Santosh Mehrotra is an economist, chairperson of the Centre for Informal Sector and Labour Studies, JNU and editor of Reviving Jobs: An Agenda for Growth. The book, featuring contributions from reputed scholars, lays bare the steep challenge that India faces in providing employment for the millions entering the workforce every year – and the many, many policy mistakes that were made to bring the country to this perilous situation.
Scroll.in spoke to Mehrotra about the effects of the post-lockdown migrant crisis, what’s wrong with Make in India and the four economic self-inflicted wounds by the current government.
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You said in May the migrant crisis set India 15 years back – now that we are into July, do you still believe that is true? And what does that actually mean?
Yes, it is still true. Let me clarify what I meant by set back by 15 years. Until 2004-5, exactly 15 years ago, the absolute number of workers in agriculture in India was increasing. For over half a century after India became independent, we had a situation where the share of workers in agriculture was falling, but falling extremely slowly.
But because of population growth, the absolute number of workers in agriculture was still increasing until 2004-5.
Now the reason I said we’ve gone back 15 years is because what has happened as a result of the reverse migration is that there has been a sharp increase in the number of those working in agriculture. Of millions! This has never happened in the last 15 years, regardless of what India’s GDP growth rate has been like before. The absolute number of workers in agriculture increasing was a phenomenon up until 2004; never since then. After the pandemic we have seen a sharp increase in workers in agriculture.
The point is two-fold.
One, if the absolute number of workers in agriculture is growing, then that is the absolute opposite of structural transformation in a developing economy. We grow up learning that structural transformation involves not just the rise in per capita income but two other changes:
- The shift of the composition of output away from agriculture first towards industry and then towards services
- The shift of the workforce away from agriculture first towards industry and then towards services
That process until 2004-05 had already been relatively slow. However, it changed between 2004-5 and 2011-12. We started generating 7.5 million non-agricultural jobs when only 2 million people were joining the labour force. So what that did was to actually pull people out of agriculture at the rate of 5 million per annum. This was an unprecedented and positive new development.
The result of that was that because of millions leaving agriculture, especially from the highly populated states of Bihar, UP, MP, Rajasthan, Jharkhand, Bengal – and they were moving not just into towns in their own states, but also to other states – because of that happening, the real wages rose in rural areas in these states as well as across the country because the labour markets tightened.
The labour market also tightened because of MNREGA, though that would be a one-off increase.
That caused an increase in rural wages in open market, which of course also led to an upward movement in urban wages. So there was an uptick in real wages all the way from 2004-5 to 2011-12. This process has been brought to a standstill from 2012 to 2018-19.
For 2012-18, the NSSO data shows us that because non-agricultural job growth fell from 7.5 million per annum to 2.9 million per annum, because you have relatively slower growth in the economy, the number of those leaving agriculture fell. As a result what has happened is that real wages have actually been flat between 2012 and 2018.
Even prior to Covid pandemic, we were in a phase of India’s development wherein the structural transformation process had stalled over 2012-18.
What is now happening post -pandemic is that millions have gone back to agriculture. They are more dependent on MNREGA. This is a retrogressive development for India, which needs millions of more jobs in industry and services, as the number joining the labour force is increasing each year at an accelerating pace.
The decline in the unemployment numbers that you’ve heard of recently, post April 2020, is merely in rural areas, primarily on account of a) MNREGA and b) temporary increase in work opportunities, because this was (April onwards) cutting season and then sowing season, so many workers go back anyway at this time.
The second is temporary, and tragically MNREGA is already much more sought after than it is supplying work. The latest numbers tell us work was demanded by 80 million, and the numbers given work was about 62 million.
That’s 18 million people going even without MNREGA work. You can imagine what the meaning of this is for real wages. It means the deepening of the income crisis that was already showing up in rural areas.
In all these multiple ways there has been a reversal by 15 years, which is catastrophic for India.
This is catastrophic because our demographic dividend ends in 20 years. Every year we are losing now is a very serious loss in the potential for generating growth and reducing poverty as we move forward.
