. 55 per cent of the workforce is still self-employed and a mere 16 per cent earns a regular wage or salary. Nearly, 78 per cent of households reported not a single regular wage or salary earner (compared to 75 per cent for Karnataka and 77 per cent for India).

Even in urban areas of Gujarat 64 per cent of households do not have a regular wage or salary earner (compared to 59  for Karnataka and 62.1 per cent for India). One response to this might be that Gujarat is known for its entrepreneurial culture and so an absence of salary earners is not a big concern. Unfortunately, 57 per cent of households still earn INR 10,000 or less per month either through self-employment or wage income. This is similar to Karnataka (59 per cent).

One indicator of development on which Gujarat does outperform both Karnataka and India as whole is the percentage of jobs that come with a written contract.

Even in terms of jobs that provide benefits like pension, healthcare etc., Gujarat is not very different from the national average and if anything a little below it (47 per cent as opposed to 50 per cent). Though on this score it vastly outperforms Karnataka (28 per cent). One indicator of development on which Gujarat does outperform both Karnataka and India as a whole is the percentage of jobs that come with a written contract, 30 per cent as opposed to 20 per cent.

In summary, Gujarat enjoys a status as a relatively well-off, industrial state and has been so for decades. But so are many other states, including Karnataka. And where it really matters, pulling workers out of low productivity occupations into higher productivity ones and raising their incomes substantially, Gujarat fails as do most other states.

Poverty in India: Measurement and eradication

From WION column.

Amidst the excitement and controversy over demonetisation and GST, and the earlier noise over flagship policies such as Make in India, an urgent issue has slipped through the cracks. That issue is, the extent of poverty in India, and what to do about it. India’s poor performance on the recently published Global Hunger Index has been in the news last week.

This, taken together with the occasion of International Day for the Eradication of Poverty (October 17), is a good time to take stock of what is going on with poverty. The poverty issue has been overshadowed in recent years by the jobs issue. The two are related. Lack of decent jobs means lack of good incomes, which in turn means poverty. So in some ways, it is good that we are now talking about the root of the problem, the failure to create an adequate number of decent livelihoods. But this should not make us lose sight of the consumption side of poverty.

The first point worth noting is that reliable nationwide statistics on what economists call the poverty headcount ratio (the percentage of Indians spending less per day than the poverty line) are not available after 2011. This is because 2011-2012 is the last year that we have large sample consumption-expenditure data from surveys carried out by the National Sample Survey Organization.

In India poverty should be measured in terms of rupees spent only, or if there should be an attempt to analyse whether basic needs are being met.

As per this data 22 per cent of Indians lived in poverty in 2011, spending less than INR 27 per day in rural areas and less than INR 33 per day in urban areas. However, in 2009-2010 the NSSO also started experimenting with a different method of surveying people’s spending habits. This method gives a poverty rate of 12.4 per cent in 2011-2012. A 2015 World Bank report explains the differences in method.

So much for the headline statistics. Let us get into some more pertinent details. The poverty issue goes much beyond the poverty rate and the poverty line. India is not doing badly as far as a strict interpretation of poverty line goes. But as the Arjun Sengupta commission showed nearly ten years ago, if we look at those who spend just a little more than the official poverty line (still a very low level of consumption), that percentage can be very high.

The figure that caught the nation’s imagination was that 77 per cent of the population had a per capita daily consumption of INR 20 or less in 2005. The basic problem remains even today. Focusing only on the poverty line is dangerous because many people may hover right above it and they will not be any less poor in substantive terms than those just under it.

Second, there is a long-standing debate in India over whether poverty should be measured in terms of rupees spent only, or if there should be an attempt to analyse whether basic needs are being met. To those who have been paying to this debate, India’s dismal performance on the Global Hunger Index does not come as a surprise.

Many people are cutting down on food and spending on other things instead.

For some years now, we have known that merely measuring daily spending adjusted for inflation is not a good way to estimate poverty, especially when nutrition is taken into consideration. What has been happening is that people are spending more money in real terms but that money is going to non-food necessities such as healthcare, education, transportation, and other services.

