The Hindu Business Line : Budget, GDP and unemployment

More people enter the employment market each year but India's growth is not creating enough jobs. The ADB points out that the ratio of employment to economic growth is low. Will the Budget ensure more jobs and happiness?

As the BSE Sensex zoomed past the 10,000-mark, there was jubilation all-round. India has joined the elite 10K club along with the US, Japan and Hong Kong. The euphoria did not stop with the Sensex. Re-working the gross domestic product from 1999-2000, the Central Statistic Organisation came up with the forecast that the GDP this fiscal would be around 7.5 per cent. Three years of high GDP growth, boasted several pink papers and government functionaries. How far is all this exuberance justified?

The stock market, as an index of growth, has its historical origin in the Dow Jones Industrial Average of America. It tracked the fortunes of a select group of America's corporate leviathans. The Dow, said The Economist, is no more modern than a steam locomotive. It is an anachronism; it is not merely industrial. It was devised in 1896 by Charles Dow. He added up the price of 12 stocks and divided the sum by 12. The index now comprises 30 companies, but those with the highest share price and not the biggest market capitalisation will carry the most weight.

General Motors, which is on the brink, accounts for a sizable part of the Dow. Standard and Poor's worked out a new index on the basis of 500 companies. The Dow is now considered a historical relic. So, how do we describe the irrational exuberance generated by the BSE 10K? After all, it also comprises the share prices of 30 companies traded in the exchange. Will India's destiny be governed by the rise and fall in the share prices of these 30 companies?

GDP projections are made without subtracting any allowance for capital consumption. It measures activities located in the country regardless of the ownership such as those carried on in the country by foreign-owned companies and excludes activities of firms owned by residents but carried on abroad. It measures the real output produced rather than that absorbed by residents. Growth models seek to simulate the growth process of economic aggregates. Rapid growth will involve changes in the nature of economic activity, with new products or processes and novel types of skills and institutions.

Growth is of several types. It may be steady where the aggregates of the economy are constant and there will be zero net investment. Endogenous growth arises from the working of a system and is contrasted with exogenous growth, which is imposed on a system from outside. What is endogenous depends on the scope of any analysis; parameters, which are exogenous in a partial equilibrium model, could be endogenous in a general equilibrium model.

Economists also talk of export-led growth immiserising growth, non-inflationary growth and zero growth. In the present Indian context, what growth are we talking about? GDP, as a measure of country's success, is flawed. A nation's well-being depends on many factors such as leisure time, income inequality and the quality of environment, which are all ignored by the measure of GDP. The GDP was developed primarily as a planning tool to guide the huge production effort of the Second World War. As The Economist (February 2006) points out, the GDP was never intended to be the definitive yardstick of economic welfare. It makes no allowance for the depreciation of the capital stock. It is for these reasons that the OECD has made an attempt to adjust GDP for the distribution of income. It points out how a country such as India, where a few families enjoy huge wealth, but most live in abject poverty, would have a lower level of well-being than one with the same GDP but less poverty. By this measure, the adjusted income per head is higher in France than in the US, where the top 1 per cent of the population enjoys 90 per cent of the wealth and income. GDP has, therefore, been complimented by other measures such as adjustment for inequality and leisure.

The unemployment boom

The GDP figures ignore the enormous waste of resources because of unemployment and under-employment. More people enter the job market each year and our growth is not creating enough jobs. The Asian Development Bank points out that the ratio of employment growth to economic growth is low.

Growth should be more labour- than capital-intensive. Subsistence farming and simple urban services are highly labour-intensive but, notes the ADB report, these are not thriving industries. The Economist commented: "Asia, welcome to the jobless boom". We have today 250 million youngsters between 18 and 35 waiting hopefully and enthusiastically for job opportunities and all that we can offer them is a vague 100 days work at Rs 500 per month under the Employment Guarantee Scheme.

Budget hopes

Management guru Vijay Govindarajan of Harvard University suggest, in his latest book Strategic Innovators, that we should manage the present, selectively abandon the past and create the future for economic success. The competition for the future is in the present. According to him: "When Vikram Sarabhai set up the IIM in Ahmedabad in 1960, he was actually thinking of 2006. In 2020, India will have to create 800 million jobs for its young workforce.

The strategy (to-create those jobs) starts today." What is the current economic philosophy of the Government of India? It believes in deregulation, privatisation and the reduced scope for government in the economic life of the country — all shades of Thatcherism, an ideology rooted in the harsh and outmoded principles of 19th century laissez-faire.

Sceptics had always denied the developmental exceptionalism, the ideological coherence and the operational consistency of the Thatcherite philosophy. Its alleged success was always open to dispute and debate. Will the Budget promise more jobs and happiness for those who do not form part of the equity cult associated with the BSE index?

Unfortunately, the Government is already thinking of cutting private sector jobs as can be seen from the suggestion to limit the activities of private courier service companies to letters and parcels above 500 grams for the benefit of the inefficient postal department. The IT services grew without government patronage and when success was achieved, government came up with regulations to obstruct its growth.

We need a leader with vision who will do to our economy what Kerry Packer did to cricket in the 1970s.

(The author is a former Chief Commissioner of Income Tax.)