All the prognostications are that in the best-case scenario the level of 2019-20 GDP will not be achieved before 2023. We would have lost three years outright. Can you imagine how long it will take for the economy to begin to grow at the rate we need it to grow in the next 17 years remaining of this demographic dividend in order to dramatically reduce poverty?
We’ve been seeing the unemployment numbers between March and July, we saw them bounce back to pre-pandemic numbers, but it is clear that the shape of unemployment, so to speak is very different from before, right?
Our so called jobs are really informal, casual or self-employed livelihood generating survival activities.
If you have seen a sharp fall in unemployment that CMIE is reporting between April and May and then further in June, it is because the kabadiwalla is back to work. The nai on the street, the vendor, the cobbler, the tailor, they are back on the street. The lockdown has ended. All that you’re seeing is this.
If you were to move around, in a city, what you will see is all these shops, these people are working… But there’s much less traffic, there are fewer people around because they are afraid and they don’t want to be in public spaces.
CMIE has suggested that salaried jobs are going away and they will be gone for a while.
Absolutely. All the sectors that have been very seriously impacted by the lockdown are firing workers. Aviation is, hotels are, tourism is, and so is the media sector.
The only two lines of business where there is an increase in economic activity and hiring are e-commerce and IT.
But let’s just remember that I-T has also lost a lot of jobs in the last two years. There has been restructuring, because that was a sector which was most showing up in the increase in joblessness.
And there is not a hope in hell that the automobile sector is suddenly going to perk up.
The book can make for depressing reading looking back at all the policy missteps and how big the size of the challenge is. And this is before taking Covid-19 into account. But I would imagine some of the proposals are upended in part because of this shift, as you say we’ve gone back 15 years?
I wouldn’t say that actually. The importance of all the proposals that we make in the book are only greater now than before. For the obvious reasons that many of the things that we are recommending in the book don’t cost much money. Many are just policy changes.
Let me give you a list of cases from our chapters that would not cost money, or not much money:
Now why did I say earlier that the number of non-agricultural jobs between 2012-19 fell? They fell primarily on account of two sets of reasons.
One was that the boom period in construction was over. Second, manufacturing, which had been growing earlier, actually saw an absolute decline. I mean, you would be shocked to know, for the first time in India’s history over that six-year period, there was an absolute decline in workers in manufacturing.
Which is on top of the situation that manufacturing in any case in 2012 merely accounted for 12.8% of total workforce.
For a country of our per capita income – the income has been increasing – one would expect the share of manufacturing to have been increasing.
Between 1991-2019 the share of manufacturing in GDP has remained at 17%, there’s been no increase.
The share of manufacturing in employment which was trending upwards – from 10.5% in 2004-5 to 12.8% in 2011-12 – in the last 6 years has actually fallen back to 11.5%. Even Bangladesh has 16%, which shows how our manufacturing sector relative to the size of the economy has been stagnant. It has not been a leading sector.
So what is the argument I begin with in the book: India needs an explicit cross-sectoral industrial strategy and I’m sorry to say and I think I say it very deliberately: Make in India is not an industrial strategy. It is merely emphasising two things
I was there at the Red Fort listening to the Prime Minister on the 15th of August in 2014, and the words that he used were: “Come, Make in India.”
It was an exhortation to foreign companies to bring in FDI. And that has been an area of focus and the government has trumpeted the increase in FDI. Yes there was an increase in FDI.
But there have been at least two very big downsides to this increase.
One, a significant proportion of the increase was for buying out Indian companies, for mergers and acquisitions, not for creating worksites or greenfield projects. Two, a significant proportion went into services, not into manufacturing.
Meanwhile China and East Asia had entrenched their position as the factory of the world. And we will come back to that later because we are now in a confrontational situation with China,
The second area of focus of Make in India was to improve the ease of doing business. No problem with that, but the focus has been merely on getting our rank up on the World Bank rankings. We all know that the rankings are determined by conducting enterprise/employer surveys in Mumbai and Delhi. Mumbai and Delhi are not India.
Make in India cannot be seen as a success story.
At the macro level, we should have seen an increasing share in manufacturing employment and output (in total output and employment). Neither has happened. If anything, I just told you that manufacturing total employment has fallen.