To put it another way, incomes have risen slowly for the poor while the need to consume non-food items mentioned above has become more and more compelling. The result: many are cutting down on food and spending on other things instead.

This much is known, indeed too well known. The question, as always, is what can be done about it. Here two recent ideas are worth exploring. One from the employment side and one from the consumption side: wage subsidies and universal basic services.

Last week the BJP government in Gujarat announced an interesting policy measure as an electoral promise. In addition to promising investments of around INR 20,000 crore in the garment sector to create one lakh jobs it also promised to pay a sizeable portion of the wages of the newly hired workers for a period of five years.

I have discussed in an earlier column, the idea that the government can subsidise wages in the private sector in order to raise incomes or stimulate employment. It has also been discussed in the context of an extension of the current MGNREGA program. The bigger picture is if the government offers various forms of capital subsidies (like tax exemptions, land, lower interest rates etc.) why not wage subsidies?

Instead of giving people income grants and letting them purchase services in the market, the State should provide basic needs such as education, health, and housing free of cost.

The concept of universal basic services (UBS) has a long history but has recently been floated as an alternative to universal basic income (UBI) in developed countries. UBI has been discussed extensively in India as well (for e.g. see this year’s Economic Survey). The UBS proposal is that instead of giving people income grants and letting them purchase services in the market, the State should provide basic needs such as education, health, and housing free of cost. This is a generalisation of existing public provisioning via the Public Distribution System (PDS) and various other schemes.

Of course many will object to such a program seeing in it a return to the “bad only days” of socialism and fiscal irresponsibility. The problem is that the “good new days” have been good only for a minority and this does not seem to be changing. If we take a look at the budgets of not only the poor but as much as half of the population, we are likely to find that the above-mentioned items account for most of the spending.

Universal public health, education, and housing will go a long way in alleviating pressure on people’s budgets freeing up resources for better nutrition. Not only that it will give them much-needed room to take risks with employment, skill development as well as entrepreneurship. Further, provisioning of such services will create much-needed employment since these happen to be difficult to mechanise.

Overall the decline in poverty numbers till 2011 (and most likely these have declined further by now, though we don’t have data), suggests that it is the time we stopped worrying purely about expenditure-based poverty lines and focused instead on providing basic services and raising incomes at the bottom.

 

A different Gandhian legacy: Shankar Guha Niyogi

From WION column.

October 2nd calls for the usual reflections on Mahatma Gandhi and his legacy. But in times when the remembrance of Gandhi has become largely ritualistic and empty of meaning, and our path diverges even more from his vision of a just, non-violent economy, it is worth remembering another person, Shankar Guha Niyogi,  who embodied Gandhi’s spirit, even though he was a Marxist himself.

Last week marked the 26th death anniversary of Shankar Guha Niyogi. On September 28, 1991, Niyogi, leader of the Chhattisgarh Mukti Morcha (CMM) and the Chhatisgarh Mines Shramik Sangh (CMSS) was shot dead in his sleep. With the recent assassination of Kannada journalist Gauri Lankesh in Bengaluru, the public discourse around political assassinations has once again come alive. And the spate of recent murders, including those of Govind Pansare, M.M. Kalburgi, and Narendra Dabholkar clearly shows the threat that such committed vernacular intellectuals and activists pose to those who want to forcibly impose their own idea of India on everyone else. Remembering Niyogi then also serves to remember our long history of assassinations.

It is worth remembering another person, Shankar Guha Niyogi,  who embodied Gandhi’s spirit, even though he was a Marxist himself.

Coming from a working-class background, Niyogi moved from his native Bengal to work in the Bhilai Steel Plant in the late 1960s, but his union organising activities soon got him fired. After spending a few years working underground, organising Adivasis, and traveling all over the state of Chhattisgarh, Niyogi finally made the Bhilai region his home. He led the mine workers and other industrial workers of the Bhilai region for nearly 14 years until his death at the age of 48. In the process, he along with the workers built a unique trade union movement that went far beyond the usual scope of union politics.

