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Mainstream, Vol XLV, No 39

Growth, Employment and Inclusion

Tuesday 18 September 2007, by Kamala Prasad


India celebrates significant GDP growth numbers more recently. This brings the boast of the Central policy-makers that more growth means “more inclusive” growth. This runs contrary to the experience of acceleration revealing “divisive growth”. It is divisive between urban and rural dimensions. It is divisive between coastal and inland States of the Union. It is divisive in terms of location and commitment of Central investments directly by government and indirectly by the public sector enterprises. Of course, the tax breaks, tax exemptions and other fiscal incentives strengthen these divisions as they are targeted in affluent regions and entities. It is far-fetched to claim inclusiveness in the face of such policy preferences. The promise of distant gratification for the distressed majority can generate only cynicism.

The Deputy Chairperson of the Planning Commission acknowledged recently the distinction between “good” employment and not- so-good jobs based on regularity, scaling up prospects and availability of social security. This is what can distinguish the new era employment from that in agriculture that is seasonal, fluctuating from weather conditions, and relations of production in farm and factory. The more recent OECD survey pegs the organised sector’s share in employment to be just six per cent from 10 per cent or so on the eve of economic reforms. If employment growth and earning are the index of quality of growth with inclusion, then the growth numbers do not impress. The Economist of London was quick to carry recently a strip-column about begging at the traffic crossings in the national capital of Delhi. The city boasts the highest per capita income in the country and the earning of beggars are higher than those in the unorganised employment.

Three elements in policy consequences from the current growth appear. Firstly, a tenuous link of growth number itself as “inclusion” is assumed. Secondly, the reality of grossly unequal rewards from the current strategy of growth is suppressed. Does inclusion confine itself to the sphere of official promises while growth numbers deliver wealth for the declining percentage of the population? The result of a survey by Merill Lynch and Capgemini is reported in the media as estimating that India had one lakh persons each with personal net worth of more than four crore rupees which makes for a share of 10 per cent of the national GDP. Thus 0.001 per cent of the more than one billion population own 10 per cent of the country’s wealth! Finally, aggressive social disaffection is spreading. The spread of the radical Left influence is witnessing phenomenal growth since the economic reforms started. There is growing resistance to “land grab” for industry under police protection. People are losing livelihood from forced land acquisition and from informalising regular jobs in organised industry. A comprehensive definition of “inclusive growth” and the structure of strategy compatibility between newer instruments and the “human face” of growth remains hard to come by.

Growth Quality

TWO positive shifts require to be watched closely. Statistical growth rate of the GDP has moved to an average level of roughly eight per cent in the course of the Tenth Plan. It is a significant acceleration from the level of about six per cent in the earlier two decades. Another significant recent shift is in relative stability of growth from quarter to quarter. There are, however, three negative or at the best indifferent trends. Growth rates vary widely from State to State. The swing in per capita income between 1991 and 2006 is from the low of less than twofold in the State of Bihar to a high of nearly fourfold in Maharashtra. A breakthrough in bridging the difference relative to past trends is not in sight. Secondly, fluctuations still bedevil sector-growth rates. Agriculture figures negatively but even core infrastructure sectors display such a trend. A correlation between the electricity growth rate and the growth of energy-intensive industry such as manufacturing is not always easy to establish. Finally, a validated analysis of contributors to the productivity growth rates in manufacturing and services is not available. Even in the highly rated IT-sector, a media report indicated productivity in the USA being more than double that in India. So, if the current spurt in the growth rate is produced by the new fiscal capitalism and accounting processes in which the global fund-flow figures significantly, then serious long-term imbalances in the total factor productivity cannot be ruled out. As Martin Wolf points out, the new global financial capital remains untested.1 Doubts about sustainability of the current growth trajectory, an issue often debated, remains credible on this count.

The external sector is booming as the last five years have seen strong global growth. India’s exports have accelerated as never before. However, imports have grown more robustly. So, the current account deficit-gap is increasing. Apart from crude and gas imports, we are increasing our dependence on import of coal, machinery, luxury goods and other commodities. Foreign trade is not adding to our foreign exchange surplus as in China and the South-East Asian countries. NRI-deposits and remittances from Indians working abroad provide the real cushion. According to the World Bank, India received during 2005-06 foreign remittance worth $ 26.6 billion or Rs 1.09 lakh crore. It is no longer the Middle East but North America that leads and contributes almost 40 per cent of the total. And Bihar and UP are the States that receive substantial part of it. What happens when the cyclical downturn sets in remains uncertain.