Let me give you a micro example. When, in 2014, the government that came to power was a very nationalistic, patriotic government, we were importing for Diwali, Ganesh and Lakshmi festivals, the lights and the crackers, all from China. Six years later today the situation is the same.
We call ourselves a software power in the world, but a significant proportion of our apps are Chinese. They completely dominate our phone industry.
The macro example is proof beyond doubt that Make in India is a failure, and we need to adopt a cross-sectoral industrial strategy, of which we lay out several components.
Moreover, the last chapter the book makes a recommendation for an urban employment guarantee. The government has already partly recognised this by saying, in its economic package, that we are going to build low-cost housing for migrants.
We make a similar argument but a broader argument, that there is a great need for an urban MNREGA. Why? Because there has been reverse migration, and one of the reasons for that is that these workers were living in hovels and slums. They would have contracted, and in fact did contract, Covid-19 because they weren’t allowed to move back, unless they just took it upon themselves to walk.
So the point is, if the government were to create an urban employment guarantee, it would have to spend less on MNREGA. What has the government had to do? Increase allocation for MNREGA post-Covid. ,Why would an urban MNREGA be better? Because it would substitute for work under the rural employment guarantee. It would pull workers back. It would attract them back, because the wages would be higher than in rural MNREGA.
Next, we make the argument for jobs in renewables, in creating an industry, especially solar but not just solar, I would say wind as well.
You see, the PM took the right decision early on in 2015 to actually expand the supply of renewable and solar energy. But what did we do?
If you have a long-term plan to go investing across the country in this industry, then you should have built up manufacturing capacity. What you did end up doing is actually sustaining a Chinese and then Malaysian solar manufacturing, who have been supplying most of the solar panels.
Why were we hell-bent on doing this very fast, expanding renewable energy by importing? We could from the beginning have done this by creating manufacturing capacity.
Importantly and ironically, you would have seen in the last month alone an announcement by Adani, that they have won a massive project for some several billion dollars for solar fields.
When I saw the announcement I looked to see if Adani will be doing any manufacturing. They are going to be importing.
So here is an investment being made by this government not recognising that there is a need to set up manufacturing domestically. So tomorrow, if the Chinese want to blackmail us, they can.
There are two sectors in manufacturing where we are a force to be reckoned with globally: automobiles and pharmaceuticals.
What have we allowed to happen in pharmaceuticals? Please remember that prior to 1991 we had a very sophisticated pharmaceutical industry. It didn’t do R&D but at least it produced the medicines that the country needed.
Drug manufacturing requires first that you bring the chemicals together and you combine them in such a way that you are able to produce the bulk drug, called the active pharmaceutical ingredient, which then becomes the basis for the formulation that you and I buy.
Our industry used to produce all the bulk drugs from scratch, because we had a formidable chemical industry
Today, 70% of our APIs are imported from China. Can you believe for such a simple drug as paracetamol or ibuprofen, the bulk drug is imported from China?
Is this the meaning of Make in India?
The government has come up with a stimulus package which is mostly made up of increasing credit to the industry which is non-collateralised, or credit guarantees. The fact of the matter is that SMEs are closing because of a lack of demand, according to a survey of thousands of SMEs by the All India Manufacturers Association.
The loans are so hemmed in by conditions that a significant proportion of these SMEs didn’t get them because they weren’t eligible. One of the conditions is that you need to have already had a loan. What if you didn’t have a loan and you’re in trouble now and want to borrow? Secondly, if you had a loan, you should not have missed any EMI until this point.
These kinds of conditions in a situation which is the worst economic crisis in the history of the country! It calls for a fiscal stimulus and not just increasing banking, liquidity etc. The government needs to take action to increase aggregate domestic demand, as exports are going to fall in any case, since international demand is collapsing, as the international economy will contract.
But why were our exports falling before the pandemic? In 2013-14, the value of our merchandise exports was US$315 billion. In every year after 2013-14, four years running, the absolute value of our merchandise exports fell, in dollar terms. That hadn’t happened in the preceding 15 years.
