India Transformed

by Rakesh Mohan

  (ii)    The ‘quality of growth’ is also important in determining the extent of the trickle-down. Some growth processes, e.g. those dependent primarily on mineral exploitation, do not lead to a wide spread of benefits, whereas growth processes that involve faster growth in agricultural GDP are much more likely to do so. As it happened, agriculture grew much faster in the second period, at 4.2 per cent per year, compared to only 2.7 per cent in the first sub-period, and this must have contributed to a greater decline in poverty.

  (iii)   Finally, the second period also saw an intensification of anti-poverty schemes, especially the rural employment guarantee programme plus various schemes to support rural livelihoods. Anti-poverty schemes represent what may be called a ‘direct attack’ on poverty, independent of the more general effect of aggregate growth and even sectoral growth.

  All three factors enumerated above are relevant, but advocates of poverty reduction tend to focus exclusively on direct programmes of poverty reduction, dismissing (i) and (ii) above as mere trickle-down approaches. Not enough research has been done quantifying the contribution of each factor in any specific period, or in a particular state. This is a particularly valuable area for future research, especially focusing on the relative effectiveness of these three factors in the different states.

  Employment creation is another dimension of inclusiveness and one that is much discussed globally. Complaints about ‘jobless growth’ are commonly heard in many industrialized countries, and similar complaints can be heard in India too. However, it is important to recognize that there are some special features of the problem in India. Open unemployment rate is not a good indicator of the scale of the problem. The unemployment rate in India varies from a low of around 3 per cent of the labor force, to a high of 7 per cent, depending on the particular definition of employment used, but the important point is that whichever measure of employment we use, the rate of unemployment does not show a significant increase over time. For example, the Usual Principal and Subsidiary Status (UPSS) measure shows unemployment of 3.17 per cent in 2004–05, falling marginally to 3.14 per cent in 2011–12. The reason why open unemployment is not a good measure of performance in this area is that in a developing country, where incomes are generally low and there is no social security, people are too poor or vulnerable to remain openly unemployed. They therefore take whatever job is available, even if the remuneration it yields is very low. In effect, many of those who are counted as employed in the statistics are actually underemployed.

  The problem lies not in the lack of total employment opportunities generated, but in the quality of the employment. In 2016, Santosh Mehrotra reports that in 2004–05, total employment was estimated at 459.1 million, with almost 82 per cent in the unorganized sector and only 18 per cent in the organized sector. Furthermore, of those in the organized sector, only about 46 per cent were in formal employment with social-security protection, while the other 54 per cent were ‘informally’ employed, without full benefits. This latter category includes casual daily labor and contract workers. By 2011–12, the total employment had increased to 474.3 million, an increase of only 3.3 per cent over seven years. This looks very low, but the labor force had also expanded by 3.1 per cent in this period, reflecting a large increase in school intake as a result of the drive to increase schooling. The rate of unemployment, therefore, actually fell.6 Total employment in the organized sector increased by 75 per cent from 58.2 million to 101.6 million, increasing the share of the organized sector to 21.4 per cent. However, as much as 84 per cent of the increase in employment in the organized sector consisted of informal hiring so that the share of informal employment in the organized sector increased from 54 per cent in 2004–05 to 67 per cent.

  The critical employment challenge in the years ahead is how to encourage sufficient growth in formal employment in the organized sector. Mehrotra estimates that such employment increased by only 6.8 million in the seven-year period of 2004–05 and 2011–12, or less than one million per year. Against this, the labor force is expected to increase by about 7 to 8 million per year, which could be higher if the presently very low female-participation rate increases. Most of the new entrants are better educated and have high aspirations for good-quality jobs in the organized sector, with some degree of social security. Although one should expect that many of them would be absorbed in well-paid self-employment, even if half the increase, or say, about 3.5 million, look for formal employment, that is much larger than the estimated addition of 1 million jobs per year in formal employment in the recent past.

  It is important to recognize that there is no inconsistency between a very good performance in poverty reduction and a poor performance in providing good-quality employment. A decline in poverty only requires an increase in incomes in agriculture accruing to self-employed small farmers and higher wages for casual labor in both agriculture and construction, the latter being a sector that can readily draw unskilled labor from rural areas. While expanding employment in these areas are positive developments, they are of little interest to the better-educated youth entering the labor force, who are no longer looking only for low-quality employment opportunities that will only raise them slightly above the poverty level. They are looking for absorption in regular employment in the organized sector, a dimension in which performance thus far has been very poor.

  The expectations of the younger and better-educated new entrants to the labor force can only be met through faster growth, especially in relatively labor-intensive manufacturing, which requires relatively low levels of skill. The organized sector needs to expand more rapidly than the unorganized sector, and with employers in the organized sector being willing to expand formal employment. This calls for action on several fronts. Since the most labor-intensive firms are small or middle-sized, it is necessary to create an economic environment where these firms flourish and expand. The objective should not be to simply keep a very large number of very small-scale operations in business, but to encourage new small firms to enter and grow to a level where they can provide good-quality employment. Their growth will displace the less successful small firms in the same area, but this structural churn has to be accepted.

