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Where are the jobs, Mr Sinha?

Ruddar Datt

WHILE the corporate sector and industry associations have welcomed Budget 2001, as it largely follows the agenda set by them, the Opposition and trade unions have described it as `rudderless' and `anti-poor'.

But there are several areas in which the Finance Minister has not paid adequate attention, the most important being employment.

According to the NSSO Household Consumption Survey, during 1983 and 1990-91, the average employment growth rate was 2.39 per cent per annum -- 1.73 per cent in the organised sector, and 2.41 in the unorganised. However, post-reforms (1990-91 to 1997-98), the employment growth rate has declined to a mere 1 per cent per annum, with the organised sector recording an abysmal 0.6 per cent. The Ninth Plan had estimated the labour force to grow at an average annual rate of 2.51 per cent in 1992-97 and at 2.45 per cent in 1997-2002. The Budget, however, does not offer any concrete proposals for enlarging employment.

For the overall well-being of society, the goal of enhancing GDP growth has to be reconciled with that of attaining full employment. But the Budget talks of downsizing: ``In the state sector, fresh recruitment is limited to 1 per cent of total civilian s trength. As about 3 per cent of staff retire every year, this will reduce the manpower by 2 per cent per annum, achieving a reduction of 10 per cent in five years as announced by the Prime Minister.''

But Mr Sinha has failed to take note of the Prime Minister's commitment to create 10 million jobs every year. How does one reconcile these two divergent goals? The working group set up by the Planning Commission has so far not found a solution to the pro blem. During the 1990s, while the average annual GDP growth was over 6 per cent, the employment growth declined. The post-reforms period is also witness to rising casualisation of the workforce. Casual labour's share in the total labour force rose from 3 1.2 per cent in 1988 to 37 per cent in 1998. Retrenchment, closures and lockouts are also on the rise. Labour unions are faced with little choice, that is, either to agree to a reduced regular workforce with a larger component of casual labour or face lo ckout/closure.

The Government seems to have succumbed to the pressure of industry associations, which have been demanding higher labour flexibility -- the right to hire and fire, that is. For instance, a study of 42 lockouts in West Bengal has shown an increasing trend towards casualisation, on the specious plea of cost reduction. By amending Section VB of the Industrial Disputes Act, the Government will only sanctify and legitimise the phenomenon of downsizing in the private sector. If the Budget proposal on `labour flexibility' is passed in Parliament, then there is little hope of jobs in the organised private sector rising, even if GDP growth touches 8 per cent.

The Budget does not provide any tangible support to the unorganised sector either, which is labour intensive. The small-scale sector (SSI), which accounts for 95 per cent of the industrial units, 40 per cent of the manufacturing sector output, 35 per cen t of exports and provides employment to 18 million, has been given the short shrift. The number of items reserved for SSIs is being reduced gradually -- from 68, the Government dereserved 15 items in the earlier two Budgets, and has proposed to dereserve another 14 (relating to leather goods, shoes and toys) in the current. This is bound to have an adverse effect on the growth of this sector, as also on employment generation.

Downsizing is a negative way to raising productivity. According to management guru C. K. Prahalad, ``Downsizing can be like corporate anorexia; it can make you leaner and thinner but it won't necessarily make you healthier. Ultimately, you need to grow a nd you need to change. There is a need to build further muscle, not simply to cut corporate fat.''

The Supreme Court has ruled against giving employers the absolute right to `hire and fire'. In the Indian Hume Pipe Co Ltd vs The Workmen (1960 (2)) case, the court held: ``Often, a workman is retrenched when he is advanced in age and his energies are de clining and it becomes difficult for him to compete in the employment market with younger people in securing employment. Retrenchment compensation payable under Section 25-F may be of some assistance but it cannot go far to help him tide over the hardshi p, especially when the proceedings before the Industrial Tribunal Labour Court get prolonged. The plight of the retrenched workman has to considered in the light of the prevailing conditions of unemployment and under-employment in the country. Abysmal po verty has been the bane of Indian society and the root cause is large-scale unemployment and under-employment.''

The apex court, accepting the reasonableness of the Industrial Disputes Act, also stated that: ``Section 25-N seeks to give effect to the mandate contained in the Directive Principles of the Constitution...The restrictions imposed by Section 25-N on the right of the employer to retrench the workman must, therefore, be regarded as having been imposed in the interest of the general public.''

Now, in the light of this judgment, is the Finance Minister right in suggesting amendments to the Industrial Disputes Act to provide `labour flexibility'?

Reducing the interest rate on small savings by 1.5 per cent is another move to appease the corporate sector. This is expected to lower not only industry's cost of borrowing but also the debt service burden of the government, exacerbated, as it is claimed , by high real interest rates. But are real interest rates really very high? During 1993-94 to 1999-2000, the inflation rate, based on the wholesale price index, rose on an average by 6.4 per cent per annum. However, the CPI(IW) and the CPI(AL) increased at an average of 8.41 per cent and 7.38 per cent respectively. With most banks paying 10 per cent for deposits committed for three years or more, and 9.5 per cent and 8.5 per cent for two-year and one-year deposits respectively. This would imply a real rate of interest of hardly 3-4 per cent.

With inflation expected to rise further, reducing the interest rate would mean a further fall in real interest rates. Mr Sinha's optimism that household savings will rise is, therefore, misplaced.

In 1998-99, the gross domestic savings rate was 22 per cent, with household savings accounting for 19.1 per cent, that is, 86.8 per cent of the total savings. The private corporate sector's share was a mere 3.7 per cent and that of the public sector, (-) 0.8 per cent. Despite concessions year after year, corporate sector savings have been declining -- from 4.9 per cent of GDP in 1995-96 to 3.7 per cent in 1998-99. The CSO Quick Estimates place it at 3.7 per cent for 1999-2000.

Reducing the interest rate will surely hit household savings. To make things worse, the Finance Minister has scaled down the tax exemption for savings under Section 80L, from Rs 12,000 to Rs 9,000. Thus, a GDP growth rate of 9 per cent, without a corresp onding rise in the savings ratio, seems unrealistic.

Now, the reduction in tax rates has not led to a proportionately higher level of tax revenues. Laffer's hypothesis does not seem valid in India. Yet, Mr Sinha has handed out tax concessions, which would result in a net loss of Rs 12,305 crore in tax reve nues (excise, Rs 4,677 crore; Customs, Rs. 2,128 crore; and direct taxes, Rs 5,500 crore). The Finance Minister hopes ``to make it up with tax buoyancy and increased voluntary compliance.'' The shortfall in 2000-01 was made good by higher income-tax coll ections. But in 2001-2002, the situation may not be as favourable, with the number of assessees already touching 23 million and the rate of increase likely to show a decline.

In sum, the Budget can be said to be growth oriented, but certainly not employment oriented. It has nothing to promote higher savings in the economy. Even if a larger inflow of foreign savings is allowed, gross domestic capital formation may not be highe r than 24 per cent of GDP.

Economists would wonder at Mr Sinha's optimism? Can GDP growth rate, which has declined in the past four years (1997-98 to 2000-2001), show a big jump despite agriculture stagnating, is the big question? The Plan outlay for agriculture and allied activit ies has not changed. This does not inspire confidence. A big push to agriculture, rural development and small industries (the main employment providers), rather than place too much faith on the corporate sector, would be a better bet for boosting growth and employment.

(The author is President, Indian Economic Association, New Delhi.)