In 1991 the exports to GDP ration was only 11%, but it had shot up by 2007-8 to 25%. That is almost what China’s export-to-GDP ratio is. This means the absolute value of exports was growing every year.
In the first four years after the current government came to power, every year the merchandise exports fell. Services exports don’t necessarily make up for it. And your current account deficit continues to be in trouble. Only in the final year of the government’s term in 2018-19 did the value of exports rise above US$315 billion.
Investment to GDP had been falling since 2014, and was down to 29%. Household savings had fallen from 24% of GDP in 2012 to 17% of GDP in 2018; this means households were dissaving in order to maintain consumption. With economic growth slowing for nine quarters straight until early 2020, tax revenue growth was slowing too, so the government’s fiscal space was shrinking all the time, and had disappeared by early 2020.
In other words, this was the state of the economy in January 2020, when the pandemic began: None of the four engines of growth were firing – exports, investment, public expenditure, and even consumption. Consumption was stagnant or shrinking because wages and salaries were stagnant between 2012 and 2018, because job growth fell sharply at a time when more and more of the young were joining the labour force, and the young were better educated than earlier.
If you were losing jobs in manufacturing and in exports, then you can imagine what the impact of the pandemic is going to be.
I want to draw a little bit from your experience with the Planning Commission and in general in dealing with policy-making in Delhi. Why do you think we’re so misguided? Is it an error of priorities, is it the bureaucracy, is it political imperatives?
It’s a combination of many of the factors. Let’s focus on the most important.
There has been a failure of the recognition of the basis of the success of East Asia and China.
It is a reflection of not recognising that there are examples of countries which have done it, which have shown how it is to be done. We seem to follow our own political impulses/compulsions, with a five-year election cycle in mind, but without a reasonable long-term vision. This is a foundational problem. This is a problem with the previous government and with this government.
But then, this government has additional handicaps. It has unfortunately concentrated power in the Prime Minister’s Office and there is no countervailing force. For a vast, complex country, with a diversifying economy, all wisdom cannot reside in the PMO
Remember, the Planning Commission was always seen as a countervailing force against the ministries, not just the Prime Minister’s Office.
All projects would have to be run by the Planning Commission. That meant that there was always a second opinion. Today’s NITI Aayog is a rubber-stamp for anything that is coming from the PMO, which brings me to a larger and deeper problem.
Whatever the weakness of the Planning Commission, and I am the first to talk about them at great length, the fact of the matter is that it had expertise. And other parts of the government also had a considerable body of expertise.
We were able to draw upon that expertise, who, if they advised course correction, or go against some decision taken by bureaucrats, they were taken seriously, because the final decision-makers at least in the economic realm all knew what they were talking about.
I’m not saying that they knew everything that should have been done, I’ve already made that criticism about them, but the fact remains that you did not make gross macroeconomic errors. Our macroeconomic policy was reasonably well guided.
I will contrast that with what has been happening in recent times.
Why was this government in a fiscal crisis before the pandemic ?
Because of four self-inflicted wounds, all of which were implemented for political reasons:
- Demonetisation, which had zero economic rationale, and it had catastrophic economic consequences for the unorganised sector. Many of the small enterprises in the unorganised sector never recovered from the shockwave.
- You got a hurriedly implemented, poorly designed GST, which was not tried and pilot-tested. One would have expected a pilot test. One would have expected the computer software would have been tested on a reasonable number of people before you expanded it to the whole country in a tryst with destiny type moment. It was one of the most wide-ranging reforms happening within six months of the exogenous shock of demonetisation that was yet another shock on the unorganised sector. You should not therefore be surprised that the slowdown of the economy began thereafter. Let me mention as an aside that the government likes to delude itself with numbers that don’t seem credible. In the Financial Year 2016-17, when demonetisation would have probably caused a shock to the economy which reduced the GDP by at least one or two percentage points, we were told by the CSO that the economy’s growth rate was 8.2%, which is the highest for the NDA period. Who can in their right mind believe this? Why did that happen? It was a technical error. With such a large number of MSMEs in our country being unregistered, their contribution to the GDP cannot be estimated directly. For each sector the CSO uses the organised sector and projects it on the unorganised side for the same sector. Now demonetisation actually left the organised sector pretty much unscathed. That is not the case for the unorganised sector. This tended to inflate the unorganised sector estimates for 2016-17. And that’s how you get an 8.2% growth rate in a year which saw a sharp decline in output in the unorganised sector.