  The areas where action is needed to achieve these objectives are well known. They include:

  (i)     creation of improved infrastructure, especially availability of good-quality power and improved transport and logistics;

  (ii)    improving the ease of doing business with both state government and central government agencies;

  (iii)   removing biases against the growth of the organized sector vis-à-vis the unorganized sector (plugging tax avoidance would help greatly in this context and the introduction of the GST will help);

  (iv)   introducing sufficient flexibility in labor market policies, including flexibility in laying off labor, to encourage firms to expand their formal labor force;

  (v)    and finally, removing distortions in the land market that have become a major constraint according to Ghani et al. Action is being taken in some of these areas, but it is not clear that it is sufficient. Relatively little progress has been made thus far in addressing labor and land market constraints.

  The third dimension of inclusiveness where India’s performance is also disappointing is in the provision of essential public services such as health, education, clean drinking water and sanitation. This failure has been extensively discussed in literature, see in particular Amartya Sen’s and Jean Drèze’s An Uncertain Glory: India and its Contradictions (2015). The good news is that the situation is improving in both these areas, but the bad news is that it is not improving as fast as one would have hoped for. There has been a substantial increase in the coverage of primary education, which is now being expanded into secondary education, but problems of quality remain serious, especially in rural areas. Unless the poor have access to good-quality education, the expansion of enrolment will not help much and will certainly not level the playin
g field to provide equal opportunity.

  Progress in the delivery of public health services is also inadequate. All the health indicators are improving, but in many respects, especially relating to sanitation and child malnutrition, India’s performance is poorer than that of other low-income countries in Sub-Saharan Africa. It is also poorer than neighbouring Bangladesh as Sen and Drèze have shown.

  Faster progress in both education and health is not only critical for improving the welfare of the bulk of the population, it is also critical for economic expansion. No country has been able to achieve rapid growth of GDP for an extended period without raising the levels of education and health of the bulk of the population to reasonable levels. China had achieved this before it entered its high-growth phase. India is probably just getting to where China was twenty years ago. The solution calls for action in two different dimensions. First, it certainly requires much larger government expenditure in the provision of these services. Expenditure by both the Centre and the states on education and health needs to be increased by at least 3 percentage points of GDP over the next five years. This will have to be fitted within the fiscal constraints of both the central government and the state governments, which in practice requires prioritization within the expenditure budget, including phasing out subsidies to those who don’t really need them, combined with mobilization of additional budgetary revenues. Second, it calls for substantial improvements in state capacity to ensure that increased expenditure actually delivers results. The delivery of these services is the responsibility of state and local government functionaries, and therefore, most of the improvement in delivery systems has to be orchestrated at that level.

  Has the Growth Been Sustainable?

  Finally, it is relevant to ask whether the faster growth generated in the post-reforms period has been sustainable. This is perhaps the most disappointing aspect of the performance. Rapid growth is bound to generate environmental stress, which takes many forms. It includes:

  (i)     erosion of forest cover because of felling of trees;

  (ii)    pollution of natural waterbodies such as lakes and rivers because of dumping of untreated sewage, industrial effluents and run-off of fertilizers and pesticides;

  (iii)   local air pollution due to burning of fossil fuels and other unsupervised incineration of municipal waste, along with crop residues, and construction activity without precautions to prevent spread of particulate matter;

  (iv)   traffic congestion in cities due to inadequate transport planning and absence of public transport;

  (v)    increase in soil salinity from excessive watering and fertilization;

  (vi)   accumulation of municipal solid waste in urban areas and unscientific methods of waste disposal ;

  (vii)  and finally, emissions of greenhouse gases into the atmosphere because of burning of fossil fuels, leading to global warming.

  Of the seven negative consequences listed above, the last is a global problem, and it can be argued that an optimal effort can only be made with global cooperation and some agreed system of burden sharing. We have seen some progress in this area recently, but not enough, and the new US administration has signalled some rethinking which adds to the uncertainty. However, the other six are essentially local problems where the benefits of action taken to control negative effects are all internal to the economy. There is no excuse for not taking action to control these negative effects. The need to do so has been known for quite some time, but it has not been translated into effective policy formulation and implementation. The result is that whether we look at forest cover, water quality or air quality, the situation is actually deteriorating.

  In the case of forest cover, which is critical for groundwater recharge and to protect against soil erosion, the present level of 23 per cent by area is very far below the target of 33 per cent, and although there has been a marginal upturn in the area under forest, the quality of the cover has deteriorated. In the case of water, all our major rivers are heavily polluted and, in most stretches, are well below bathing quality. This is because most of the sewage generated in the cities flows untreated into these rivers. The total sewage treatment capacity in India is only about 30 per cent of the total urban sewage generated and even that is not fully utilized. Industrial effluents are also not adequately treated before being dumped into natural waterbodies. The inability (or more likely, unwillingness) to impose strict control on small-scale units, threatening them with closure if they don’t comply, is an important explanatory factor. Air quality in Indian cities has deteriorated alarmingly, and the WHO recently declared Delhi as the city with the worst air quality in the world. The World Bank has estimated that the cost of high air pollution in India is as much as 8.5 per cent of GDP.

