Irrational expectations

The experience of the last 50 years reveals a disturbing paradox: the higherthe rate of growth, the slower has been the rate of growth of employment. Aneasily accessible analysis of this is available from T.S. Papola’s 25-pagecontribution to The Indian Economy: Problems and Perspectives, edited andintroduced by Bimal Jalan, who has just been given a richly deserved secondterm as governor of the Reserve Bank of India. Papola concludes that “overthe decades, the growth of national income has gradually accelerated whileemployment growth has decelerated”.

The paradox is that when during the fifties and sixties, the economy wasgrowing at a mere 3.5 per cent per annum, employment was rising at well over2 per cent; when, however, during the seventies, economic growth was takenover the 3.5 per cent “Hindu” hump, employment growth declined to just 2per cent; and as growth in the economy accelerated to 5.8 per cent over theeighties, employment growth slackened to a mere 1.8 per cent. Over the firstdecade of reforms, employment growth has stagnated at virtually the samelevel as the rate of growth of the economy in the last decade of socialism,namely, 5.8 per cent. A decade of reforms has neither raised the averageannual rate of growth nor the annual average growth of employment.

The growth of employment in the organised sector, which is the one mostconstricted by our present labour laws, gives hardly any cause forreassurance. In the eight years of the nineties for which the EconomicSurvey, 1999-2000 provides the figures (1991-98), the highest rates ofgrowth of employment have been 1.44 per cent and 1.51 per cent in 1991 and1996, respectively, the lowest have been 0.44 per cent and 0.46 per cent in1993 and 1998, respectively. Our organised sector, private or public, cancertainly stimulate growth, but its capacity to stimulate employment isseverely restricted for the good reason that the larger an enterprisegrows the more capital-intensive it gets, both for technological andmanagerial reasons. This results in declining employment elasticity, atechnical term for the rate of growth of employment declining with everyexpansion in output. Larger scale does not mean larger employment, indeed,quite the reverse.

The employment co-efficient, that is the increase in employment associatedwith every increase in growth rates, is highest in agriculture, next highestin the tiny sector micro-enterprises, khadi and village industries, ruralfood processing units, and other tiny industry. The faster these grow, thefaster is the rate of growth of employment. Next comes construction,followed by small industry. As industry moves through the medium-scale tothe large-scale, output growth accelerates exponentially but employmentgrowth tapers off. There is thus no escaping the dilemma that the faster theorganised sector grows, especially when, under our experience of reforms,this is at the expense of the unorganised sector, the graver becomes ourproblem of unemployment. And that is where the “politicians professed loveof workers” comes in. Can a democracy promote growth at the cost ofemployment?

I stress “democracy” because all “miracle” economies from the SovietUnion of the thirties to the Brazil of the seventies to contemporary Chinahave been based on authoritarian political systems, where some segments ofthe population were (and are) squeezed to furnish the investible surplusindispensible to the “miracle” acceleration of rates of growth. To expectpoliticians in a democracy to disemploy the employed (which is what exitpolicy is all about) in order to promote a form of large-scale sector growthwhich will make growth rates progressively more and more remote fromemployment generation is not a rational expectation.

In a democratic polity like India’s, priority to labour laws reforms, withthe explicit aim of promoting large-scale organised enterprise, is possibleonly against a background of fast growing employment opportunities in theunorganised sectors of the economy. Growth, as Papola puts it, has to beboth “reasonably high” and “employment-intensive”. That is possible onlyif agriculture and unorganised industry race ahead. Yet, annual averageagricultural growth rates have declined from 4.7 per cent in the last decadeof socialism, the eighties, to a mere 3 per cent in the first decade ofreforms, the nineties. Growth in agricultural output has been crippled,declining from over 45 per cent over the decade of the eighties to underhalf that rate just 20 per cent — through the reforms of the nineties.

The onslaught of liberalisation, and the coming onslaught of WTO-inducedglobalisation, have already led to the closure of over one-third of ouremployment-generating small industries (as confessed in a written answer toUma Bharti — bless the little sadhvi’s heart — in Parliament last week).All the evidence points to other employment-intensive sectors the tiny,the micro-enterprises, rural food processing, and khadi and villageindustries having suffered a similar fate. Construction alone has been abright spot, which is perhaps why the urban poverty ratio has been moreencouraging than the rural. Meanwhile, there has been a dramatic anddistressing fall in performance in respect of all employment-generation andasset-creation programmes relating to poverty alleviation.

With the rate of growth of employment falling in all sectors that generateemployment, how rational is it to suggest that one’s “love of workers” isbest expressed by advocating reforms that would make that tiny segment ofthe industrial proletariat which is actually protected by our labour lawslose their “privileges” while fostering “miracle” growth rates in largescale industry whose proud boast is that they are “efficient andinternationally competitive” because they have derisoryemployment-elasticity rates? (This is a May Day column.)

Aiyar is a Congress MP but these views are his own