- Self-inflicted wound number 3 comes in the early part of 2019 just before the election. One of the things that was happening over time was that the number of tax filers was growing. The number of tax filers at the end of Financial Year 2018-19 were 60 million. In the budget just weeks before the election, the threshold for levying income tax was raised from annual income of Rs 2.5 lakh to Rs 5 lakhs. The middle class voted in favour of the government, very nice. But what that did was that it reduced the taxpayers from 60 million to 15 million, to 1/4th. Imagine a situation where the economy has already been slowing for many quarters on account of self-inflicted wounds, and now to reduce the personal income taxes when your revenues slow down even further. As the economy was slowing, GST revenues were not growing at the expected rate. But GST was supposed to have stabilised by now. It has been three years, but GST revenues have not stabilised. If anything, they have tended to fall. So the central government doesn’t have funds to spend. So it starts holding back on legitimate dues to the states (eg, GST dues). The states are the ones who can carry out public investment. The Centre is not responsible for most of the public investment in the economy. Yet the Centre held back the revenues, legitimate ones, so the states could not spend.
- Fourthly, in the middle of 2019, as you saw the private investment-GDP had been systemically falling for several years, overnight, the government reduces corporate tax rate from 30% to 25%, hoping there would be an increase in private investment. Of course there was no increase in private investment, the economy was slowing. So you reduce corporate taxes at a time when the government revenue was falling and you cut your own revenues by Rs 1 lakh crore. That decision did not lead to any increase in investment. You’ll be stunned to know that private corporate savings in the last few years have gone up from 9.5% to 11.5% of GDP. This is happening because their incomes are growing, but they are not investing. If anything they are taking money abroad. And the government had promised to reduce the corporate tax from 30% to 25% in 2015. I remember the statement of the then-Finance Minister that every year we will reduce it by 1 percentage point and we will keep eliminating loopholes and exemptions. They didn’t do it for five years but then suddenly did it in 2019, and they do it overnight at a time when you need the revenue..
So you see, there is self-inflicted wound upon wound. If the government then had no fiscal space when the pandemic broke, you should not be surprised. And the government now doesn’t want to borrow. Let me make the last point here.
The stimulus that was announced post-pandemic, late as it was – it took them two months – 90% of the package is in the form of liquidity for banks and bank guarantees etc. Just 1% of GDP is in the form of fiscal stimulus. No more than Rs 2 lakh crores, which includes the Garib Kalyan Yojana, etc.
The point is that this is the worst economic crisis in the history of the country. I recall from when I was in the Planning Commission, the global economic crisis hit us. The fiscal stimulus size then was 3%-4% of the GDP, and, sure enough after two quarters, economic growth, which had slowed to 4%, bounced back.
Otherwise, if that had not happened, the average GDP growth rate between 2004 and 2014 would not have been 7.9% despite the global economic crisis and despite higher oil prices.
The current government, at the moment they came to power, they had a windfall gain in any case, which they did not utilise for raising public investment which had been falling – they used it for welfare measures. Therefore they had no fiscal space.
Now we still need a massive fiscal stimulus, in the absence of which we can’t put money in people’s hands. If we can’t put money in people’s hands, aggregate demand in the economy will not rise. If it does not rise, MSMEs will see no demand, and therefore their supply side response will not happen and they will not even borrow the money even though banks’ liquidity has increased and the repo rate has fallen.
What does everyone – the media, the public, even other experts – get wrong about the question of providing jobs in India?
The one recognition that is totally missing among academics, policymakers, you name it, is that in 20 years the demographic dividend will be gone. This dividend is a once-in-a-lifetime opportunity. It will never come back. It began in the early 1980s, and we’re already two-thirds of the way through.
