Focus has to shift from the automated large scale sector, to promotion of the rural economy and the small and micro sectors.
The Union Budget 2023-24 is around the corner. A budget is expected to identify the issues facing the economy and society and try to provide solutions to them. This may involve continuing policies or changing them. The budget represents the priorities of the government – what gets more allocation and what gets less. Changes in priorities take time to show any impact, so many analysts say that budgets do not make a difference. But, given that the budget is the largest single economic event, it matters even if priorities remain unchanged.
One of the most crucial immediate problems facing India is inadequate employment generation and persisting high rates of unemployment. The problem is particularly acute for women and educated youth. This has resulted a low labour force participation rate in India. Those who do not have paid work have to depend on those who are earning. The family income, made up of incomes of those working, has to support the non-earning members and the per capita family income gets reduced. This results in higher levels of family poverty. The recently released Report of People’s Commission on Employment and Unemployment points to the various issues that need to be urgently tackled.
Issues in employment creation
Two factors are particularly highlighted in the Report. First, compared to other similar countries, like, China and Brazil, India has about 20% less workers in the labour force. About 450 million are in the labour force out of a population of about 1.4 billion. So, each working person has to support two others in the family. This dependency is much less in other comparable large countries. The implication also is that India’s GDP is much lower potentially than what it could have been if there were 20% additional workers in the labour force doing productive work.
The Report points out that in the age group of 15 to 25 years about 24 million young people could potentially join the labour force in 2022. This is assuming that 30% of the women would not enter the labour force due to social reasons. The estimate is based on calculating the number of young of different age groups who can join after secondary education, undergraduate and higher studies. For 24 million youngsters ready to join the labour force, only about half a million will get the desired organised sector jobs and the rest will have to go into the unorganised sector.
Inadequacy of employment generation is a result of the high degree of mechanisation and automation in the organised sector. For example, in the auto industry more and more robots are used along with contract labour working at low incomes. In banks, increasingly machines are used for cash transactions or printing pass books and money transfers can take place via the net. In agriculture more tractors, harvester combines and threshers are used, displacing labour.
The report points to four types of unemployment in India. First those who are in the labour force and do not find work. Second those who are under-employed since they do not find a full week of work. Third, those who have given up looking for work and have dropped out of the labour force. Finally, the disguised unemployed largely in agriculture but also in trade, etc. Counting all this, it is shown that while 332 million have some kind of proper employment, 286 million are in need of work or better work.
The report also points out that these kinds of unemployment are in the unorganised sector.
When employment is lost in the organised sector the workers enter the unorganised sector to sustain themselves. So, while employment needs to be created in the organised sector, the situation will not improve till enough work is created in the unorganised sector. The difficulty is that most of the investment is going into the organised sector due to government policies and due to access to credit. Schemes like PLI are pushing more investment into select organised sectors.
Characteristics of unorganised employment
The second factor is the existence of a very large unorganised sector which offers very low incomes. Most of these workers are in agriculture and in the micro and small scale sector of industry and services. A very substantial part of this sector consists of those who have to do residual work that they have to create for themselves. They are compelled to do this work at very low incomes because otherwise they would starve.
The recent e-shram portal shows that 94% of the 28 crore registered on it declare an income of less than Rs.10,000 per month. The current World Bank poverty line is $2.15 per person per day (in PPP terms) which translates to Rs 13,000 per family per month. Thus, by international standards, most of the unorganised sector workers and their families are poor, even if two persons are working in a family.
The unorganised sector has been hit hard since demonetisation and has been on the decline. While demonetisation was a one shot shock to this sector, GST is a continuing hit. It has benefitted the organised sector at the expense of the unorganised sector. Demand has correspondingly shifted from the latter to the former. Examples of this abound – textiles, leather goods, FMCG, pressure cookers, luggage industry and trade. The organised sector is colonising the unorganised sector, which has been invisiblised in both data and policy.
Impact of marginalisation
The result is growing inequality in the economy leading to a shortfall in demand in the economy. Consequently, capacity utilisation in the organised sector has hovered at between 70 and 75% and inadequacy of private organised sector investment. Public sector investment is autonomous but is only about 10% of the total investment and therefore cannot compensate for the decline in the private sector investment.
The government insisting that the Indian economy is the fastest growing world economy believes that nothing specifically needs to be done for the unorganised sector. It has repeatedly stated that its strategy of not giving more support to the poor (which it is characterising as `revdi’) was correct and that is the reason why the Indian economy has done better than other economies.
Its strategy has been to promote large industry through corporate tax cut and subsidies under Production Linked Incentive Scheme (PLI). It is especially promoting a few big businesses so that they become huge. It is using public investment to promote capital intensive infrastructure. But due to high capital intensity, they do not generate much employment and unemployment grows. This strategy will accelerate the trend of rising inequality, slowdown in demand and decline in the rate of growth of the economy. The limits of this strategy of development were already visible prior to the pandemic when the economy had slowed down sharply.
What should the budget do?
In brief, the coming budget needs to reverse this strategy of aggravating the divide in the country between the large scale on the one hand and the small and micro sectors and agriculture on the other hand. Focus has to shift from the automated large scale sector, to promotion of the rural economy and the small and micro sectors. Small labour intensive infrastructure projects in rural areas need to be promoted and not the big ticket capital intensive freight corridors and national highways which only benefit big businesses. Priority to health and education which can generate a lot of employment needs to be stepped up. That will also increase productivity of the workers.
This article was first published in The Wire as Budget 2023: Policy That Is Not Delivering Needs Change.