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The economy: Changing Tracks

Even as the Indian economy is likely to register an unprecedented annual growth of over 8 per cent between 2003-04 and 2006-07, the appalling state of infrastructure, the deep divide separating industry and agriculture, and the uneven spread of the fruits of growth cloud the picture.


Changing Tracks

Even as the Indian economy is likely to register an unprecedented annual growth of over 8 per cent between 2003-04 and 2006-07, the appalling state of infrastructure, the deep divide separating industry and agriculture, and the uneven spread of the fruits

of growth cloud the picture.


here is a new confidence in the Indian economy today – as the last vestiges of the old economic order disappear, the economy is likely to register an unprecedented annual growth of over 8 per cent between 2003-04 and 2006-07. Even as industry has grown at 8.3 per cent per annum over the last four years, the exports of goods and services had risen to roughly 20 per cent of GDP by 2004. The foreign exchange reserves have tripled from $54.2 billion in March 2002 to a comfortable $165.3 billion at the end of March 2006. Till recently, it was thought that as China had emerged as the global hub for manufacturing, India enjoyed the parallel unchallenged status as the worldwide provider of services. This perception, which certainly has a kernel of truth, is now thought of as a stereotype: in recent years, India has demonstrated its manufacturing prowess across a spectrum of industries that include auto components, steel, cement and pharmaceuticals. Further, the services outsourced to India are not simply confined to software programming: India today enjoys a comparative advantage in, and exports, services related to medical diagnostics, engineering design and financial and business accounting.

Clouding this picture are three factors: the appalling state of India’s infrastructure and the deep divide separating industry and agriculture. The third has to do with the uneven spread of the fruits of this growth manifest in the inability of industry to absorb those employed in low productivity agriculture. The organised public and private sectors are a source of employment for no more than 8 per cent of the workforce; yet they nurture the hopes of many. Consequently, agriculture and other unorganised sectors (in industry and services) serve as a sponge, soaking in the disguised and openly unemployed. We discuss these points seriatim.

While leaders of industry fret about the government dragging its feet in amending archaic labour laws, a similar concern has not been voiced about infrastructure. This is indeed surprising – a majority of economic analysts list infrastructure as the binding constraint on India’s growth. Additional power generation in the last five years has been woefully inadequate, while the large transmission and distribution losses merely underscore the sorry state of this sector. A similar lack of attention afflicts other infrastructure sectors such as roads, railways, ports and airports.

The prime minister, Manmohan Singh, has claimed that the power sector needs an investment of $75 billion over the next five years. Ironically, the Indian economy is investment constrained; indeed, the savings rate was higher than the investment rate during 2001-02, 2002-03 and 2003-04. (Since then however, the investment rate is higher than the savings rate, and the current account deficit has been widening.) To redress the plight of the power sector, the government must not raise the bogey of a high fiscal deficit at this point – it must not simply induce private investment in this sector but lead from the front by making adequate investments in the power sector. A retreat into pre-Keynesian fiscal orthodoxy appears bizarre at this juncture: with our mounting stock of foodgrains and large foreign exchange reserves, it appears to tie our hands without providing viable policy options. Domar, as early as 1946, had demonstrated the irrationality of “sound finance” through the following proposition: if the rate of growth of an economy is greater than the rate of interest paid on public debt, then the magnitude of public debt is irrelevant in ensuring its sustainability. If public investment is a prerequisite for the structural transformation of an underdeveloped economy, the rate of interest and the composition of the fiscal deficit (in terms of capital and revenue expenditures) emerge as key policy variables. Further, if the prattle about “financial repression” is to be ignored and the economy is not to capitulate to the whims of international finance, the rate of interest on ad hoc treasury bills can be kept deliberately low. The accompanying table corroborates the above propositions for the Indian economy for two periods, marked by virtually identical fiscal deficit to GDP ratios but a striking contrast in terms of economic performance.

