Solving endemic problems

SHUBHASHIS GANGOPADHYAY

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SEVENTY years ago, when India became an independent nation, the major problems were poverty and lack of industrialization. Starting with the Second Five Year Plan, government policy focused on planned industrialization. It was felt, rightly or wrongly, that investment in infrastructure and other core industries like coal, steel and power would not be taken up by private parties. The reasoning was twofold: (a) these required large amounts of investment and private parties did not have enough resources to make these large investments and (b) much of the investment necessary for infrastructure took time to generate returns on investment and would, therefore, discourage private parties from investing in them. The government took it upon itself to kick-start the process of industrialization through public investment in state run enterprises operating in the core sectors and in infrastructure.

All the way till 1991, government controlled the process of industrialization through various policies like licensing, import controls for both products and technology and access to foreign exchange. The main objectives were: (a) to maintain macro-balance in foreign exchange reserves and (b) to distribute industrialization across the country so that the so-called backward states could catch up with the more industrialized ones.1 However, such state control of India’s industrialization did not have the desired effect and an acute foreign exchange crisis led to an easing of controls in 1991.

All central government controls on India’s industrialization process were relaxed and India moved towards a more federal structure in that the states were now freer to embark on their own process of industrialization. India experienced unprecedented growth after the 1991 reforms, though a break from the past ‘Hindu’ rate of growth had started in the mid-eighties.2 Even though the growth in the years after the reforms has been exemplary compared to what happened before, India’s growth rates have stagnated in recent years and the hope of reaching 10+ per cent GDP growth, as experienced by China consistently after its reforms, is fast retreating.

 

At the time of Independence, India was characterized by low levels of industrialization, typical of a pre-colonial country, a large rural population and low agricultural productivity. The Green Revolution mechanized agriculture along with the use of high yielding seeds, fertilizers and irrigation. This improved agricultural productivity. For example, rice yield was 6.68 quintals per hectare in 1950-51; in 2015-16, it had risen to 24.04. Similarly, wheat yield increased from 6.63 to 30.93 between 1950-51 and 2015-16.3

Nevertheless, we are still way below productivity levels achieved by China. Such comparisons with other countries have prompted state and central governments, as well as agricultural experts, to work towards further improvements in yield through subsidizing technology, better seeds, use of water and irrigation and what not. The general approach is that higher yields will increase farmer incomes.

Unfortunately, increasing yield will be disastrous for farmers without a major demographic change in the rural-urban landscape of India. Study after study has shown the inelasticity of demand for most agricultural out-put. Even income elasticities are low, implying that income growth in non-agriculture is not sufficient to arrest falling prices resulting from improved yields.4 The current farmer protests across the country are but a reflection of this. This year, on the back of a good monsoon and better yield, farm harvest prices are much lower than last year that followed from lower rainfall and lower yields. Improved productivity will depress prices sufficiently to actually lower farm incomes, not increase them. To counter this and maintain farm incomes, it is imperative that non-rural demand be increased substantially to absorb the higher yields.

 

In 1918, a hundred years ago, 71% of the Indian population was rural. If rural and urban households were of the same size, and similar in other aspects, then an estimated 70% of the workforce was in agriculture in 1918. Today, about 58% of all households are officially described as agricultural households. In 100 years, we have been able to reduce the rural population by a dozen percentage points. Given that our population has increased while our total available land has not, the pressure on land has gotten much worse over the last 100 years, unless much of the rural population is gainfully employed in non-farm activities.

Since 1970-71, the average Indian farmer has half the land to till. The Agricultural Census in India figures show that from 2.29 hectares in 1970-71, average farm holding has fallen to 1.15 hectares in 2010-11. India describes its farmers as marginal (owning less than one hectare), small (between one and two hectares), semi-medium (between two and four hectares), medium (between four and 10 hectares) and large (above 10 hectares). Since 1970-71, marginal farmers have increased by 156%, small by 84% and semi-medium by 30%. The numbers of medium and large farmers have fallen by 26% and 65%, respectively. Indeed, much of the poor in India is rural and the disparities between rural and urban incomes have only grown since the reforms were implemented.5

Table 1 gives the movement of the population from rural to urban areas for countries that had a rural population share that was at least as large as what India had in 1950-51. Thus, while 88% of the Chinese population was rural, for India it was 83% in 1950-51. By 2011, from being five percentage points above India in 1950, China had reduced its rural population to 20 percentage points below that of India. India is not urbanizing fast enough. Not surprisingly, the share of the labour force in agriculture also fell drastically in China (Table 2) compared to India.

 

TABLE 1

Share of Rural Population Across Countries, 1950-2011

Decline in rural population of countries that had a share of rural population at least as large as India’s in 1950

Country

Rural population (million)

Share of rural population (%)

Fall in share of rural population (%)

 

1950

1950

2011

 

Tanzania

7,383

96

73

-24

Bangladesh

36,272

96

72

-25

Kenya

5,737

94

76

-19

Zambia

2,071

91

61

-33

Nigeria

33,993

90

50

-44

Thailand

17,211

90

66

-26

Indonesia

65,557

88

49

-44

China

485,765

88

49

-44

Cote d’Ivoire

2,368

87

49

-44

Sri Lanka

6,978

86

85

-1

Ghana

4,212

86

48

-44

Pakistan

30,965

83

64

-23

India

308,484

83

69

-17

Source: Table 10.10 from Adam Szirmai, www.dynamicsofdevelopment.com, 2015.

