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Tuesday, Jan 07, 2003

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Employment generation in Tenth Plan — Out-of-the-box ideas need the right backing

Vidya Pitre

With most problems nowadays, the economic answers are only political questions.

Joan Robinson, Collected Economic Papers II.

FULL employment is considered an elementary objective of economy and society. In India, the problem of jobless growth as a consequence of liberalisation over the past decade has resulted in the setting up of two groups during last two years to recommend proposals for tackling the problem of unemployment.

The Task Force under Mr Montek Singh Ahluwalia was set up in 1999 and produced its report in 2001. It recommended a number of programmes to push economic reforms, such as de-reservation of small industries and expanding the role of FDI in small industries and trade. An increase in the rate of growth, rather than special programmes for creating jobs, was seen as the ultimate solution for the problem of unemployment.

There were two main problems with the report of the Task Force as perceived by the Planning Commission.

First, it had not paid enough attention to the large backlog of under-employment, leading to the estimate of required jobs at 10 million. The Task Force considered this too high.

Second, the emphasis on growth, per se, as the solution to the problem.

Not satisfied with this approach, the Planning Commission set up a special group under the chairmanship of Dr S. P. Gupta to study the same problem.

The special group, in view of the limited potential of the organised sector, rightly placed the task of employment generation on the unorganised sector.

The use of labour-intensive and capital-saving technology, in general, and regenerating the growth of the unorganised sector, in particular, form the key components of the package proposed by the Gupta Committee.

In India, there are several contradictions stemming from the dual economy. The group has gone into great detail in suggesting several measures for correcting these gaps. However, its sustainability depends on certain dimensions other than the demand-side ones, and these perhaps lie outside the scope of the report's terms of reference.

Employment generation is set as an objective in itself in the introductory remarks of the special group's report. In other words, its role in poverty reduction or as a necessary condition for sustainable growth is not mentioned.

Further, the average wage at which this employment generation is to take place is not specified. Consequently, we do not get any idea about the resources to be mobilised, and the impact of employment generation on the demand or output pattern. Whether it will alter income distribution radically is another key issue emerging from the discussion.

The fact that the planners felt the need to address the content of the earlier Plan with greater emphasis reflects the realisation that achievement has fallen short of expectations. In the literature, inadequate emphasis on growth and modernisation strategies, or problems in implementing these programmes, are cited as the factors responsible.

With the help of a small exercise, we attempt to provide a rough estimate of the resources required to generate the targeted employment. With the capital output ratio at 4:1, a gross investment of Rs 100 will generate output, that is, value added, worth Rs 25.

And assuming an average return on capital of 14 per cent, with PLR (prime lending ratio) at 11 per cent, Rs 11 will be left as wages. So, to employ one person at Rs 55 for one day, investment worth Rs 500 is required to generate output of Rs 125.

Consequently, the estimate of investment required for one person to be employed for 300 days in a year is 500* 300 = Rs 1, 50,000. For one million jobs, an investment of Rs 1,50,000 crore is needed.

With GDP around Rs 20,00,000 crore, in 1999-00, at 8 per cent growth, there is a potential of creating roughly 3 million jobs.

The Gupta Committee, or Special Group, was constituted with the clear and specific objective of "targeting ten million opportunities per year over the Tenth Plan Period".

As per our formulation, the economy has the potential of generating 3 million jobs, which appears to fall radically short of the target for employment. The Table gives an estimate of resources for different rates of return on capital and capital/output ratio.

The above exercise gives us a rough idea of the quantum of resources needed to undertake this task.

The cost of generation of employment depends on several variables — inter alia the capital/output ratio, return on capital and daily wage rate. The Committee views the issue from the angle of employment elasticity. So, the growth rate emerges as the crucial variable.

To achieve high growth, lowering the capital/output ratio, or adoption of labour-intensive techniques as a development strategy is advocated. The technology with which an economy operates depends on the amount of goods and services produced.

The amount of goods and services produced at a given point, in turn, depends on the demand pattern, which is determined by income distribution. So, changes in technology have to be worked out in this framework. Adoption of labour-intensive techniques will also cut the return on capital, making larger amounts available for wage disbursement. Here, one aspect of the emerging trends in monetary policy needs special mention. The trend of falling interest rate observed in the recent past is likely to continue.

The rate of interest — that is, the return on capital — is a double-edged weapon. On the one hand, it will reduce the cost of capital, promoting capital-intensive technology.

On the other, it will make larger resources available for wage disbursement. It is here that monetary policy will have a bearing on employment.

Further, the wage rate per employee has been rising in the economy. So, two factors — reduced cost of capital and higher cost of labour — will lead to use of technology that is capital-intensive.

The Gupta Committee recommends a reversal of this trend and advocates labour-intensive techniques. For this, the relative returns on factors of production — capital and labour — are important determinants.

The issue of employment generation has to be viewed in a broad framework. The relationship between growth and employment and also growth and income distribution will be the basic determinants.

Production and distribution are interdependent in a fundamental sense — distribution determines what is produced and by whom.

All this sounds trivial and yet needs to be elaborated and emphasised. The full implications of distribution, consumption and production have to be grasped for devising employment generation activity.

In other words, the demand generated from employment creation though labour-intensive techniques will be different from the existing demand pattern, creating inflationary pressure.

This highlights the need for the formulation of an employment generation plan not in isolation but in relation to other parameters, including the national wage policy structure, and within an institutional set-up consistent with the desired income distribution needed to reach the target growth rate.

Against this backdrop, it is difficult to accept the argument in favour of reduction in employment on the ground of cost-cutting or efficiency.

The target variable should be the number of persons employed at a certain wage and not reducing the wage bill by cutting employment and raising the wage per employee. This will have an adverse effect on income distribution.

The Gupta Committee's reduced emphasis on the growth rate per se is noteworthy. It has stressed the importance of its content, which is vital.

The policy structure required, therefore, is a package of various measures, such as pricing of capital and labour, promotion of labour-intensive techniques, and a suitable mix of taxes, subsidies and institutional changes, including land reform.

Various models, including cooperative/corporate farming, need to be examined for this. If land reform is difficult, the possibility of a politically less-demanding alternative may be explored.

This could be in the form of capital reform — as in, say, the transfer of ownership of 10 per cent of the capital of a PSU to the poorest of the poor. Any development strategy, to be effective, needs to take into account the institutional structure, or else it will be meaningless.

Over time, the economy has been becoming more input-intensive, with the share of agriculture in GDP falling steadily. The input requirement per unit of output for agriculture is less than in other sectors.

So, as rightly observed by group, there exists a huge potential of growth in productivity and output in agriculture and agro-based activities.

It is hoped that the Special Group Report on "Targeting Ten Million Employment Opportunities per year over Tenth Plan Period", against the backdrop of Task Force Report, will initiate debate among policy-makers, academicians and professionals.

With reduced emphasis on the growth rate per se and the assignment of a key role to agriculture for employment generation, the Special Group's report appears to provide a more logical and consistent framework.

As shown above, even at 8 per cent growth, at the daily wage rate of Rs 55, only 3 million jobs can be generated. The target for the Special Group was 10 million.

This calls for radical and comprehensive measures backed by tremendous political will, the need for which, perhaps, has never been greater.

(The author is with Reserve Bank of India. The views are personal.)

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