The new number that is on everybody’s lips in September is 23 (actually 23.9)% - the dramatic drop in Gross Domestic Product (GDP), for the April-June quarter of 2020-2021. Given that consumption had dropped owing to the lockdown, firms were not investing in fixed assets such as plants, machinery, etc., and global markets were relatively inaccessible due to the pandemic, the numbers should have come as no surprise. The only sector that grew was agriculture, at 3.4%.
Of God ... and Goals:
In a country where stoic faith in Karma can help in overcoming the biggest of setbacks, it is easy to pass off the decline in GDP as an ‘Act of God’. However, much as we would like to console ourselves, ‘God’ had nothing to do with this ‘Act’ of decline. In fact, even before the pandemic hit our shores, India was at serious risk of going back to the 3% growth rate that had defined it for much of the period up to the 1990s, and which has been pejoratively termed the ‘Hindu growth rate’.
India’s growth rate had continuously declined from 2016-17 and had halved to 4.2% in 2019-20. More importantly, the Gross Value Added - a measure of what our sectors really produced—had declined to 3.9% over the same period. Despite the call for ‘Make in India’ earlier and ‘Atmanirbhar Bharat Abhiyaan’ later, industry grew at a mere 0.8% in 2019-2020, with the manufacturing sector growing at 0%. To put matters in perspective, in 2006-07, when India grew at 9.6%, the average growth rate of industry was 12.9%, while manufacturing grew at 14.3%. Throughout 2013-14 to 2018-19, growth rates of industry and manufacturing, though they had almost halved, were still at 7.5% and 7.8% respectively.
Output growth, by itself, is less important than growth in employment. India has exhibited a phenomenon of jobless growth in the past, with growth in jobs not being commensurate with a growth in output. What is more important, however, is the impact of a growth (or fall) in output across various sectors, especially manufacturing and industry, on employment. What if output grew by 1%? How much of such growth would translate into greater jobs? There are sectoral differences in the ability to create employment.
It has been found that the agricultural sector does not contribute to job growth, even if output within the sector grows. In fact, a 1% growth reduces jobs in agriculture by 0.08% and has to do with the substitution of labour by capital and automation to raise agricultural growth. The construction sector presents a picture of a sector where almost all growth gets translated into a growth into employment. It is also one that is more labour intensive than, say, sectors like financial services, real estate and professional services. The manufacturing sector is far less useful in this regard, with a 1% increase in output leading to only a 0.4% increase in jobs, while sectors like electricity, gas and water supply, utility services and mining also share agriculture’s inability to create jobs despite increase in output.
It appears then that the sectors that have been growing have very little ability to add to employment.
The third goal is that of maintaining inflation rates through an inflationary targeting monetary policy that India adopted in 2016. With the headline Consumer Price Index breaching the psychological 6% mark, even as the divergence between the wholesale and consumer prices has grown (see my column published in this newspaper on August 19), this policy is now being questioned. There seems to be evidence that such targeting may have been at the cost of growth. Which then brings us to the third G.
Of Government Policy:
Which of these goals should take precedence as regards government policy? While the government and the RBI have been focusing on growth and inflation respectively, there has been no ‘godfather’ for unemployment. Thus, while we have headline measures for GDP growth and inflation that are tracked regularly and used for policy interventions, there has been no such attempt to announce a headline measure of unemployment for policy purposes. A starting point would be to announce a headline unemployment measure and a clear goal for unemployment reduction that the government would seek to achieve.
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Such unemployment reduction then should follow a focused approach. With fiscal stress and limited resources at its disposal, policy interventions should focus firstly on those sectors that can yield the greatest impact. A recent article published in another platform indicated the possibility of a K-shaped recovery post-pandemic, with the rich becoming richer and the poor poorer. A bailout of the financial sector, while politically imperative, may accentuate the K-shaped growth, by cushioning the rich, while at the same time leaving the construction sector, with its higher employment potential, devoid of funds.
Finally, the policy of inflation targeting may be revisited. The goal may be to ensure price stability, without fixing it within a range of 4-6% as currently practised. It is time we changed our goals to reflect more an ‘act of focused government policy’ than an ‘act of God’.
Tulsi Jayakumar is Professor of Economics & Chairperson of Family Managed Business at Bhavans SPJIMR, Mumbai. She can be reached at tulsi.jayakumar@spjimr.org.