While it was widely suspected that some major industrialists of Bhilai were behind his murder, the case resulted in only one conviction, that of the hired assassin. And this too fourteen years after the murder, in 2005. Those behind the murder got away.

Ramchandra Guha once remarked that every thinking Indian had a Gandhian and a Marxist inside, struggling for supremacy. This certainly seems true of Shankar Guha Niyogi. Niyogi did not describe himself as a Gandhian, and remained close to communist politics all his life. But his practice reveals a creative mind at work that Gandhi would have been proud of. Satyagraha and Sarvodaya found their echoes in Niyogi’s ‘sangharsh’ and ‘nirman’, the struggle for the creation and the creation for struggle, as he called it.

Satyagraha and Sarvodaya found their echoes in Niyogi’s ‘sangharsh’ and ‘nirman’, the struggle for the creation and the creation for struggle, as he called it.

Even as he fought for the mine workers’ rights, wages, working conditions, and other bread-and-butter trade union issues, Niyogi wrote with great feeling about the degradation and despoilation of the air, the water and the forests in the mining areas. Under his leadership, the CMM and the CMSS treated environmental issues as central to their programme and not as an afterthought. The rights of forest dwellers over their own produce, for example, formed an important part of the movement. This is an early example of what later came to be called a “red-green” movement.

Niyogi embraced the ethos of Sunderlal Bahuguna’s Chipko movement and called it a ‘revolutionary movement’. He invoked the spirit of the American Indians in his writings on the environment. CMSS also supported the movement against the Narmada dams and showed the hypocrisy of officials who treated Adivasis as the principal threat to forest ecosystems while selling the forest to saw-mill owners. The union fought against monoculture planting of Eucalyptus and Pine trees for wood, and for the conservation of biodiversity.

Let us take a moment here to realise the significance of an environmental conservation movement that is not based on the urban upper-middle class but, rather, operates with workers, peasants, and Adivasis, who constitute the majority of society.

The movement was born from the recognition that the communities which lived close to nature could be trusted to use it sustainably and had a lot to teach everyone on sustainable use. A centrepiece of the struggle was the ‘Know Your Jungle’ campaign that was built on the understanding that intimacy with the forest created a love for it. This type of thinking is what we find in Gandhi and in other creative Gandhians, such as J.C. Kumarappa, who were proponents of the local economy.

India’s modern environmental movement owes a lot to Gandhi, and Niyogi is a prominent thinker in this tradition.

India’s modern environmental movement owes a lot to Gandhi, and Niyogi is a prominent thinker in this tradition. But Niyogi combines it very effectively with a consciousness of the environment born out of daily struggles of not only Adivasis and peasants but also industrial workers.

Environmental, social, and economic concerns are thoroughly interwoven in Gandhi and so they were in Niyogi also. A particularly novel idea one finds in Niyogi’s writing is that of an ‘environment station’ (pariyavaran thana). “Just as there are police stations (thanas) everywhere, there should be ‘environment stations,’ he wrote. These would employ local people who are well-versed about the local ecology and its problems. Thus, in one go, such a step helps in creating employment as well as a new consciousness about nature. Sadly, this idea has received hardly any attention, even in social movements.

The Chhattisgarh movement took an all-round approach to workers’ lives, intervening as frequently in areas of health, education, alcoholism, and gambling as in areas of regularisation of contract labour and minimum wages. For example, Shaheed Hospital set up by the CMSS still operates in the region and the noted activist Dr. Binayak Sen, who came to Chhattisgarh inspired by Niyogi, used to practice there. And it is worth noting, at the time when the contract labour system has become the norm across all industries, one of Niyogi’s key struggles was against the contract labour system in the industrial plants of Durg-Bhilai.

Another, particularly interesting aspect of the CMM was its engagement with local history. For example, the celebration of local martyrs whom the predominantly Adivasi workforce could relate to and, thereby, find their own histories of struggle. Tribal freedom fighters, such as Vir Nayaran Singh who was executed by the British in 1857 became focal points of the new struggle.