Growth Not Inclusive

If growth is to be more inclusive, the yawning gap between agriculture and industry, which mirrors the geographical divide between the eastern and western regions of India, needs to be bridged. Figures reported in the ‘Approach Paper to the Eleventh Plan’ are self-explanatory: if the economy were to grow by 9 per cent per annum and the agriculture sector at 4 per cent per annum, the gap between agricultural and non -agricultural incomes would still widen, unless non-agricultural employment were to increase by 5 per cent per annum.Not only has agricultural growth remained limited to 1 per cent per annum in the first three years of the Tenth Plan, its vulnerability demands immediate redress because over 50 per cent of the workforce

Table : Fiscal Ratios and the Rates of Growth

1987-88 to 1990-91 1999-00 to 2002-03

Fiscal deficit (centre + states) (per cent of GDP) 8.94 9.41
Net revenue expenditure (per cent of GDP) 17.66 17.43
Capital expenditure (per cent of GDP) 5.93 3.11
Rate of growth of industry (per cent) 8.2 5.1
Rate of growth of GDP (at factor cost) (per cent) 6.7 5.0

Notes: (i) The net revenue expenditure in the second row is calculated as the difference between revenue expenditure and interest payments. Figures in the first three rows, calculated as a proportion of GDP at market prices, are the simple averages of the annual figures for the specified periods.

(ii) The rates of growth in the next two rows are also simple averages, with the index of industrial

production providing the base for the calculation of the rate of growth of industry. Source: RBI (2004): Handbook of Statistics on the Indian Economy, 2004.

Economic and Political Weekly December 16, 2006 continues to be employed in this sector. The slow growth of agriculture not only limits the size of the home market but could also lead to industry facing a wage goods constraint in the future. Just because organised industry has been labour displacing in the recent past, it does not mean these trends can be projected into the medium term.

That is not all: as agriculture remains the repository of the bulk of the workforce, agrarian distress robs society of the glue of social harmony. The 61st round of the National Sample Survey (NSS) provides a glimmer of hope – there has been a partial reversal of the drastically low rates of growth of employment, which spanned the second-half of the 1990s (between 1993-94 and 1999-2000) [Chandrasekhar and Ghosh 2006]. Rural non-agricultural employment has increased from 2.26 per cent per annum (CAGR) in the latter half of the 1990s to

5.27 per cent per annum between 199900 and 2004-05 (CAGR). Neutralising this trend somewhat is the fact that manufacturing still provides employment to less than a quarter of the urban male workforce, with agriculture and services providing employment to a shade more than twothirds of the rural and urban workforce respectively. It is tautological that the rate of growth of output in any sector is simply the total of the rate of growth of labour productivity and the rate of growth of employment. In the recent past, much of the increase in output manufacturing has been because of an increase in labour productivity while employment has stagnated – the employment elasticity of manufacturing output today is an abysmal 0.08. A 12 per cent increase in manufacturing output leads to a mere 1 per cent increase in employment in manufacturing.

It is imperative that we flag two more facts about the employment situation – the share of wage employment (both regular and casual) for urban male workers and both urban and rural female workers has declined vis-à-vis the 1980s: the selfemployed now constitute almost half the workforce. Second, almost half the rural and about 40 per cent of the urban workers did not find self-employment remunerative enough. It appears self-employment is a fallout of poverty-push rather than demand pull. In this scenario, simply relying on market forces to co-opt those who have been left behind is a symptom of our failure – the failure of our collective imagination. If growth is to be achieved on the premise of “inclusion”, it must pull in those who have been left untouched by the market.

The malaise of unemployment (and underemployment) makes India appear like two different countries – with large areas resembling sub-Saharan Africa rather than Maharashtra, Gujarat or Punjab. A two-tiered labour market has created high wage jobs for a minuscule minority while the rest suffer the ignominy of income, if not time, unemployment. Substantive or participatory democracy cannot exist without the right to employment. A political system that cannot guarantee employment to all its citizens merely retains the husk of democracy – it is only formally democratic. In a recent monograph, Amit Bhaduri argued that Indian democracy has survived by fostering an illusion:“by holding out the hope of socio-economic mobility for the majority and neglecting the utter hopelessness of a desperately poor minority” [Bhaduri 2005:25]. The next phase of development must not only spur growth but must give teeth to initiatives like the national rural employment guarantee scheme.




Bhaduri, Amit (2005): Development with Dignity,

National Book Trust, New Delhi. Chandrasekhar, C P and Ghosh, Jayati (2006):

‘Employment Growth: The Latest Trends’,The

Hindu Business Line, November 14.

Economic and Political Weekly December 16, 2006

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