The Hindu Business Line : Wages of unemployment

More than failing the farmers, the NDA fell because unemployment became excessive. But tackling rural and urban joblessness requires a broad-spectrum approach that goes beyond ideological purity. Needed are less simplistic and more comprehensive solutions to engineer both economic growth and full employment simultaneously, says P. V. Indiresan.

IF A straw poll were taken today among political commentators, they would pronounce, almost unanimously, that the NDA government fell mainly because it failed the farmers. Likewise, a straw poll among financial pundits will elicit the view that agriculture should be the first priority for the new government. I like to be a minority of one and disagree with both.

No doubt, the NDA did badly in the rural areas, but in metros, it did far worse. In Delhi, it had all seven seats, and this time lost all but one. The story was similar in Mumbai, Kolkata and Chennai. The NDA lost for several reasons and most because unemployment became excessive. For instance, in Delhi, the rate of unemployment rose from 5.67 per cent to 12.73 per cent between 1992 and 2000 even as the employed population fell from 35.02 per cent to 32.88 per cent (Economic Survey of Delhi, 2001-02). A farmer's suicide is dramatic; gnawing frustration among youth is not equally visible but a greater recipe for political disaster.

Delhi is a much-pampered city. It receives thousands of crores of rupees of investment every year. Yet, the city cannot produce jobs fast enough. Blinded by the flyovers and the dazzling lights from towering buildings, our experts have failed to notice that, when it comes to employment, India does not shine even in Delhi. If the story is so bad in Delhi, in villages, it is far worse.

Indian economy is growing at 5-6 per cent. The new government is making brave noises of raising that it further. Then, in five years, the GNP will increase anywhere between 30 per cent and 50 per cent. Can agriculture match that growth? If it does, can the market absorb 300 million tonnes of grain that will result from such growth? There is no history of agriculture growing at such a rapid pace in a sustained manner; there is no prospect of demand for agricultural products increasing at that rate. Then, what hope is there that agriculture will create enough jobs to absorb the growing workforce? Can it satisfy the educated? Can it pay an average of Rs 8,000-10,000 per month, which is the current norm in industry and in services?

It is a universal rule that the share of agriculture will shrink steadily in growing economies. In developed countries, at least 80 per cent of rural employment is outside agriculture and not dependent on it. In order to develop, in order to prosper, India too needs a similar diversion of rural employment away from agriculture. What agricultural labourers (and even small farmers) need most is non-farm employment.

The Left is insisting on land reforms, which translates to redistribution of land. That is ideology, not logic. Farmers will become as rich as city dwellers only when they cultivate larger and larger chunks of land. Those that are left out should look for jobs elsewhere. Our farmers know that well: they sell their little bits of land to educate their children in the hope they will get "company" jobs.

Currently, the net capital formation is in excess of Rs 300,000 crore a year. The outgoing NDA government tried to create one crore jobs a year but could not do so. Thus, the average capital actually needed to create one job is well in excess of Rs 300,000. Most policy-makers are unaware that the cost of creating jobs is so high.

As a counter-argument, some people cite the example of micro credit. Undoubtedly, micro credit has been a very useful and successful tool of employment generation, but only at the bottom end. A national economy cannot survive only on beekeeping, vermi-composting and wayside teashops, which are the kind of jobs that micro credit can generate. Such jobs cannot make the nation wealthy nor help it to compete in the global market.

Those jobs that can compete in the global market pose different kind of problems. Such workers are footloose. It is difficult to tie them down to any one employer; they may even emigrate. Hence, employers have to pay them very high wages so as not to lose them. Then, globalisation leads to increasing wage disparities that crowd out jobs for the poor.

Public policy has made this disparity worse: Our governments have deliberately kept new capital infusion per job low in villages, at times a hundred times less than the Rs. 300,000 plus, which is the national average per job. That calculated, deliberate, rural-urban disparity in investment is at the root of rural poverty and despair, not the neglect of agriculture alone. As a corrective, many commentators are advocating substantial investment in education. They conclude that with improved education, villages will automatically prosper. Unfortunately, that is not true. Villages already have a large surplus of educated but unemployed youth. Education in excess of demand can do more harm than good.