The reason why China is China – they grew at the rate of 9% to 10% per annum and almost completely wiped out poverty in that 30-year period – is because they rode the wave of the demographic dividend. They started with the same rate of per capita income as India in 1979. Their economy is now four and a half times as large, and that’s how much larger their per capita income is.
And their demographic dividend ended in 2015. Interestingly, China has since 2015 become an ageing society. And you know what the Chinese leaders said: “Europe became old after they became rich. We have become old before we have become rich.”
Now Chinese leaders are saying this when their per capita income is four times ours. We are already going to become the largest population in the world. We have the largest number of poor in the world, more poor people than in all of Africa taken together. If we don’t create non-agricultural jobs during the lifetime of our demographic dividend, in the same way that China did, what will happen to our youth?
Our youth unemployment rate trebled between 2008 and 2013, from 6% to 18%.
We know now post-pandemic that the open unemployment rate after this May-June improvement is still 40%-50% higher than the highest unemployment in our country’s history (6.1% in 2018-19) and this is not going away.
We must get a fix on understanding that from this point onwards, we have to create more non-agri jobs, with GDP growth. Our better and better educated workforce, including girls getting better educated, will not want to work in agriculture, they will look for urban jobs in industry and services. If they don’t find these jobs, then we will miss the dividend. There is no question, no question but that this will happen.
Then the implication is that we’ll be surrounded by the same poverty, the same ill-health, the same malnutrition, that you and I have grown up with. For the rest of our lives, and the lives of our grandchildren, and their grandchildren. By 2040 we will become an ageing society. We haven’t provided for social insurance for our worker; 91% of our workforce doesn’t have old age pension, disability insurance, maternity benefits.
It is the most shocking thing.
The reason we don’t understand is because somehow the political class is caught up in a five-year election cycle, their time horizon does not exceed five years. Our bureaucrats are serving our politicians, and our bureaucrats are not domain experts – who also can’t understand the impending crisis, over and above the current crisis of the pandemic.
This was a problem in the Planning Commission, but it is a much greater problem in this entire government, particularly in the Prime Minister’s Office, that predominantly doesn’t like economists, doesn’t listen to them in any case.
Because if you did listen to economists, you would not take the four decisions that were self-inflicted wounds.
If in the next few years we don’t change the nature of our bureaucracy from a generalist bureaucracy into a domain-specialist bureaucracy – I write about that briefly in the Planning Commission book – we can forget about realising the present advantage of the demographic dividend. The dividend is a dividend because with new non-agri jobs, comes higher income, hence higher savings, and that leads to higher investment, and thus sustained higher GDP growth – and hence poverty reduction.
Why did China become China or Korea become Korea? Because their bureaucracy consists of domain experts, not generalist bureaucrats, who are agile in their environment and respond to two sets of things: The global economy is constantly changing so you have to respond to that. If you’re a highly integrated economy, and India has become a highly integrated economy, and your own economy is diversifying every day, you have to be able to respond to the constantly evolving nature of your own economy.
Our bureaucrats are too procedure-bound. They do not have the vision, and our politicians don’t have the vision. We have stopped Five Year Plans, which were essentially vision documents (all of East Asian nations still have five year plans, and have planning ministries). We have neither plans nor any vision document nor a planning ministry. So who’s going to give us the vision?
Please tell me, if our political class cannot get it – partly because they are not educated enough, partly because their time horizon is only five years – if the bureaucrats who have permanent jobs for life can’t get it or won’t get it because they are generalists, then where is this country going?
What three books / podcasts / papers / articles should we read on the current moment or on the subject in general?
- Karan Thapar’s recent interview on the economy with Dr Pronab Sen, former Principal Adviser, Planning Commission, and Chief Statistician, Government of India
- Karan Thapar’s recent interview with Prof Ashish Jha, Harvard Global Health Centre, Harvard University. He is an epidemiologist, who explains how the pandemic spread in India is much worse than the government data seems to suggest.
- Santosh Mehrotra and J Parida, India’s Employment Crisis: Rising Education Levels and Falling Non-agricultural Job Growth, October 2019