Raghuram Rajan may be a world-class economist, but his recent utterances are more political and generic in nature, not based on a real understanding of the nuances of the jobs problem in India.
Former Reserve Bank of India (RBI) governor Raghuram Rajan makes a fair point when he calls for better estimation of gross domestic product (GDP) numbers when the current ones seem to be at odds with other indicators that do not show robust good economic health.
In an interview to CNBC TV18, he said: “I know one minister (in the Narendra Modi government) has said how can we be growing at seven percent and not have jobs. Well, one possibility is that we are not growing at seven percent…”.
Yes, that is one possibility, but surely he should know that a percentage point added or shaved off current GDP numbers would not have made much difference to the number of jobs created or destroyed. He can just check the jobs created under NDA-1, when growth was much lower than in the boom years of UPA-1. Jobs growth was far lower in the second instance (read about this here for some of the details).
So whether it is the Finance Minister, whose statement on GDP and jobs was indirectly criticised by Rajan above, or Rajan himself, the reality is that employment has now a very low linkage with growth, no matter how it is measured. Even a substantially ‘improved’ measure of GDP (which, in Rajan’s view, must mean a lower figure than the 7 per cent being touted now), will not move the needle on jobs much.
This is the problem with macroeconomists who tend to make motherhood statements and talk in generalities about the jobs problem when its linkage with GDP growth is growing more tenuous. What we need is more sectoral understanding of the jobs problem, since sectors that show up big in the GDP figures may not necessarily be the ones creating the most jobs. Mukesh Ambani’s petroleum and petrochem business is huge in terms of its contribution to GDP, but its jobs potential is measly (read Arvind Panagariya’s article on this here). However, his retail and telecom businesses may be doing the opposite – creating a huge jobs value chain through forward and backward linkages.
Rajan should know this, for a Reserve Bank Working Paper that was published right under his watch in 2014, one by Sangita Misra and Anoop K Suresh (“Estimating Employment Elasticity of Growth for the Indian Economy”), uses Planning Commission data and the authors’ own estimates to show a declining linkage between growth and jobs.
The paper estimates the overall employment elasticity of the economy at less than 0.2 per cent in the latest period (see Table 1), which means a 1 per cent rise in GDP brings only a 0.2 per cent lift in employment, and this too unevenly. It may not happen in all the years. So even if the GDP number were to be cut from 7 per cent to, say, 6 per cent with the help of some of the more competent economists that Rajan may recommend, the impact on jobs would be minus 0.2 per cent – or about eight lakh jobs on an employment base of (say) 400 million.
In fact, a research report on State of Working India 2018 (see Table 2), prepared by Azim Premji University, builds on the RBI paper and estimates that the employment elasticity in recent years may have fallen even below 0.1. This means even 10 per cent GDP growth may mean only a 1 per cent lift in employment. So, a loss of 1 per cent due to better GDP calculation means only a theoretical job loss of 400,000 in an economy where 12-15 million people are said to be entering the working age group of 15-plus every year.
And there is the other issue. The employment elasticity is not the same all through, for it can rise in boom years and fall in recessionary years, and then not rise even in the subsequent boom years, as employers substitute labour with cheap capital after a recession makes interest rates low and capital becomes easy to access.
Given below is a table from the 12th Plan, again something Rajan should be aware of since it was finalised when he was chief economic adviser in the Finance Ministry. Tables 1 and 2 both show how employment elasticities moved during various phases of the pre- and post-liberalisation era.
Table 1: Employment elasticity using CAGR approach
Table 2: Growth is delinking from jobs
The real story of India’s jobless growth or job-full growth lies in understanding the impact of growth on specific sectors, and even regions of the country. Table 3, which shows sectoral employment elasticities, tells us in which sectors GDP growth may have helped create more jobs or less. Note the top row on agriculture in Table 3. Whenever GDP grows, agriculture sheds jobs, for its employment elasticity has been negative for a while. This is one major new source of the unemployment problem. So, if GDP grows, and agriculture sheds jobs, we will see a rise in unemployment rather than a fall.