 

TABLE 2

Fall in Share of Agricultural Labour Force

Decline in the proportion of agricultural labour force to total labour

Country

Share of agricultural labour force(%)

Fall in share of agricultural labour force(%)

 

1960

2010

 

Tanzania

93

77

-17

Bangladesh

86

48

-44

Kenya

88

61

-30

Zambia

85

72

-15

Nigeria

73

45

-39

Thailand

84

38

-54

Indonesia

75

38

-49

China

83

37

-56

Cote d’Ivoire

84

   

Sri Lanka

57

33

-42

Ghana

63

57

-10

Pakistan

61

45

-26

India

74

51

-31

Source: Table 10.10 from Adam Szirmai, www.dynamicsofdevelopment.com, 2015.

 

Suppose that the farm population was halved by moving the rural population into urban areas. Given the same yield, this will immediately result in near-doubling of incomes with a lower number of farmers working on the same amount of land as before. This can be achieved without any impact on prices and output. Though this is a ‘back-of-the-envelope’ calculation, it points to the only meaningful and sustainable solution for Indian agriculture. Policies aimed at improving productivity alone are untenable given its impact on aggregate prices. The way out is to reduce the number of people directly dependent on agriculture.

Youth in farming households need to be given income earning opportunities outside of agriculture and this is where industrialization and urbanization become more important policy goals to address the plight of farmers in India. In other words, to address the plight of agriculturalists, the focus has to be outside agriculture. The more public investments are made in agriculture the more will individual farmer incomes be squeezed, unless there are fewer farmers. Thus, though the plight of farmers is a serious issue, the solution does not lie in agriculture.

 

This brings me to the second major problem in India today. The Indian labour force is increasing by about 10 million people each year. This will only get worse as India is a young population with the median age being 24 (i.e., 50% of the population is of age 24 or less). Given the sorry plight of agriculture, it is unable to absorb any further increases in employment; the additional labour has to be absorbed in industry and services. Unfortunately, there are two major impediments to this absorption. First, investment is down. Gross fixed capital formation was 34.31% of GDP in 2011-12 but has fallen to 29.22% in 2016-17. More importantly, private investment has come down.

 

Capital formation in industry and services does not only increase labour productivity, thereby improving the earnings of incumbent employees; it also expands employment by absorbing new labour. When the labour force is increasing, investment will have to happen to create employment. The private sector, always searching for government sops, has not eased the creation of non-farm jobs. Not only has it cut down on investment, wherever possible, it is substituting employment with machines.

Table 3 gives the factory sector employment between 2000 and 2012, as available from official data put out by the Ministry of Labour.6 Whether it is the government, or the private sector, instead of any secular increase, factory employment has been highly unstable.

 

TABLE 3

Growth in Factory Employment

Growth in factory employment

Year

Public

Private

Total

2001

262.78

40.90

35.64

2002

9.33

11.08

10.43

2003

-76.71

-21.90

-22.16

2004

38.26

38.02

38.06

2005

-5.99

7.59

5.56

2006

-3.55

16.44

15.17

2007

14.29

-3.95

-3.07

2008

-15.72

-6.14

-7.41

2009

-16.63

-12.02

-12.57

2010

50.40

69.46

67.34

2011

2.87

7.10

6.64

2012

-44.49

-35.78

-36.64

Source: Labour Bureau Chandigarh, Ministry of Labour and Employment.

 

TABLE 4

Employment in Banks and Major Ports

Growth in high skilled services but not in lower skilled services

Year

Growth in bank employment (%)

Growth in employment in major ports (%)

2001

-2.91

-8.23

2002

-0.12

-2.87

2003

-2.77

-4.64

2004

2.02

-8.23

2005

0.00

-2.21

2006

0.00

-5.78

2007

-7.23

-2.75

2008

20.35

-2.87

2009

0.63

-2.47

2010

2.59

-4.58

2011

6.07

2.75

2012

6.23

-5.48

2013

6.58

-12.77

Source: RBI and Transport Research Wing, Ministry of Road Transport and Highways.

 

The second impediment is the euphoria that the growth of the service sector in the last two decades has created. This euphoria has prevented us from identifying a major problem with the service sector growth. This sector is made up of two distinct employment requirements. One has to remember that the aggregate data on the Indian service sector employment in India includes both the sophisticated ones like banking and IT, as well as those that employ informal labour in delivering food and grocery to one’s house or, those who get employment in neighbourhood shops and retail stores.

