Last month, global investment strategist Ruchir Sharma set the dovecotes aflutter when he declared that for countries like India, “5% (GDP growth) is the new 7%, the appropriate aspirational standard.”
He based his growth pessimism on the emergence of four Ds – deglobalisation, depopulation (a shrinking global labour force), declining productivity, and a debt overhang as big as the one in 2008. Almost on cue, India’s GDP number for the first quarter of 2019-20 (April-June) fell with a thud to 5%.
Few Indian economists will agree with Sharma’s formulation, for if India has to accept 5% as the new aspirational benchmark, there is little chance of providing jobs to our still growing working age population. According to estimates made in the Economic Survey 2018-19, even though the rate of growth of the working age population is slowing due to the fall in total fertility rates across states, the projected annual increase in the working age population during 2021-31 will be 9.7 million, before falling further to 4.2 million in the following decade. In short, till at least 2041, the overall size of our working age population will keep growing, even if at a steadily slowing pace.
So, we do need higher growth. However, the choice is never a binary one, between slower and faster growth. Some nuance is lost in this kind of thinking, for we need policies that improve the quality of the growth, regardless of whether we grow at 5% or 7% plus.
Illustration: Chad Crowe
Since it is impossible to predict global growth conditions, demographics and productivity even a couple of years hence, what we need are all-weather policies that ensure good outcomes regardless of the actual GDP growth number. For the last decade or more, the economy’s employment elasticity has been falling. The 12th plan estimated it at 0.19, and Azim Premji University’s ‘State of Working India 2018’ put it at 0.1. An elasticity figure of 0.1 implies that for every 10% growth in GDP, employment grows only 1%.
During the Vajpayee years, despite lower growth, employment grew by nearly 60 million between 1999 and 2004. In the next five years, and especially in the boom-boom UPA-1 years, employment growth was just a few million.
This does not imply that fewer jobs were created in the UPA years; just that fewer people were willing to work at the wage rates available. This is consistent with the sharp fall in poverty rates during the UPA period, which made many women drop out of the workforce – and the trend continues.
This leads us to two broad hypotheses: The quality of jobs in the Vajpayee era was poor, but jobs at those wages were aplenty even with low growth. The quality of growth in the UPA era was poor, which is why even at rising wage levels, people were dropping out of the workforce.
For policy makers, the message should be clear: Don’t focus on just growth, but on its subcomponents. It is possible to have high growth with very few worthwhile jobs, but it is equally possible to have good quality jobs even with lower growth. This means not just macroeconomic policies, but microeconomic ones matter.
All economists would agree, for example, that we need factor reforms (freeing land and labour markets) and agricultural market reforms. Only if we free the markets for agri-produce will farmers benefit from increased productivity by, first, catering to a bigger national market and then to a global market. If this does not happen, every bountiful harvest will lead to a crash in prices and farm misery – precisely our story over the last few years.
In the last decade or more, we had jobless growth because capital markets were liberalised before the labour and land markets, as a result of which employers liberally used capital and automation when humans could have been employed in larger numbers.
We invested in capital intensive sectors like petroleum refining, when more job creating sectors like apparel, furniture and leather works should have been encouraged with easier labour laws. We focussed on subsidising agriculture because politicians loved to play sugar daddy to farmers, when the focus should have been on policies to create more non-agricultural jobs, especially in urban areas, to absorb the workers who want to leave low-income agriculture.
We need the right kind of urbanisation policies – which means allowing land prices to be driven by real demand and supply, and not artificially constrained by arbitrary building laws and zoning rules. But land reforms and rational building laws cannot happen without getting politicians out of the way. It is no secret that most politicians hold their ill-gotten wealth in real estate, and they resist a fall in prices since this would destroy their wealth.
Similarly, foreign investment in job creating sectors will come only if our legal system works faster. The World Bank’s Doing Business 2019 report showed India’s ranking rising to 77 from 100, but our performance in two vital areas – enforcing contracts (rank 163 among 190) and registering property (154) barely budged. Without the ability to buy property and enforce contracts, two big job-creating sectors – construction and real estate – will simply underperform.
The short point is this: If we want to improve the lot of our citizens and create worthwhile jobs, we need to focus on the micro reforms involving specific sectors. Higher growth will happen when the composition and spread of growth improves, and not merely the topline. The quantum of growth is less important than its quality.