This fond faith in education as a driving force of economic growth is based on instinct. There is even a famous law to back it up: According to Say's Law, there is always a demand for every supply. If Say's Law were true, as education improves, job opportunities would also improve automatically.

As Nobel Laureate George J. Stigler has pointed out, Say's Law holds precisely true in a barter economy but not when the economy is monetised. As we are witnessing already, educated villagers are not getting matching jobs. Education is not a primary driving force for employment. It amplifies the potential of existing jobs, but is a poor originator of new jobs.

The Indian economy is on the horns of a dilemma: Fast-growing sectors have no option but pay high wages, particularly when they are dependent on exports. When high wages are conceded, less money is available to finance new employment. On the other hand, if wages are low, labour productivity is low; the nation will not be able to compete internationally. Either way growth is stunted; jobs do not increase fast enough.

Ideological zeal has made a bad situation worse. For instance, In the US, housing is regarded as a major driving force of the economy. The number of housing start-ups is accepted as a critical factor in the health of the economy. In India, the attitude towards housing is the exact opposite; prevailing ideology has forced housing policy to be as hostile as it could be made. At every turn, in land acquisition, in construction, in buying and selling and, above all, in renting, there are innumerable restrictions, heavy taxes and unbearable corruption.

That is serious because half the net capital formation goes towards housing. It is a curious fact that where wages are high (in cities) real estate prices are high choking the demand for housing. Where real-estate prices are low (in villages), high-wage jobs are not encouraged. Once again, the demand for housing is restricted. The houses that do come up are in cities and are small, and offer little space for household durables. Thus, the prevailing administrative practices that discourage housing cut down the demand for household durable goods too. Thus, our ideological hang-ups about housing choke half the capital we use, curtail much of the employment that would have been generated otherwise.

On the demand side, high-wage jobs concentrated in cities crowd out lower wage jobs that would have flourished otherwise in villages. Existing jobs in agriculture are shrinking, and the few that are available pay poorly. Rigid labour laws discourage hiring of workers. Rigid bankruptcy laws waste financial and human resources in brain-dead industries crowding out new jobs.

On the supply side too, the situation is bad. Present style of college education makes youth unemployable the same way high quality training rendered Eliza Doolittle (in Bernard Shaw's My Fair Lady) incompetent. On the other hand, there are not many with much much-needed vocational skills.

There are transaction costs too. Over-centralised bureaucracy and unimaginative audit mechanisms breed inefficiency and corruption too: Each unnecessary job at the top can destroy several more below.

Hostile regulations are choking housing and wasting half of the national capital formation. Above all, many politicians actively obstruct progress merely to build vote banks of caste and of slums.

Thus, like the common cold, the causes of unemployment, particularly in the rural areas, are many and varied. Like the common cold, one single remedy will not do; a broad spectrum of remedies is required.

Unfortunately, we are afflicted by ideological purity. We swear by subsidies, land redistribution and subsistence employment schemes that deal with symptoms but do not tackle the underlying disease. We behave like the Six Blind Men of Hindoostan, analysing correctly in parts and coming to entirely wrong conclusions overall.

Over this scene two schools of thought dominate: Globalisers point out the success of East Asian Tiger economies and advocate liberalisation of trade, increased competition and low inflation through fiscal responsibility. Socialists insist on protection, nationalisation and fiscal handouts. Experience shows that globalisation leads to jobless growth and socialism to growthless dead-end jobs. Evidently, neither approach is perfect. We need less simplistic and more comprehensive solutions to engineer both economic growth and full employment simultaneously.

(To be continued)

(The author is former Director, IIT Madras. Response may be sent to indresan@vsnl.com)

This is 124th in the Vision 2020 series. The previous article was published on May 17.

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