The demand for preferential employment to people from the Lohar community in the steel plant is an excellent example of thinking that updates Gandhian ideas.

The charter of demands from a large peasant-workers rally from October 1980 illustrates the innovative thinking behind the CMM. These included diversion of waters going to Bhilai Steel Plant to farmers during the drought year, higher prices of output for farmers and lower prices for consumers, a halt to mechanisation of iron ore mines, jute mills and cotton mills of the area, construction of small dams and repair of ponds, making local languages, such as Gondi and Chhatisgahi the medium of instruction in primary schools, a ban on commercial sawmills in the vicinity of forests, preferential employment for people from the Lohar (ironsmith) community in the Bhilai Steel Plant, expansion of cottage and handicraft industries, and one Industrial Training Institute in each kasbah.

Notice how a Gandhian spirit suffuses many of the demands; preference to farmers over the industry, fight against mechanisation intended purely for profit, appropriate technology such as small dams, emphasis on local languages, and support for handicraft industries. The demand for preferential employment to people from the Lohar community in the steel plant is an excellent example of thinking that updates Gandhian ideas. In it is the recognition, that was Gandhi’s main insight, that India’s artisanal communities have nurtured a vast store of useful knowledge that can be harnessed for everyone’s welfare.

All this is not to say that Niyogi was a ‘Gandhian’. Indeed, like most creative thinkers he easily transcended such labels.

All this is not to say that Niyogi was a ‘Gandhian’. Indeed, like most creative thinkers he easily transcended such labels, taking whatever was useful from wherever he could and discarding the rest. The point is to remember a committed, patriotic Indian who lived Gandhi’s spirit and tried to create a new vision for India. Even now, in the new neoliberal India, most of what Niyogi fought for remains relevant, perhaps is even more relevant. Ever faster rates of economic growth are creating an increasing rate of stress on our natural ecosystem. To make matters worse, the fruits of this destructive growth are very unevenly distributed. A dangerous cocktail of jobless growth and degrading ecosystems brews in our society.

While the immediate reasons for his assassination may have been different from those of Gauri Lankesh, Kalburgi, Pansare, Dabholkar, or even Gandhi, all these murders demonstrate the danger that dedicated, committed individuals who speak, write and act truth to power in the languages of the common people pose to our ever more entrenched power structures. It is imperative that their memories be kept alive.

Given Shankar Guha Niyogi’s stature and influence (hundreds and thousands of workers struck work and showed up at his funeral), it is noteworthy that there is not a single authoritative book from a major publishing house on his life and work. Some of his writings and essay on him are available here. And Ilina Sen’s memoir, Inside Chhattisgarh, talks about the activities of CMM and CMSS. An account of his life and work is highly desirable in these times.

After 70 years Independence, Indian economy remains dominated by the informal sector

From WION column.

Last month the National Sample Survey Organization (NSSO), India’s pre-eminent public data collection agency released a report right in time for some Independence Day deliberations. But it hardly got any press coverage anywhere, despite the fact that it deals with the condition of nearly 70 per cent of India’s non-agricultural workforce. This is a report based on a survey of nearly three lakh enterprises all over the country in the informal manufacturing and service sectors.

The unorganised or informal sector refers to those millions of tiny businesses that employ a handful of workers each, or in many cases do not employ any hired workers at all, but operate only with family labour. Seventy years after Independence, the Indian economy remains dominated, in numerical terms by the informal sector.

111 million is a large number, nearly 70 per cent of the nonagricultural labour force of India.

The NSSO report estimates the number of such enterprises in manufacturing and services (that is, excluding agriculture and construction) at 6.34 crore. The estimated size of the workforce employed in this sector is 11.1 crore or 111 million. It is important to emphasise that these are the estimates based on the sample survey. As is well-known, small informal businesses are hard to investigate. So, despite the best efforts of the NSSO (and it is widely known to be one of the best at the job it does) in reality the numbers may be much higher. In any case, 111 million is a large number, nearly 70 per cent of the nonagricultural labour force of India. And it has increased from 108 million in 2010 (the previous survey round). Of the 111 million, 36 million are in manufacturing, 39 in trade and 36.5 in other services.

