Why incomes, jobs aren’t rising fast enough

Some economists are vigorously churning out statistics to prove that the Indian economy is generating enough jobs. Some of them are also challenging the thesis that inequalities are increasing. In fact, some even suggest that inequality does not matter. Their statistics-laden arguments remind one of the saying, “There are lies; there are damned lies; and then there are statistics”.

Much of the statistical confusion about whether the economy is generating enough jobs arises from definitional problems: What is a ‘job’, and what is a ‘good’ job? As Shakespeare said: ‘A rose by any other name would smell as sweet’. To the people it does not matter, whether it is a ‘job’, a ‘livelihood’, or an ‘enterprise’ so long as it provides a sustainable source of adequate incomes. What people need are opportunities to use their assets, which for millions at the bottom of the pyramid are only their labour and some traditional skills, to generate sustainable incomes.

Three stages

The Indian economy can be divided into three broad stages. In the middle is the economy of formal enterprises with formal jobs, where people are on an upward escalator, and can foresee careers, and can expect income security. Above the escalator is a fast elevator, available to those who have financial assets, which multiplies their money and increases their wealth much faster.

Below the escalator in the middle is the ‘snakes and ladders’ world of underemployed citizens and the informal economy in which over 90 per cent of Indians live. They scramble up rickety ladders to earn some income: and are pulled down whenever some disaster strikes — a medical emergency, floods or droughts, or demonetisation.

The Indian economy is missing the bottom stage of the up escalator. Therefore, people at the bottom are not able to move up faster. Inequalities are increasing because the wealth of those fortunate to be in the fast elevator are rising much faster than the incomes of the hundreds of millions struggling amongst snakes and ladders.

Economies grow, and per capita incomes increase, when productivity increases. And productivity increases when people acquire capabilities with which they can produce more and earn more. Growth is inclusive when people can earn adequate incomes to purchase the fruits of economic growth, and when they can also continuously learn to improve their capabilities. What is missing in the Indian economy are adequate opportunities for masses at the bottom with limited skills to earn and learn faster.

Understanding the system

The systems’ thinker Donella Meadows, co-author of the Club of Rome’s report ‘Limits of Growth’, provided the insight that, “Every system is perfectly designed to produce the results it is presently producing”. Therefore, to understand why the Indian economy is not creating good income generating opportunities for people at the bottom of the pyramid, we must examine the structures shaping the present economic system. These include the structures of policies, and the structures of thought (and ideologies) driving those policies. I will highlight three.

The first is the mindset towards ‘informality’. Informality is seen to be bad, and to be done away with. Therefore, formality is imposed on to it, even brutally (as with demonetisation). Whereas, there is a ‘form’ within what appears as informality: a set of structures that enable the informal to function. This form must be understood, and built upon to add strength, and not be destroyed by ill-conceived surgical interventions.

The second is a bias against the ‘small’. An economy with too many small enterprises is considered to be a weak economy. Whereas one should expect to find many more small enterprises in an inclusive and innovative economy. The practical problems small enterprises have is that they are unable to access resources (finance, markets, etc) as easily as large enterprises can, and that they also do not get the attention of policymakers who find it more attractive to engage with the big fellows. Small enterprises (which include even road-side pakora sellers) have to overcome many constraints because they are small. They could overcome them more effectively if they aggregate in clusters and associations. They will have more clout with the political system. They will get more attention from banks and international buyers. They will be able to provide themselves with shared facilities for training, quality, etc., which they cannot individually afford. The thrust of policies must be to encourage more formality in clusters and associations of small enterprises so that they can engage with the formal system, rather than imposing needless formality on the enterprises themselves.

The third fundamental change must be in the orientation towards employees. Humans are the only ‘appreciating assets’ an enterprise has: the value of other resources depreciates with time. Humans have the capacity to learn and to develop their capabilities if they are provided an environment to learn.

Humans can improve their own productivity and also improve the productivity of all other resources used in the enterprise — materials, energy, machines, etc. Very advanced AI systems are acquiring this ability too. However, they cost a lot whereas humans can be hired for very little in India.

Improving productivity

The key to improvement of the total factor productivity of an economy (and of an enterprise), and to simultaneously increase the incomes of citizens, is to engage people in activities, in small and large enterprises, whereby they develop their own capabilities as they earn and learn, and simultaneously improve the productivity of their enterprises. If all enterprises in a country were to improve their productivity (measured as total enterprise output divided by the numbers of people they employ) by, short-sightedly, reducing their numbers of employees, how will total employment increase in the economy?

Political capacity for reforms is always constrained in all societies. Therefore, it must be directed towards what is essential for improvement of the whole system. India needs labour reforms. There are too many laws and regulations, badly administered, and often contradictory, tying up enterprises into knots. The thrust of the reforms must be towards encouraging employers to ‘retain and train’ their employees, rather than making it easier to ‘hire and fire’ them.

The writer is a former member of the Planning Commission. (Through The Billion Press)

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