NYAY works against jobs

Jobs has taken centre-stage in this election. While the government is on the defence (no pun intended), the opposition is gunning hard on the jobs front. The Congress, which was the main opposition party in the state elections of November 2018, made several promises to provide some relief to select unemployed in its campaigns and reaped benefits.

But, such promises cannot go very far. No political party can really promise jobs because this is mistakenly construed as a promise for government jobs and the government is not very enthusiastic in offering jobs itself. Of course, no party can explicitly promise jobs in the private sector. But, they need to do something about this elephant in the room.

Unlike inflation, which has proven political power, the unemployment rate has historically not been a macro-economic indicator with similar electoral potency in India. It is worth wondering if it was a political conspiracy to never measure the unemployment rate as a fast-frequency indicator so far. If there are no measurements then there are no arguments. But, fast-frequency measurement of the unemployment rate and a host of other labour market indicators are now well established. CMIE has started this and the government will eventually produce its own fast-frequency measures of employment / unemployment. Hopefully, we will start debating the problem and not just its measurement. Because, the issue of jobs will not leave centre-stage in a hurry.

Politicians need not promise jobs. They should, however, promise to keep the unemployment rate in control. This is practical and it is also a sensible macroeconomic objective.

In February 2015, Government of India and Reserve Bank of India signed the Monetary Policy Framework which formally adopted flexible inflation targeting in India. Since then, inflation has declined and remained in control. The RBI can claim success. But, this success may have come at the cost of high unemployment.

The monthly unemployment series from CMIE is young as it starts only in 2016. Further, the series was disrupted by demonetisation which crashed the labour force participation rate in the months following demonetisation in November 2016. Data from November 2017, a full year after demonetisation suggests that the Philips curve seems to be at work in the short run in India. i.e. low inflation is accompanied with high unemployment.

This is of course, very preliminary. But, if there is indeed a relationship between inflation and unemployment at play in India then law makers need to take a stance on the combination of inflation and unemployment they prefer, and not just inflation.

Government apologists are busy counting the creation of jobs. But, the problem is not the creation of jobs -- jobs are always created. The current problem is that on a net basis these are not enough. The important macroeconomic metrics are the prevalence of a high unemployment rate and in the case of India also the low and falling labour force participation rate.

Political parties need to think through and make promises to the electorate about their stance on the tradeoff between inflation and unemployment that they hope to achieve.

The Congress has probably assumed that there is no solution to the jobs challenge. And so it may have deduced that if jobs cannot be provided, it may at least provide the poor with assured incomes. This is a defeatist approach. It is more important to provide jobs to those who seek jobs than to provide income as doles. Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime -- goes the old adage.

Governments do find the resources to fund their pet projects. The biggest problem with NYAY (Nyuntam Aay Yojana) is not the resources or the administrative nightmares of identifying the poor or the perverse impact of preservation of the scheme.

The biggest problem with the scheme is that it will worsen India's biggest problem on the labour front. It will keep the labour force participation rate low or it may even depress it further. We need more hands to the till, not less. Feeding them without work will keep them away from work. This would be a structural damage to the economy and to society. India already has among the lowest labour force participation rate in the world. NYAY will make it worse.

NYAY is the outcome of India's neglect of the severe jobs challenge that it has been facing. It is best used as a temporary reprieve before we start using the unemployment rate and the labour force participation rate as macro-economic indicators of economic and political relevance along with the inflation rate.