The majority of the non-agricultural workforce in India reports being self-employed and this fact has not changed for decades.

Interestingly, of the over 6 crore enterprises in this sector, 84 per cent do not report employing any hired workers and this proportion has remained more or less constant over the past 30 years. Such firms account for 62 per cent of all workers in this sector. In other words, the majority of the non-agricultural workforce in India reports being self-employed and this fact has not changed for decades.

In this backdrop, let us consider the statement made by BJP President Amit Shah earlier this year, that the government would not be able to provide jobs to everyone who needs or wants one, but would rather encourage self-employment. Self-employment is, in fact, already the default option for anyone who cannot secure a job. So this statement does not amount to saying much.

In the informal sector, a family of even three members (say a husband-wife team with a child) that works together running a shop, a restaurant, a workshop, etc. earns only INR 8000 per month even today.

The most important part of the report is the data on earnings in the informal sector. If we look at the enterprises that work only with family labour, the report shows that the earnings of such enterprises (measured as Gross Value Added or receipts minus non-wage expenditures) are on average INR 95,753 per year or roughly INR 8000 per month. The good news is that this number has increased substantially, at least in nominal terms, since 2010, when it was INR 57,883. But the absolute value is still low. What it means is that in the informal sector, a family of even three members (say a husband-wife team with a child) that works together running a shop, a restaurant, a workshop, etc. earns only INR 8000 per month even today. What about hired workers in this sector? The report estimates their earnings to be INR 87544 per year or around 7300 per month. Very similar to self-employed workers.

What is the reason for such low earnings? A typical answer is because these workers are not very skilled and the businesses are not very productive. In fact, there is no shortage of skills in the informal sector. What they lack is formal certification of their skills, because most workers are informally trained. And as for productivity, the situation is similar to that of farmers who often fail to capture the value of what they produce because of their vulnerable position in a supply chain dominated by more powerful actors such as fertilizer and seed companies, and big retailers. In the informal manufacturing and service sector too, intense competition and a weak position in the supply chain result in informal businesses failing to capture most of the value they produce. Thus, appearing to be of low productivity and earning a pittance.

This very large section of our workforce does not earn enough to be in the income tax net either from the wage or the business income end.

Needless to say, this very large section of our workforce does not earn enough to be in the income tax net either from the wage or the business income end. Further, many transactions still occur in cash. There are many reasons for this, two important ones being that banking is expensive for low amounts of money and that these workers are not treated with respect in banks.

The Modi government’s response to the persistent informal and cash-based nature of the economy has been to force formality by measures such as demonetisation and the Goods and Services Tax. These are meant to ensure that such economic activity also becomes visible to the government and can be monitored and taxed.

On the heels of demonetisation came the confusion and shock of GST.

Unfortunately, the NSSO survey cannot help us understand the effect of demonetisation on this sector because it was conducted from July 2015 to June 2016. But, it is telling that to date no comprehensive survey has been carried out by the government to assess the extent of the damage to the informal economy due to demonetisation. I know from my own conversations with the handloom and power loom weavers in Banaras that business was at a standstill for several weeks in November and December. And its effects are still being felt because losses forced many weavers to sell assets, including machines, to survive. On the heels of demonetisation came the confusion and shock of GST.

The most important one is to give the informal sector the infrastructure it needs to flourish, building functional cooperatives that improve the bargaining power of small producers, ensuring effective government support at least equal to what big businesses receive, and so on.

In fact, the Modi approach is misguided on several levels. First, these measures are authoritarian, nonfederal, and undemocratic. Second, the economics behind them is unsound. Third, there are many better ways to ensure that the government tax base widens and transactions become formal. The most important one is to give the informal sector the infrastructure it needs to flourish, building functional cooperatives that improve the bargaining power of small producers, ensuring effective government support at least equal to what big businesses receive, and so on.