But why has foreign debt shown a sharp increase to about $ 155 billion? It is racing to catch up with the foreign exchange reserves. It is no longer contributed by government borrowing. India’s corporate sector enjoys the luxury of raising loans as external commercial borrowing (ECB). It is not for infrastructure projects or fixed asset creation. The excuse is relatively cheap money for importing raw materials and other goods. Private companies are competing with one another rather than taking the consortium mode for intermediation. Is this competition adding to the cost of money so raised as also heavier burden in case of default or currency fluctuations? Finally, the government is facilitating acquisition of companies abroad by Indian enterprises. Last year, the outflow on this account was almost equal to the inflow of FDI. This is not like investment abroad in the energy sector but for pure trading. The global experience with M&A in terms of return and success is mixed. Expansion of global exposure might be contributing to the Indian footprint in foreign lands but it has potential adverse consequences during the apprehended downturn.

Finally, a clear picture of the relative contribution from the small and medium enterprises and the large corporate houses is not easily available. The government is propping up the so-called global scale of production and offering increasing sops for the same. This is revealed from a reply in the Lok Sabha that the SME-sector is making larger contribution to production as also exports. If that is so, then the scale of incentive at present is perverse. Budget papers relating to tax exemptions admit this reality. It is indicated that larger the company, greater the preference in exemption. That is one reason for the phenomenon of “jobless” growth. It amounts to the job-creating industry being discriminated for the largesse of public finance and other incentives to be cornered by the large private corporate sector. Public policy seems to favour the two-tier economy to sustain the growth momentum that deepens multiple disparities.

Dimension of Employment

OECD Economic Outlook 2007 was widely flashed recently to sustain a thesis that Indian growth was creating jobs.2 There were caveats. This was only in terms of absolute numbers and in comparative terms with the other BRIC countries. Brazil, Russia and China added much less numbers than India since 2000. Why should it not provide any consolation? The summary media flash lists four reasons. First, the growth in employment has been faster since 2000 in the informal sector, an area suffering from data deficiency. ILO noted earlier in its 2006 Global Employment Trend that unorganised sector employment was not “necessarily of better quality” than that in stressed agriculture. Secondly, the employment elasticity of growth, that is, potential to create jobs with every one per cent growth of GDP, has remained static at 0.3 per cent during this period. This results from highly capital intensive growth. Thirdly, the organised sector growth is shrinking in relation to the pre-reform period. It has come down to six per cent in 2005 from more than 10 per cent then. Fourthly, the employment to population ratio at 50.5 per cent in India is the lowest in relation to every other BRIC country. A more volatile problem persists, namely, finding suitable jobs for youth and women. The accelerated growth rate has not reduced the unemployment overburden of the past; it has added to it.

What have the country’s surveys revealed? Both the NSSO and the Economic Census have, more recently, confirmed growth in numbers in relation to the situation during the 1990s. What are the caveats here? First, employment growth has resulted from reversion of agricultural growth to a positive 1.3 per cent compared to being negative during the 1990s. Secondly, the work participation rate between 1983 and 2004 by the usual status indicates positive decline for the rural female and stagnation for the urban female. Thirdly, the census of small industry in different periods shows reduction in small enterprises and reduction of employment in relatively larger enterprises. This indicates a policy bias: against reservation for small industry for one; larger enterprises hiring employees on contract to be retrenched at pleasure. Fourthly, in relative sector comparison, services sector shows the highest growth followed by manufacturing with the lowest by agriculture. This is one element of the currently debated agricultural crisis. Finally, small States and Union Territories show exceptionally high growth of employment relative to the principal high growth States. Quality is a casualty since these small States have no organised industrial base. This is the phenomenon of jobless growth.

High growth of SDP in States led by manufacturing indicates stagnant or declining growth of stable employment. That is what reflects the share of organised employment in the economy declining to only six per cent. In this connection, the Deputy Chairman of the Planning Commission had mentioned recently that “there is need to know why the organised sector had failed to generate adequate jobs”. One explanation is that public sector that led to the growth of organised sector employment has now a low priority in policy. It has followed the policy incentive for downsizing to scale up profit. It dare not engage in labour-intensive activities. Public policy preference for private enterprise has created moral hazards for public enterprises. A reversal can result only when governments provide concrete indication that they are serious about increasing “good” employment. Good employment is one that is regular, offers compensation commensurate with productivity and sets the example of innovating social security.