Close to half of the children in India do not complete school and less than 20% enter colleges. Jobs in financial institutions and IT require higher education attainments. We have to keep this in mind when we get euphoric about our services sector growth. With this educational background for the large majority of people entering the job market, the contrast in the growth of employment in banks and ports highlights the problem in the Indian labour market and the failure of job creation for the youth trapped in agriculture.

 

In addition to bank jobs requiring higher educational levels, these jobs are in the formal sector. Much of the job creation that is happening is in the informal sector. The instability of informal sector jobs, its low wages and lack of non-wage benefits (like medical insurance or pension) does not make them very attractive to the large numbers of young people. Today, 93% of the labour is in the informal sector, including agriculture. According to International Labour Organization data, China had slightly more than 25% of labour in regular wage and salary employment. In 2014, that had increased to more than 55%. Contrast this with India; in 1991, India had around 15% that marginally improved to around 17% in 2014!7

 

Why is regular salary employment important? First, stable incomes are welfare improving for labour. Stable incomes encourage long-term private savings and, hence, investment. Reduction in income uncertainty enables households to invest in children’s education and in the health of household members. Second, stable careers encourage investment in labour’s own human capital. There is a lot of talk, especially by private employers, that they do not get skilled labour. To acquire skill, labour has to invest in time, effort and resources. However, the private sector is unwilling to regularize employment and would much rather work with contract labour.

Of course, the recent emphasis on skill generation, and the law requiring firms that make above a certain level of profit to spend on corporate social responsibility (CSR), have seen a lot of initiative on skill training of the youth. However, given the large army of people looking for jobs, and the low wages in agriculture, wages continue to remain depressed at the lower skill levels which are precisely the levels most of these training initiatives are focused on. It is not surprising to see many young people accessing these programmes but staying away from the job market even when they are offered jobs based on this training. The low uptake, or high attrition rates, of these jobs, is largely because the youth do not find these jobs remunerative enough compared to what they were making without the training. In other words, the skilling programmes have to be more carefully thought out and carried out for longer periods and at greater depth.

 

India needs a major transformation. Things like the privatization of Air India, the goods and service tax (GST) and the building of roads and highways will certainly improve the efficiency of current economic activity. How much this will impact people trying to enter into this more efficient economy is what I am questioning. India’s youth is its major resource, but this resource is useful only when they are trained well enough to participate in a modern economy. If agriculture and low paying non-agricultural jobs in the informal sector are the only things on offer, then the Indian transformation will remain incomplete. The 1991 reforms will not be sufficient to usher in a new era.

India can draw inspiration from the experience of Sweden. Rothstein explains how Sweden at the turn of the last century, when it was characterized by many of the ailments facing the Indian economy today, transformed itself into a modern, egalitarian, inclusive and highly innovative society.8 It required an active political system that brings together diverse groups to a common understanding. The commonality was based on an appreciation of the fact that educated and healthy persons with high integrity, resulting from social norms and explicit regulations, working with a government that focuses on the provision of public goods and services, can generate benefits for all social and economic groups.

In India, the common goal has to be the solution to the problems faced by India’s youth. They have to be able to enter the economic arena as productive workers. The system has to reward them for their effort. They cannot be kept trapped in agriculture and low skilled, non-agricultural, informal jobs. Businesses, government and administrators must work together to create and nurture the institutional support that the youth need. Superficial debates on the role of private education and the efficacy of easy hiring and firing policies in the labour market are not addressing this issue. It is in our interest to address this issue as it is dangerous for a society when the majority are excluded and frustrated.

 

Footnotes:

1. Sumon Bhaumik, Shubhashis Gangopadhyay and Shagun Krishnan, ‘Reforms and Entry: Some Evidence from the Indian Manufacturing Sector’, Review of Development Economics 13(4), 2009, pp. 658-672.

2. Ibid.

3. Government of India, Ministry of Agriculture and Family Welfare, Pocket Book of Agricultural Statistics 2016. Directorate of Economics and Statistics, New Delhi, 2016.

4. See, for example, Praduman Kumar, Anjani Kumar, Shinoj Parappurathu and S.S. Raju, ‘Estimation of Demand Elasticity for Food Commodities in India’, Agricultural Economics Research Review, Vol. 24, January-June 2011, pp.1-14; Nathalie Pons, ‘Food and Prices in India: Impact of Rising Food Prices on Welfare’, Centre de Sciences Humaines (Delhi), 2011.

5. Nishant Chadha and Bharti Nandwani, ‘Ethnic Fragmentation, Public Good Provision and Inequality in India, 1988-2012’, Review of Market Integration, 2017 (forthcoming).

6. Successive governments have, somehow or the other, not taken this problem seriously. Otherwise, it is difficult to explain why, in spite of the huge increases in the labour force, the government has not yet been able to develop a system of monitoring new employment. Official data in 2017, available on the website of the Ministry of Labour, has estimates till 2012 only!

7. https://www.bloomberg.com/view/articles/2016-04-13/india-will-struggle-to-cashin-on-its-demographics

8. Bo Rothstein, ‘Explaining Swedish Corporatism: The Formative Moment’, Scandinavian Political Studies 15(3), 1992, pp. 173-91.

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