  In short, we have some way to go before we can arrest the ongoing deterioration in most environment-related indicators, and it will obviously be an even longer haul before we can actually reverse the deteriorating trend. The good news is that most of this can be tackled if there is determination and political will. Containing these undesirable consequences of unsustainable growth calls for high-quality design of regulation, optimal structures of pricing and penalty to discourage polluting activity, combined with firm enforcement. Unfortunately, the regulations that exist in these areas are poorly designed and even more poorly enforced. Enforcement is largely in the realm of state governments, and vested interests are strongly entrenched. Better regulation will inevitably involve higher costs, but this is only giving teeth to the principle that the polluter must pay. In practice, the costs would be borne largely by the higher-income population, and in the absence of effective action, the cost of pollution is borne disproportionately by the poor.

  Fortunately, this is an area where public consciousness has begun to increase and the shortcomings are increasingly being pointed out by the media. The judiciary has also been more active in intervening in environmental issues. While judicial intervention is no substitute for effective regulation and enforcement, it helps to raise consciousness and provides an area of focus for NGOs to complain. It remains to be seen whether all this can be translated into determined action by both the central and state governments.

  To summarize, there is much that has been achieved in the twenty-five years since the reforms began, but as the old problems were solved, new ones have surfaced, and solutions to these need new initiatives that will have to be as far-reaching as the original reforms were.

  Select Bibliography

  Ahluwalia, Montek S. ‘The 1991 Reforms: How Home Grown Were They?’, Economic and Political Weekly, 16 July 2016.

  Datta, K.L. Poverty and Development Planning in India. New Delhi: Concept Publishing Company, 2014.

  De Long, J. Bradford. ‘India Since Independence: An Analytical Growth Narrative’. In Modern Economic Growth: Analytical Country Studies, edited by Dani Rodrik. Princeton: Princeton University Press, 2001.

  Drèze, Jean and Amartya Sen. An Uncertain Glory: India and its Contradictions. London: Penguin/Allen Lane, 2013.

  Mehrotra, Santosh. Realising the Demographic Dividend: Policies to Achieve Inclusive Growth. New Delhi: Cambridge University Press, 2016.

  Panagariya, Arvind. India’s Trade Reforms. India Policy Forum, vol. I (2004): 1–57. Washington DC: Brookings Institution Press.

  Rodrik, Dani and Arvind Subramaniam. ‘From Hindu Growth Rate to Productivity Surge: The Mystery of the Indian Growth Transition’. IMF Working Paper no. WP/04/77, Washington, D.C., May 2004.

  3

  Remembering 1991 … and Before

  Omkar Goswami

  It seemed like the ushering of a new India. The signals were just right—of a government that had finally shown purpose by leveraging a major economic crisis to kick-start the much-needed fiscal and industrial reforms.

  The word ‘pentimento’ describes hazy images that sometimes peep through layers of over-painting on old canvases. Trying to remember the world of 1991 in 2016 is
exactly that—dim images of a quarter century ago that briefly appear in one’s memory, overlaid by myriad changes that have occurred since. Here are some:

  Telephones. Unless you were a politician, bureaucrat, an ‘important’ person or a ridiculously persevering soul, it was virtually impossible to get a telephone in any of the main cities. The hard fact: in 1990–91, India, with a population of 839 million, had just 4.5 million telephone lines, or a teledensity of 0.53 phones for every 100 citizens. Owning this princely possession didn’t mean that you could connect to the chosen few who did. Quite often, the phone was unusable because there was no dial tone, engaged for no obvious reason, or cross-connected. There was virtually no direct dialling outside the city limits. Local calls were not charged according to their length or time of day: it was 25 paise per call.

  Liquefied petroleum gas (LPG), or canned cooking gas. There were two choices: either wait till eternity or use your connections to jump the colossal queue. For the middle class that didn’t have LPG, the only other choice was kerosene. To get it, you needed a ration card, perhaps the most valuable document in pre-1991 India. Without an LPG connection, you were entitled to 6 litres every fortnight, available in most parts of Delhi on the first and second of the month, and then on the fifteenth and sixteenth.1

  Bank tokens. With ATMs and Internet transactions, few from today’s urban India will remember the sheer tedium of banking in the early 1990s. You first deposited the cheque at one counter and received a numbered brass token. Many entries were made in different ledgers as the cheque tortuously made its way to the cash counter, which could take three quarters of an hour on peak transaction days. The cashier would holler your number, and you would rush to get the money and escape.