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Shankar Acharya: UPA's inclusion gets it wrong

The government needs to accelerate labour reforms to spur inclusive growth

Shankar Acharya 

For more than seven years the United Progressive Alliance (UPA) government has touted its distinctive brand (so claimed) of “Inclusive Growth”. There is nothing wrong with the basic idea, which is that the fruits of rapid economic growth should be widely shared, particularly by the poor and marginalised segments of society. But the strategy deployed has been seriously flawed. It has emphasised massive expansion of anti-poverty expenditure programmes, including the flagship Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and open-ended entitlement programmes for food and education. This approach has embedded large and continuing increases in government expenditures and subsidies in the Centre’s budget. Without commensurate increases in tax revenues, this has led to a series of large fiscal deficits (since 2007/08), which have fuelled inflationary forces and rising interest rates.

Quite apart from its well-known deficiencies of corruption, mismanagement and poor targeting, this approach is simply unsustainable in the medium and long run. It contrasts sharply with the far more effective inclusion strategy followed in successful East Asian countries such as China, South Korea, Malaysia and Thailand. These nations made rapid and sustained expansion of labour-using manufacturing activities (especially for exports) the centrepiece of their inclusion strategy. The success of their approach is obvious. South Korea joined the ranks of advanced industrial nation some years ago. China, which had average living standards comparable to India’s in the late 1970s, is now about three times better off and a rising super power. In essence, the East Asian approach banished (nearly) poverty by generating decades of double-digit industrial growth which sucked in their abundant resources of low-skilled labour (the poor) into factory employment.

This approach is echoed on page 297 of the government’s for 2010-11: “The key strategy for achieving in the has been the generation of productive and gainful employment, with decent working conditions, on a sufficient scale to absorb the growing labour force”. Nice thought but not followed up in actual policies and results, as the next sentences acknowledge: “The (2007-12) aims at generation of 58 million work opportunities… The 64th round (2007-08) of NSSO survey on employment-unemployment indicates creation of 4 million work opportunities between 2004-05 and 2007-08”. An achievement of 4 million in three years versus the aspiration of 58 million in five!

If this disastrous record was not bad enough, the story gets worse in the official data on employment in the “organised sector” (meaning all public employees and non-agricultural private employment in units with 10 or more persons). Between 2003 and 2008 (latest year reported in the Economic Survey) this inched up by only half a million workers to attain a paltry total of 27.5 million (including nearly 10 million government employees) out of a total labour force of about 500 million. In sum, by 2008, according to government data, only 6 per cent of India’s labour force were in “decent” organised sector jobs with high security, while 94 per cent toiled in casual, ill-paid and insecure (hire and fire) conditions. Indeed, the number of organised sector employees was unchanged from 27.5 million back in 1995, indicating the culpability of pre-governments as well in failing to foster job growth in the organised sector.

As for the crucial East Asian transmission mechanism for inclusion, the expansion of factory employment in manufacturing, “decent” organised sector jobs in the public manufacturing sector actually fell in India from 1.8 million in 1995 to 1 million in 2008, while in private organised units employment stagnated at around 5 million. Manufacturing sector employment accounted for a mere 18 per cent of total organised sector employment in 2008. Put differently, there were only 6 million employees in organised manufacturing compared to over 9 million in government jobs!

As all businessmen – and most competent economists – know, the principal obstacle blocking job growth in Indian manufacturing factories has been our exceptionally restrictive labour laws, which ensure job security for the tiny minority of organised sector employees while almost completely discouraging fresh hiring from the vast pool of ill- paid workers in the unorganised/informal sector. That’s why in India you see very few sizable factories in labour-using sectors like textiles, garments, leather products, low-end electronics, toys, etc, which formed the backbone of East Asia’s employment-intensive growth with inclusion. As someone said, “In a desert (created by our labour policies) you don’t expect to see hippopotamuses”! And now that wages have been rising fast in the successful East Asian nations (especially in the Chinese behemoth), these labour-using activities are shifting to places like Vietnam and Bangladesh rather than India, despite the availability of our hundreds of millions of low-skilled workers, desperately seeking factory jobs.

Apparently, successive governments (including UPA) have preferred to mouth pro-worker slogans, while perpetuating a policy regime that throttles growth of jobs very effectively. Rather than undertake that encourage real job growth, the has preferred to expand “make-work” doles (such as MGNREGS) and subsidies through government budgets to the many millions in casual, informal and part-time employment. Among the other unfortunate consequences of this very inferior approach to inclusion have been: the serious stunting of our manufacturing sector; enormous and rising population pressure on agriculture, for lack of other alternatives; the most “casualised” labour force in the world; the encouragement of a (unsustainable) subsidy culture; perennially stressed government budgets; a bias towards inflation; and growing schisms between haves/have-nots, organised/unorganised, urban/rural, skilled/unskilled, which are weakening the fabric of society and making governance ever more difficult. The political/ security problems of Naxalism and insurgencies in the north east and Kashmir are compounded, if not caused, by the fundamental failure to ensure rapid growth of decent, non-agricultural jobs.

A lament: If only all those well-meaning and dedicated social activists who campaigned so well and effectively for and other entitlement programmes would deploy their very considerable skills and commitment to the cause of reforming our job-stifling labour laws, we might actually achieve a successful strategy of

The author is honorary professor at Icrier and former chief economic adviser to the Government of India
The views expressed are personal