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Cementing the layers

india Updated: Dec 15, 2006 03:43 IST
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Had it not set a growth target of 9 per cent per annum, one doubts whether the Approach Paper to the Eleventh Plan would have attracted more than passing attention in the media. For, ever since the determination to fulfil the investment targets set in the Seventh Plan plunged the country into short-term external borrowing in the late Eighties and into a foreign exchange crisis in 1990, five-year plans have become unpleasant reminders of an era of dirigiste growth that most people would like to forget. The 9 per cent target did the trick because it reinforced the  boundless confidence that the middle-class feels in India’s future and, more generally, in the virtues of global capitalism. But for precisely this reason, it has attracted sharp criticism from the Left, which has called it the brainchild of Montek Singh Ahluwalia, ‘the blue-eyed boy of the Bretton woods twins’!

Both the critics and the defenders of the paper are way off the mark, for this is the first approach paper since the Mahalanobis Plan of the mid-Fifties that has focused not on augmenting growth but employment, and on making growth inclusive. It is, therefore, the first approach paper that has made the creation of millions of productive jobs its primary responsibility. As agriculture is now creating few new jobs, the central challenge is to find enough non-farm jobs to remove 10 million people from agriculture. To do this, non-agricultural employment must grow at 6 per cent per year, ie, 1.3 per cent faster than it has grown in the last four years.

In the Seventies and Eighties, such an admission would have prefaced the announcement of a ‘direct attack on poverty’, or plans to adopt ‘appropriate technology’ to create more jobs. This is where the paper takes a wholly different path. It regards higher growth as a prerequisite to achieving a much higher rate of growth of productive employment. It also recognises that market-led growth has changed the character of the labour force and left it completely without social protection. Lastly, it recognises that a section of the poor are being left out of the growth process altogether.

The paper deals in painstaking detail with the ways in which the poor can be made partners, instead of victims, of growth. Where it departs from its predecessors, and indeed from the approach to reconciling growth with equity outlined in the CMP of 2004, is in emphasising that this needs changes of policy and processes of governance, and not just the allocation of more money to social sector programmes. The bulk of the paper outlines some of these policy changes.

Its central proposition, that higher employment growth requires a higher growth of GDP, has been hotly contested by some of the most respected economists of the past. The approach paper’s justification contains sufficient ambiguity about the link between the two, to keep the controversy alive. It, therefore, needs to be understood better.

A useful starting point would be to ask ourselves why, when economists have developed so many theories to explain the growth of GDP, there are, literally, no theories that explain how to push up the growth of employment over time. In fact, the only existing prescriptions are derived from static models of economic equilibrium at a point in time. These state that if there is a surplus of labour, then in the long run, the wage rate will decline in relation to the price of capital. This will encourage the replacement of capital with labour till the surplus disappears. This model, which has been extensively tested in Europe and the US after the onset of globalisation, has stood up relatively poorly to empirical testing.

The probable explanation of this lacuna in economic theory is that  from 1820, when data became available for a few of the present OECD countries, till the early Seventies, the first generation of industrialised countries suffered from unemployment only during economic recessions. Their normal condition was one of constantly bumping against a full employment ceiling and having to import labour to meet their needs. Till the First World War, there was no impediment to doing so. Thus there was no particular reason to explain what did not happen.

It was not just the first generation of industrialised countries that felt this hunger for labour. Exactly the same thing happened in East and South-east Asia from the late Sixties to the late Nineties when their economies were growing at 7 to 8 per cent per annum. Today, a quarter of the Malaysian labour force is from other Asean countries. South Korea, Taiwan and even Japan also have large immigrant labour forces.

The hunger for labour arises from a feature of growth whose implications have still to be recognised fully. Since the 1820s, the growth of labour productivity in the service industries has almost never exceeded a third to two-fifths of the growth of labour productivity in industry. This has meant that even when there is no increase in employment in industry, extra labour has been needed to assemble, distribute, insure, sell and service between three-fifths and two-thirds of the additional output of the existing labour force. This demand has been met by immigration.

That is the root cause of the huge waves of migration within Europe and from Europe to America in the 19th and early 20th centuries. It also explains the steady growth in the proportion of employment in the service sector that all industrialised countries have experienced.

The Indian experience since liberalisation also conforms to the above model. Employment in the organised sector has stagnated after the mid-Nineties because employers have substituted capital for labour even more rapidly than in the past. This has trebled labour productivity in industry in just 11 years (1993-2004). This high growth in productivity is directly responsible for the vigorous growth of employment in the service sector of the economy. This has ensured a 4.7 per cent growth in non-agricultural employment between 1999 and 2005, and a 2.6 per cent overall growth in employment.

Although the paper does not spell it out clearly, the above relationship between productivity in manufacturing and employment in the service industries clearly guides most of its policy prescriptions. To absorb up to 65 million more workers, the rate of growth of non-agricultural employment needs to be pushed up to 5.8 per cent. This is the reason why a high growth rate is necessary.

But employment need not grow only in the service industries as it has been doing during the last six years. At India’s stage of development, it should be growing rapidly in the manufacturing industry. It is to remove the crippling disincentives to employment that organised industry faces, and not to pander to the rising industrial bourgeoisie, that the Planning Commission has suggested amending labour laws to allow outsourcing, contract labour and easier retrenchment, and a reappraisal of the policy of reserving products for the small-scale sector.

If there is a lacuna in the paper, it is the absence of new initiatives to reduce the vulnerability of labour and to prevent the marginalisation of those who already live on the fringes. It recognises that with organised sector jobs actually declining, all of the 40 million new jobs of the last five years and the 55 to 65 million jobs they hope to create in the next five will come up in the unorganised sector, which has no social security and no protection in old age. Despite that, it makes only a brief mention of the urgent need for health and social insurance for the unorganised sector.

By the same token, there is no reference to the need to pay royalties or dividends to those who surrender their land or lose traditional forest land and water rights to development projects, and thus make them partners in development. One can only hope that these will be included in the final draft of the Plan.