But let us step back for a bit. This August 15th marks the 70th anniversary of India’s independence. That is seven decades of policy-making with the aim of creating a modern Indian economy. The early development planners and economists in the 1950s spoke of the elimination of the small-scale economy that later came to be called the informal sector. Textbooks commonly referred to it as a transient phenomenon, soon to be replaced with large, modern firms. What happened? How come, even after decades of both planning and market-led growth, the better part of our workforce is still self-employed in tiny businesses and earns half of what a peon in a government office earns?

Plainly, the policies that were followed, both during the planning and the post-reform periods have not worked. But a nation-wide serious debate on both these failures has not occurred. It is in no political party’s interest to conduct such a debate because they have no imagination other than what has been tried already.

Let us not make job creation in India a number game

From WION column.

Over the past few months, the question of job creation, or lack thereof, in the formal sector of the economy has steadily been in the news. Clearly, the Modi government is feeling the pressure to do something, or at least to be seen to be doing something, about it. The first response to the accusation that the Indian government has failed on the job creation front was in the form of Amit Shah’s statement that it was not jobs that were promised, but livelihoods. So the government would encourage self-employment. Never mind that self-employment has always been the fallback option for those not able to secure jobs. Half of the Indian workforce is self-employed.

The revelation that 10 million workers left out of the Employee Provident Fund Organization (EFPO) because of employers defaulting on their responsibilities have been registered during the EFPO amnesty program this year.

Since this response was unlikely to cut much ice, a second response has emerged over the last few weeks. This is to argue that in fact, India has a much larger formal workforce than previously estimated. 15-25 per cent instead of the usually quoted figure of 7-10 per cent. This is asserted on the basis of the revelation that 10 million workers left out of the Employee Provident Fund Organization (EFPO) because of employers defaulting on their responsibilities have been registered during the EFPO amnesty program this year. The program (running from January 1st to June 30th) gave firms the opportunity to register workers that were off the books so far and pay their PF dues for a nominal fine of INR 1 per year.

The sudden 26 per cent increase in the size of the workforce that qualifies for PF is being billed as an increase in formal sector employment. Following up on this, a few days ago, the NITI Aayog task force, led by Chairman Arvind Panagariya and charged with reviewing the state of employment data, recommended that formal employment is redefined more “pragmatically” to include workers that are covered under PF, insurance, or pension schemes.

Of course, if receiving the “formal” label means these workers can now fight for better working conditions and more benefits, this would be welcome!

Now, bringing workers who qualify for PF, insurance, or pension schemes into the system so that they actually get the benefits they are supposed to and making sure companies are actually paying into the system, is, of course, a good idea. But using this as a way to underplay the jobs crisis is simply playing a numbers game.

Redefining informal workers as formal will look good on paper but does not change anything on the ground. In fact, it may even make things worse if the “formal” label ends up taking all such jobs off the radar for improvement in working conditions. This is because even jobs in which workers qualify for various benefits are often precarious, hazardous, or otherwise prone to malpractices (such as stealing of PF). Even contract workers can be on PF schemes. Of course, if receiving the “formal” label means these workers can now fight for better working conditions and more benefits, this would be welcome!

But the cynical use of data does not stop there. An article from a few days ago in the Financial Express is a master class in how media can be used for manipulation even in the staid world of economic statistics. The headline reads “Job Creation Boost: Pradhan Mantri Awas Yojana Urban birthed 1.7 crore jobs.” The highlighted summary goes: “Two years after its launch, the Prime Minister Awas Yojna Urban (PMAY-U) may be off to a slow start, but the scheme has already employed close to 1.7 crore people so far, says a study.” This article has been tweeted and retweeted as proof of the success of the Modi government in job creation.