Table 3 also tells us which sectors will create jobs when growth happens. Construction and utilities (electricity, water supply, gas, sewerage, waste management) have a total and positive correlation to GDP growth. While construction is easy to understand, utilities are not. Utilities are largely urban-based, and this implies that jobs have a close linkage to urbanisation. And real estate and utilities are key job creators in urban areas – areas that the Narendra Modi government has been pushing as hard as possible after the disruptions of demonetisation and the goods and services tax (GST). Within manufacturing, sectors like furniture, apparel, automobiles, electronic items (computers and mobiles) and other such sectors have greater employment potential than some traditional sectors. Again, these sectors are urban-driven, and the Modi government has given sops to push these sectors as also the benefit of fixed-term labour contracts to enhance job creation.
Table 3: Sectoral employment elasticities
Table 4: Employment elasticities in manufacturing
What Tables 3 and 4 show us is that jobs will grow if you let sectoral economists work out policies for their specialist areas, not macroeconomists talking in the air about growth and fiscal prudence.
If you go back to Table 1, another stark reality is the steady fall in the economy’s employment elasticity, a trend that accelerated after economic liberalisation in 1991. In fact, the only period post-1991 where employment elasticity actually improved was 1999-2004, the Atal Bihari Vajpayee era in which the government started major investments in infrastructure and construction. This collapsed as soon as borrowing-led growth boomed during UPA-1. Till now, there has been no recovery.
The above tables and thoughts lead us to three tentative hypotheses on how to revive jobs growth.
One, listen more to sector experts than macroeconomists. The former know what is possible in which sector, the latter know little about what really works. Even the design of GST’s rate structure would have benefited more from consulting microeconomists and sector experts than macro mavens.
Two, the break between growth and jobs accelerated after liberalisation. The two big things that happened in 1991 were capital market reforms and delicensing. This benefited big, capital-intensive investments. Since other factor market reforms did not happen, especially in land and labour, the old pre-liberalisation mindset of not hiring more if you can avoid it was re-emphasised post-1991. Agriculture was not liberalised, and even now we are seeking remedies in failed ideas like farm loan waivers and higher minimum support prices (MSPs) – which are both anti-market and against the interests of farmers in the long run, who will find banks unwilling to lend to them.
Indian business has become more capital-intensive, and less labour-intensive, while Indian agriculture has fallen victim to anti-market policies and state control. In agriculture, growth actually creates more problems, as prices crash and farmers lose even more when they raise productivity.
The moral of the story: reforms, if not balanced, will lead to overuse of some factors of production and underuse of others. Just as urea subsidies have led to lopsided use of nitrogenous fertilisers, causing enormous soil damage, the outpacing or capital market reforms over land and labour has workers and jobs behind.
Third, there are legacy mindset issues to contend with. The Modi government has eased the rules for taking on apprentices, and also allowed companies to take on labour with fixed-term contracts. But once-bitten, twice shy. Businessmen brought up in the era of excessive protections to labour are unlikely to shed their wariness about employing more easily. And given the double-balance-sheet crisis, stoked by the excess of credit expansion in 2006-08 (something which Rajan himself agrees with), few companies are in a position to expand employment even if they are willing to, as they also have to simultaneously deleverage. They are more willing to flog assets and raise productivity from capital already invested than expand labour too soon.
One way to get businesses to stop privileging capital investment over labour is to bring parity in taxation. Capital-generated income is taxed far less than labour income. One should ideally tax both sorts of income similarly, and additionally tax wealth obtained through inheritance significantly, as America does, so that inter-generational inequity is reduced.
There are many other issues that help or retard jobs growth – including the huge improvements in productivity that may be retarding fresh investments – but we need to understand the basics first. The issue is not just wrongly reported growth, but a wrong focus on growth without understanding what is causing the growth and whether it is leading to jobs.
Stated differently, it means the right kinds of job policies can enhance growth, but policies that merely enhance growth may not necessarily give us the same results in terms of jobs growth. The two are essentially random variables if the employment elasticity is as low as 0.1.
Raghuram Rajan may be a world-class economist, but his recent utterances are more political and generic in nature, not based on a real understanding of the nuances of the jobs problem in India. Even better GDP estimates are not going to rescue us from the jobs crisis if we have the Rajans pontificating on the issue without infusing the debate with a commonsense understanding of Indian reality.