One measure of such employment is located in the level of wage and ratios between the highest and the lower levels. The OECD report indicates that while in China the real wage in manufacturing trebled between 1990 and 2005, in India the increase was a mere 2.7 per cent. The march of growing wage inequality in India relative to others is demonstrated in just one lakh persons having a net worth of a little over four crore rupees. Some CEOs are flaunting an annual compensation upwards of ten or twenty crore rupees. And what is the lowest wage in the new era urban/industrial employment? Call centre jobs with high attrition is over one lakh rupees a year. Private security services offer a little over Rs 25,000 a year. An economic paper has run a series on the booming construction industry finding it difficult to access enough rural migrant labour. Surprising that it has not factored in the wage rates and working conditions in the construction industry. It has even put the blame on the PAP-rural employment activities for this shortage! The booming sectors in the economy are keeping workers’ wages perpetually depressed so that the managerial compensation and rent keep moving up!

The 1999-2000 employment-unemployment survey had come to the damning conclusion that compensation to labour from increased productivity is very meagre indeed. This has not changed much since then. The NSSO 2004-05 indicates employment rate exceeding growth in persons coming on the labour market. Based on this, the Prime Minister’s Economic Advisory Council has projected that everybody seeking jobs will get it by 2010. This is too good to be realistic unless confirmed in Census 2011. But the Chairman of the Council is reported having put a caveat: “whether people are satisfied with their remuneration or not is a different matter”. There is growing evidence that grossly inflated compensation for capital has no relation to its contribution to employment. This phenomenon cannot but fuel vastly expanding economic inequality. And inequality in wages when the impression goes round of over-exploitation of labour, including technical manpower, is a recipe for depressed manpower productivity.

Evidence on Economic Inclusiveness

RECENT evidence indicates shareholders’ stake and cheap credit contributing to profit rather than efficiency and productivity. Public policy is showing excessive bias in favour of excessive concentration of wealth. China has, for instance, smaller numbers of billionaires despite higher growth and much larger number of enterprises. Yet, China is now worried about growing economic inequality with potential for adverse social consequences. The old disease of benefiting the progeny of promoters and adding to further concentration of wealth in narrower circles does fuel a sense of exclusion among the real contributors to growth.

Employment, to be inclusive, has to be sensitive to certain norms. First, irregular and casual jobs need to be excluded from any enumeration. Since food and survival are daily necessity, there must be a daily income norm indexed to the price of essential survival commodities. Secondly, the government should lay down a national minimum wage, as suggested by the Rural Labour Commission decades ago. Sharp differences over the level of wage in the National Rural Employment Guarantee Act leading to bound-rate of rupees sixty per day when the overall per capita income is rising is irrational. Third, the current political practice of token insurance and/or other schemes as social security in almost every Budget must be replaced by a binding social security system for workers below a certain threshold. Sixteen years of economic reform has not brought to any conclusion a legislation on social security for the unorganised sector. A legislation that is in the making is seen only as a bundle of pious intentions. Its firm commitment remains: “By this Act the Central Government may formulate and notify from time to time suitable welfare schemes for different sections of unorganised sector workers on the recommendations of the National Advisory Board.” Fourth, social security must become a charge on every enterprise, old and new. Finally, with emphasis having shifted to business efficiency and profitability, a national business fund that sustain access to quality manpower should appear. Such a trust fund with a suitable structure of government participation can add to a labour-intensive enterprise, if needed, on sub-minimum wage initially for them to migrate in a reasonable period to more remunerative enterprise. If the liberalised system is really as efficient as is touted, then it should show the potential to be inclusive in such real term in employment delivery.

Does poverty reduction connect with the employment-led inclusive growth? When started it was considered as merely a “holding on” policy framework till the poor are integrated in the growth policy itself. The outcome was a selective action approach that sought to aid enterprise in small and tiny sector supported by a policy of reservation and protection. Directed bank credit and state policy of procurement was focused on to this end. Private enterprise was given income tax exemption for undertaking activities for poverty alleviation. Low level of housing was added in the PAP. The PDS also gave it the needed income redistribution prop. In effect, India’s anti-poverty strategy was a two-tier undertaking that could converge at some stage. It created minimalist redistribution condition on the one hand and a low grade welfare component of self and wage employment on the other. It aimed at fostering public-private partnership to strengthen a bottoms-up effort for growth. Economic liberalisation seemingly adopted it but without a plan to serve the inherent long-term objective. It has failed to innovate on the old platform for it to become part of the growth strategy. Therefore, its output is declining. In a way, the current state of poverty alleviation reflects failure of the policy of “growth with social justice”. The new slogan of more inclusive growth confirms the dilution of the constitutionally mandated doctrine of economic justice.