Closer examination reveals that the Express report is based on a study by the National Council for Applied Economic Research (NCAER) published in April 2014. This study uses input-output data from the Central Statistical Organisation and employment data from the National Sample Survey from the year 2009-2010 to show that for every lakh rupees invested in the housing sector, 2.69 new jobs (2.65 informal and 0.4 formal) are created in the economy. So with an estimated investment of Rs 42,160 crore under the Awas Yojana, employment of 1.71 crores should be generated. Thus, we arrive at the 1.7 crore jobs figure.

What we need is a genuine policy response that can increase the number of decent, secure jobs, paying at the minimum the government class IV monthly salary.

So note the data gymnastics here. Firstly, the study is based on data from the UPA-II regime and was published before the present government came to power. Secondly, it is based on indirect input-output analysis, not on any survey of actually created jobs. Thirdly, according to the study, 87 per cent of the jobs created would be informal. Fourthly, it is well known that the construction sector has been a principal source of (informal) jobs in the past few years.

So in sum, a three old study based on seven-year-old data confirms what we know about informal job creation in the construction sector and is not designed to say anything about the current debate on how to create decent, formal jobs. What we need is a genuine policy response that can increase the number of decent, secure jobs, paying at the minimum the government class IV monthly salary. What we are getting instead is a juggling of the numbers and misleading headlines.

Indian farmers are dying from abysmally low wages

From WION column.

Once again farmers have been killed in police firing while taking part in a protest. This time in Madhya Pradesh’s Mandsaur district. It has trigerred the usual flurry of articles and emergency policy measures. The most prominent policy response has been the promise by several state governments to offer debt relief by waiving outstanding farm loans. In recent weeks Maharashtra, Punjab, and Karnataka have announced waivers with Adityanath announcing them earlier in Uttar Pradesh soon after his victory in the assembly polls. Other states may follow suit, because farm distress is a nation-wide phenomenon.

Much has been written as usual on what will happen to the states’ fiscal deficit, in particular if the centre refuses to contribute, as Finance Minister Arun Jaitley has indicated. Commentators have also weighed in on how repeated waivers punish those who repay in addition to reducing incentives for repayment of future loans and how past loan waivers have not worked to stem the farm crisis. Indeed we have been here many time before. Farm loans have been waived in times of drought, famine, or other rural distress since the colonial period. It is a legitimate short-run solution not only in agriculture but in any sector, provided, and this is key, it is a solution to an unforeseen problem, a sudden external shock, and is part of an overall strategy to prevent crises in the future.

Instead what we see is a refusal to deal with the long-run structural problems and the use of loan waivers as a cynical political measure in place of a vision. This makes the public discourse on agriculture to be about inefficient farmers who need to be bailed out with public money rather than about negligent or even malign government policy.

While debt relief is to be welcomed as a short-term measure, it should be borne in mind that it only works partially. If only cooperative bank loans are waived and not nationalised banks, that leaves some people out. Further, governments have no control over private loans, in particular loans issued by informal moneylenders, which have made a strong comeback in the rural economy. It also only works to the extent that the relief actually goes to those who need it most. And there is many a slip between the cup and the lip, ranging from definitinal issues on who qualifies for relief and who doesn’t, whether banks actually stop collection efforts, official corruption and so on. Only promises have been made thus far.

The crisis, as manifested in years of below average growth, unremunerative land holdings, and ultimately in the horrendous phenomenon of farm suicides, is very well-documented. Its principal causes are also well-known and have been known for years.

Ultimately as veteran rural journalist P. Sainath said in a recent interview on the subject, the loan waiver is only a symptom of a crisis, it is not the crisis itself.

The crisis, as manifested in years of below average growth, unremunerative land holdings, and ultimately in the horrendous phenomenon of farm suicides, is very well-documented. Its principal causes are also well-known and have been known for years. Ever decreasing size of holdings, predictably rising costs of production, unpredictable output prices, and a woeful lack of public investment.

