India is now well and truly in the middle of a socio-economic upheaval. The economy has been weakening for a couple of years now. The social upheaval is new but its seeds have been fermenting for a while. The danger here is that the social and economic sides of an economy are not divorced from each other. Each influences the other and the current quagmire threatens to unleash the worst type of feedback between the two.
The most dangerous smoldering ember that could erupt due to the interaction between the social and economic sides is unemployment. The rising unemployment in the country has been commented upon widely. Less noted is the fact that rising unemployment disproportionately affects the young. Misfiring European economies like Spain, Greece, and others routinely report youth unemployment rates above 25 per cent. This is a social tinder box for a country like India whose median citizen is in the 30s and which is thrusting 10 million new young people to the job market every year. This dynamic, popularly hailed as India’s demographic dividend, can rapidly turn into a demographic curse if the employment situation doesn’t improve. A massive pool of unemployed youth makes for a huge collection of unhappy people, running high on testosterone and anger, looking to vent.
Along with this volatile pre-existing cocktail, we now have the addition of the state strong-arming youth protesters across the country. Each violent police action begets more resentment, protests, and additions to the ranks of protesters. Unemployed youth are fodder in these situations for all sides. The young can provide volume, sound, and muscle with relatively little concern for self in normal times. Lack of attractive opportunities makes this risk-taking trait more acute. Self-preservation is a predilection that affects the middle-aged more since they have more to protect.
So where will the jobs come from? The job creators are entrepreneurs, conglomerates, and multinationals. It is in their nature to take investment risks as long as the returns are high enough. Investment rates in India fell well below 30 per cent a while back. Clearly, the returns were not compensating entrepreneurs for the risk. The recent social upheaval is only adding to the perceived risk. It can only be dissuading more fence-sitters from investing in the economy until the uncertainty ebbs and the situation calms down. But the more investors adopt a “wait-and-see” approach, the worse the job situation will become. The worse the job situation becomes, the greater will be the ranks of the angry youth. This has all the makings of a devastating feedback loop. For the sceptical, the examples of Brazil (28 per cent youth unemployment) and South Africa (58 per cent youth unemployment) should be salutary examples of emerging economies descending into crime, violence, and crisis due to failing to productively (and respectfully) engage their youth.
The government’s focus on the economy is unclear. Through its personnel decisions in the past few years, the central government has signaled its low priority on economic management. The position of Deputy Governor (Monetary Policy) of the RBI lay vacant since July 2019 when Viral Acharya resigned. Despite the fact that he announced his decision to resign back in May 2019, the government only filled the vacancy this week. In the interim, the Monetary Policy Committee was operating without a key technical specialist for seven months. A previous vacancy for Deputy Governor of the RBI also remained unfilled for 11 months before MK Jain was appointed in June 2018.
This is particularly debilitating for the RBI because the government replaced Governor Urjit Patel with someone whose domain competence does not lie in either banking or finance or markets or macroeconomics or monetary economics. To compound matters, the government has chosen as economic advisors two people whose domain specialisation is in markets, banking and finance. They would be far better used in the RBI rather than the ministry of finance, which requires trained macroeconomists.
The choice of personnel in key ministries has been equally confusing. In the latest garnish to this soup of confusion, the prime minister was accompanied by the home minister during pre-budget consultations about the state of the economy with industrialists and economists. Strangely, the finance minister was not included in these deliberations.
The overarching impression all of this has given is that the government has prioritised its non-economic agenda over the development agenda. This has become more glaring over the last 18 months when the government started running out of the low oil price largesse that financed its welfare spending till 2017. Without the fiscal room for more spending and the political will to enact labour and land reforms, the government seems out of ideas. Its only proactive moves appear to be retrograde ones such as raising import duties. More damagingly, it is seen as trying to control the message by refusing to release data. This just makes things worse because people assume the worst.
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A few changes are needed immediately. The government needs to announce a clear plan and timeline for structural reforms. Alongside, it has to start staffing technical positions by prioritising domain competence and empowering these hires with policy relevance. Importantly, it needs to pledge its commitment to the integrity of institutions tasked with the regulation of corporations and banks, monetary policy management, data collection/dissemination and law enforcement.
The government also needs to desist from trying to drown out protesting voices with state muscle power. Protests serve as a pressure cooker valve. They preserve order by allowing people to vent. Hope goes a long way, especially for the young. A climbdown from the arrogance of power would be a good way of generating hope.
This article first appeared in the print edition on January 16, 2020 under the title ‘Reset and refocus’. The writer is Royal Bank Research Professor of Economics, University of British Columbia.
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