Growing inequality of income stratifies “dualisation of income”. Exclusion of the marginalised in modernising sectors of the economy; “informalisation” trend in large and medium sectors; and the doctrine of merit in the skill-based economy are adding to social polarisation and alienation among the workers—educated as well as unskilled. From one account, in the 21st century, almost 35 per cent of the working population in the informal economy are under the poverty line.3 Spreading social protest and sporadic violence are symptoms of a deeper malaise that defies containment policies. This is demonstrated best in the spread of the “Naxalite movement” despite putting an internal security tag to commit more funds for coercive action. In reality, it reflects the public policy of exclusion aiming to craft society for the benefit of the resourceful. A new caste system of levels of income without any societal average is seen as the long-term social objective. Otherwise, the Central Government would not have described the genuine ecological protection issue by the Apex Court as derailing its fight against “Naxalism”. The PAP started as merely the entry point for empowering the poor to wrest their share in the national economy within a reasonable period. This is now a distant dream.

The trickle-down thesis has no firm yardstick to measure its impact on inclusion or exclusion of population. The outcome is an outlandish position that “nine per cent growth is widely inclusive”.4 The effort in such a view is to protect the politics of polarisation and shield the lifestyles of the affluent contrasting the growing deterioration of lifestyle of the “outclass”. But the current trickle down mechanism has no takers in the “outclass”. It has to test positive in terms of a minimum basket of needs delivered in a manner that it helps the struggle against exclusion. It is tested in the form of food and nutrition security but public policy is in disarray in this respect at present. The latest NSSO output confirms that a mere 27 per cent of the population in rural India consume fruit and vegetable, source for micro-nutrient that is needed for immunity.5 India’s failure in managing child malnutrition is so dismal that the world has stopped looking at it. The government is busy depressing the cost of money and scaling up the security of profit for large corporate enterprises but has no policy for security of livelihood of the poor. A RBI study of the utilisation of remittances from abroad in 2006 revealed that “a predominant portion of remittances (54 per cent) is spent on food, education and healthcare”.6 This confirms the distress migration. An NCAER study concludes that 81 per cent of Indian households save but many out of them remain financially fragile when income and expenditure are taken into account. Rural non-farm employment has expanded but largely from public sector infrastructure investment. If that investment declines, rural income will also decline. Businessman Atul Churiwal of Merchant Chamber of Commerce stated on July 11 that “farmer’s income eroded by 50 per cent in the last few years, in real terms”.7 The landless labourers’ condition suffers more. All this evidence shows how hollow vending of economic inclusion remains.

The government claims implicitly that the higher growth is from private sector investment. This will look credible when employment expansion and workers’ income growth enters the private corporate sector discourse. Two negative articulations from industry are already being presented. First, a complaint is heard that public sector rural infrastructure investment and minimum wage are forcing decline in urban migration and eroding the competitiveness in certain industries. Second, the growing shortage of skilled manpower for knowledge and modernising industries shows a modest interest in taking over just 300 industrial training institutes by the private sector out of about 5000 set up over decades by exclusively government investment! The Finance Minister states that there is no paucity of financial resources. But the reality seems otherwise, in-so-far as projects targeting inclusion are involved. The Rural Development Ministry demanded extension of employment guarantee to 200 additional districts this year. The Budget committed funds for just 131 instead. The Supreme Court ruled that the ICDS be extended to all the remaining blocks by December this year. The Budget does not see merit in it. The government displays distinct reluctance to legislate affirmative action in private industry. The USA boasts of such legislation and industry lobbied President Regan during the 1980s not to scrap it. It would seem that all the sound and fury about more inclusive growth only tends to conceal the poverty of public commitment. Decent employment-led inclusive growth remains elusive. Credible action remains far short of the stated objective. This reality cannot but generate increasing social turmoil in the years to come.


1. Martin Wolf, “The New Capitalism”, Financial Times, London, June 19, 2007.

2. The Times of India (daily), New Delhi. June 20, 2007.

3. Barbara Harriss-White and Anushree Sinha (ed.), Trade Liberalisation and India’s Informal Economy, Oxford, 2007.

4. Swaminathan S. Anklesaria Aiyar, The Times of India, June 24, 2007.

5. The Pioneer (daily), Delhi, July 2007.

6. Sanjiv Shankaran. Mint (daily), February 21, 2007.

7. The Statesman (daily), New Delhi, July 12, 2007.

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