In the early 1990s investment in agriculture was around 3.8 per cent of GDP. Since then it has steadily fallen. The 2005-06 budget document lamented that it had fallen from 2.2 per cent in the late 1990s to 1.7 per cent in 2004-05 and that this was “a matter of concern.” Increased public investment was one of the key recommendations of the Swaminathan Commission also. While the share in GDP has gone up from its 2005 low, it is still well below the level reached in the early 1990s.

Given the extensive Swaminathan Commission report as well as many other studies, our problem is not lack of knowledge on what needs to be done to revive the rural economy. The really important issue is, how do we view agriculture and the rural economy in general? What place does it occupy in our imaginations? Is it a source of cheap labour, food, and raw materials for the urban economy? Do villages exist for the sake of the city? Or do they have their own autonomous existence and future? And if we believe the latter, do we act like we believe it?

I fear we don’t act like we believe it. Take one example. RBI data shows that agricultural wage growth has slowed down dramatically over the past few years, in real terms from a high of 15-16 per cent to a low of 0-1 per cent from 2013 to 2016.  The NSS Situation Assessment of Farmers survey (2012) showed that for households with 2.5 acres of land or less (which is 75 per cent of all households), 20 per cent report wages as their primary income source. This number goes up to 35 per cent for households owning an acre or less.

Now, take into account the fact that wages would constitute an important secondary income source even for those whose primary income comes from selling their own product. So, we are talking about half the rural population or more for whom wages matter as a source of income, not just as a cost of production. So, such a sharp decline in wage growth for millions of workers should be a matter of intense policy concern. Instead this collapse has mostly been interpreted in terms of its (positive) impact on inflation. So complete is the macroeconomic obession with inflation that a collapse of rural wage growth is considered to be a good thing.

Generally economists believe that wage growth should be commensurate with productivity growth. In other words, it is only when wages rise faster than productivity that inflationary concerns become salient. Now, output of foodgrains, setting aside fluctuations due to weather, has grown at around 3 per cent per year on average for the past decade or more. The growth of output is faster in case of cotton (around 10 per cent).

The State of Agriculture report (2015) attributes most of this increase to increases in productivity (as opposed to additional acreage or workers). Looking at these figures one is tempted to say that agricultural wage growth observed in the pre-2015 period was indeed a problem. Perhaps due to an unusually tight rural labour market due to increased opportunities in urban areas and MGNREGA, wages grew much faster than productivity. This is a fair point within conventional economic thinking.

For an income of around INR 7000 a month to become equal even to what the lowest paid government servant gets today, it would have to more than double. Even at the rate of 10 per cent growth a year, incomes double only every seven years.

But enough about growth, let us now bring in the level element. Recall that rural wages, like wages in many urban informal activities, are very low. For an income of around INR 7000 a month to become equal even to what the lowest paid government servant gets today, it would have to more than double. Even at the rate of 10 per cent growth a year, incomes double only every seven years. Thus, one of the Swaminathan Commission recommendations that the net take home income of farmers should be comparable to those of government servants, would require sustained growth of wages for several years at very high rates. For there to be changes in the quality of life in the villages in keeping with aspirations, wages may have to grow must faster than productivity. Employers will of course want to pass on these higher wages to buyers in the form of higher farm gate prices.

But the structure of agricultural markets is such that producers have almost no price setting power. They are forced to buy expensive inputs (input subsidies intended for farmers often do not reach them) and sell their output for very low prices, often less than the cost of production. This is because markets are competitive, the product is perishable and transaction costs (of transportation, storage, etc.) are high. So selling at the price being offered at the local mandi is the only option for the farmer.

Hence, the persistent and just demand for fair prices; a demand that has seen immense mobilisation by farmers across the country for years. The small and marginal farmers (which is the majority of farmers) are caught in a double bind. As wage-earners their wage growth has collapsed. As employers, when wages are growing strongly, they do not get a high enough price to recover the costs of production.

Here, we run into the crux of the problem. In our urban-centred imagination, it is not conceivable that the producers of food and raw materials will decide the price at which they want to sell their output. Because they exist for us. On the other hand, we will gladly allow large companies to sell us meals, clothes, and shoes at prices they set.