He based his growth pessimism on the emergence of four Ds – deglobalisation, depopulation (a shrinking global labour force), declining productivity, and a debt overhang as big as the one in 2008. Almost on cue, India’s GDP number for the first quarter of 2019-20 (April-June) fell with a thud to 5%.
Few Indian economists will agree with Sharma’s formulation, for if India has to accept 5% as the new aspirational benchmark, there is little chance of providing jobs to our still growing working age population. According to estimates made in the Economic Survey 2018-19, even though the rate of growth of the working age population is slowing due to the fall in total fertility rates across states, the projected annual increase in the working age population during 2021-31 will be 9.7 million, before falling further to 4.2 million in the following decade. In short, till at least 2041, the overall size of our working age population will keep growing, even if at a steadily slowing pace.
So, we do need higher growth. However, the choice is never a binary one, between slower and faster growth. Some nuance is lost in this kind of thinking, for we need policies that improve the quality of the growth, regardless of whether we grow at 5% or 7% plus.
Illustration: Chad Crowe
Since it is impossible to predict global growth conditions, demographics and productivity even a couple of years hence, what we need are all-weather policies that ensure good outcomes regardless of the actual GDP growth number. For the last decade or more, the economy’s employment elasticity has been falling. The 12th plan estimated it at 0.19, and Azim Premji University’s ‘State of Working India 2018’ put it at 0.1. An elasticity figure of 0.1 implies that for every 10% growth in GDP, employment grows only 1%.
During the Vajpayee years, despite lower growth, employment grew by nearly 60 million between 1999 and 2004. In the next five years, and especially in the boom-boom UPA-1 years, employment growth was just a few million.
This does not imply that fewer jobs were created in the UPA years; just that fewer people were willing to work at the wage rates available. This is consistent with the sharp fall in poverty rates during the UPA period, which made many women drop out of the workforce – and the trend continues.
This leads us to two broad hypotheses: The quality of jobs in the Vajpayee era was poor, but jobs at those wages were aplenty even with low growth. The quality of growth in the UPA era was poor, which is why even at rising wage levels, people were dropping out of the workforce.
For policy makers, the message should be clear: Don’t focus on just growth, but on its subcomponents. It is possible to have high growth with very few worthwhile jobs, but it is equally possible to have good quality jobs even with lower growth. This means not just macroeconomic policies, but microeconomic ones matter.
All economists would agree, for example, that we need factor reforms (freeing land and labour markets) and agricultural market reforms. Only if we free the markets for agri-produce will farmers benefit from increased productivity by, first, catering to a bigger national market and then to a global market. If this does not happen, every bountiful harvest will lead to a crash in prices and farm misery – precisely our story over the last few years.
In the last decade or more, we had jobless growth because capital markets were liberalised before the labour and land markets, as a result of which employers liberally used capital and automation when humans could have been employed in larger numbers.
We invested in capital intensive sectors like petroleum refining, when more job creating sectors like apparel, furniture and leather works should have been encouraged with easier labour laws. We focussed on subsidising agriculture because politicians loved to play sugar daddy to farmers, when the focus should have been on policies to create more non-agricultural jobs, especially in urban areas, to absorb the workers who want to leave low-income agriculture.
We need the right kind of urbanisation policies – which means allowing land prices to be driven by real demand and supply, and not artificially constrained by arbitrary building laws and zoning rules. But land reforms and rational building laws cannot happen without getting politicians out of the way. It is no secret that most politicians hold their ill-gotten wealth in real estate, and they resist a fall in prices since this would destroy their wealth.
Similarly, foreign investment in job creating sectors will come only if our legal system works faster. The World Bank’s Doing Business 2019 report showed India’s ranking rising to 77 from 100, but our performance in two vital areas – enforcing contracts (rank 163 among 190) and registering property (154) barely budged. Without the ability to buy property and enforce contracts, two big job-creating sectors – construction and real estate – will simply underperform.
The short point is this: If we want to improve the lot of our citizens and create worthwhile jobs, we need to focus on the micro reforms involving specific sectors. Higher growth will happen when the composition and spread of growth improves, and not merely the topline. The quantum of growth is less important than its quality.
Infosys best placed near-term, on both growth & margin.
