Article (October-2019)


Productive investments and labour reforms can beat the slowdown

Surendra Nath

Designation : -   IAS(ret), former Secretary to GOI, Professor, Business Laws & Industrial Relations

Organization : -  Amity University, Noida


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This analysis of factors contributing to economic growth and employment generation will help in understanding the causes of economic slowdown and job losses, and working out possible strategies for promoting economic growth, and creating and sustaining jobs.

Trends in GDP growth rate are an index of economic growth. Annual GDP growth rate in the last few years has been as follows :

2019-20 (April- June Quarter- Q1): 5%

2018-19: 6.8%

2017-18: 7.2%

2016-17: 8.2% (this was the year of demonetization on Nov. 8, 2016, which sucked 86% of the cash money in circulation, which had been the main stay of the informal sector economy, providing about 90% of the total employment in India).

2015-16: 8%

2014-15: 7.4%

2013-14: 6.4%

Economic growth, which was on the upswing during the financial years 2013, 2014 and 2015, peaked up in 2016 (the year of demonetization), and then started slipping down in the next three years to a 6 year low of 5%. Economic growth is the basis of creating and sustaining productive employment. Economic slowdown will, therefore, obviously, lead to reduction in employment.

Index of Industrial Production (IIP) is also an index of economic growth and employment generation. In the last few years, the trends in IIP have been as follows :

2018-19: 3.6%

2017-18: 4.4%

2016-17: 4.6%

2015-16: 3.3%

2014-15: 4%

2013-14: 3.3%

IIP, which had peaked up to 4.6% in 2016-17 (the year of demonetization), thus, started slipping down in the subsequent years, almost in tune with GDP growth rate. IIP relating to manufacturing sector fell by - 0.4% in March 2019. Consumption of goods and services is a factor which contributes to economic growth. Trends in the consumption of goods and services are captured by trends in GST (Goods and Services Tax) revenues. GST revenues, which, thus used to be over a lakh crore of rupees till July 2019, slid to below Rs one lakh crore in August 2019.

August 2019: Rs 98202 cr

July 2019: Rs 1.02 lakh cr

June 2019: Rs 99939 cr

May 2019: Rs 100289 cr

April 2019: Rs 113865 cr

March 2019: Rs 106577 cr

There has thus been an all round slippage in the growth of GDP and industrial production in the last three years after 2016-17, the year of demonetization. Consumption of goods and services in India is also not going up.

Let us now take a look at the top 5 sectors generating nonfarm employment in India. These are (Livemint 12.4.2018) :

Construction and Real Estate : 35.74%

Trade : 14.56%

Miscellaneous Services : 8.43%

Transport and Storage : 7.44%

Education : 6.26%

Construction and real estate is the biggest contributor to nonfarm employment. Much of the construction work is in the informal sector, and has, obviously, suffered the brunt of demonetization. Real Estate tops the bankruptcy chart (Business Today. 19.2.2019). Out of 1984 bankruptcy cases in the 2 years ending Dec. 2018, 235 relate to real estate, and 153 to trading - the two sectors contributing to about 50% of the nonfarm employment. Stamp duty mostly comes from real estate. It has been a major source of revenue to states, and has been increasing at about 15% annum in most of the states. Let us take a look at the stamp duty revenues of MP, as an example of the trend ( In the last few years stamp duty revenues of MP have been as follows :

2018-19: Rs 5304.77 cr (+10.2% over the previous year)

2017-18: Rs 4813.89 cr (+21.95%)

2016-17: Rs 3947.39 cr (+1.67%, the year of demonetization)

2015-16: Rs 3882.53 cr (-0.37%)

2014-15: Rs 3896.98 cr

Reduction in the buoyancy of stamp duty revenue around the period of demonetization in 2015-16 and 2016-17, is thus in evidence.

Textile sector, which employs about 4.5 cr workers, is a significant contributor to employment. Export of cotton yarn fell to 34.6% during the quarter April-June 2019, according to Northern India Textile Mills Association. Automobile sector, which employs about 3.7 cr workers, is another major contributor to employment. Sale of passenger cars slipped by -31% in July 2019, according to Automobile Association of India.

So, it is obvious that the overall employment situation is subdued. What are the possible causes?

Employment is generated by productive expenditure. Consumption expenditure also produces employment. But it lacks the multiplier effect of capital investment or productive expenditure. An analysis of trends of govt. expenditure shows that the proportion of capital expenditure of govt. has steadily fallen (Quality of Fiscal Spending has taken a Beating- Radhika Merwin, 1.2.2019).

1950-51: 34.59% (of total govt. expenditure)

1960-61: 52.22%

1970-71: 44.35%

1980-81: 36.71%

1990-91: 30.19%

2000-01: 14.67%

2015-16: 14%

2016-17: 12%

2017-18: 10.1%

2018-19: 13%

Capital investment produces a multiplier effect on economic growth and employment, while revenue expenditure or consumption only leads to economic growth, without the multiplier effect. Those who are concerned with promoting and sustaining productive employment have to restore the proportion of capital expenditure.

Private sector expenditure of companies is getting diverted to social welfare through legislative changes, like the one requiring at least 2% average profits, during the last 3 years, of companies with a profit of Rs 5 cr or more, or a turnover of 1000 cr., being spent on schemes like poverty alleviation or PM relief fund or other central govt. funds, under Sec. 135 of the Companies Act 2013, as CSR expenditure. So much so that in Lok Sabha 2019, a bill was being brought to provide imprisonment up to 3 years, and fine up to Rs 25 lakh on companies defaulting in diverting their profits from capital expenditure to social welfare, to which now Govt. has assured that it will not be a criminal offence.

Under Sec. 182 Companies Act, 2017 amendment, companies are now making secret payment to political parties, mostly to the political party in power. This has created a combination of companies looking for govt. contracts and political parties, which grab large amount of loan from banks controlled by the political party in power, despite repeated defaults. Defaulted bank loans have swelled to about Rs 10,50000 cr. During 2018 and till May 2019, companies had made a secret payment of Rs 5029 cr, about 95% of it to the political party in power in central govt. Companies profits normally go into capital investment which lead to economic growth and sustain productive jobs.

Profits of even public sector companies are being diverted to unproductive use, like Rs 146.83 cr paid by ONGC, IOC, BPCL. HCL, OIL in 2016-17, for Sardar Patel statue in Gujarat.

Payment of cash or free goods, usually close to elections, from govt. budget by the political parties in power has been on the increase. Rs. 5215 cr. was paid to 2.6 cr farmer's families in March 2019, close to the elections in April - May 2019. This is a form of electoral bribery. Lakhs of crores of rupees have been paid in cash for toilets, houses, or as free goods like LPG stove and cylinder for cooking, free insurance and overdraft from banks in the name of Jan Dhan accounts, are gratifications which induce votes. Lakhs of crores of rupees have been spent from govt. budget during the last few years on cash transfers and free goods, which adversely affects fiscal spending and reduces capital expenditure for creating sustainable productive jobs. When cash and free goods are available, people lose the motivation for participating in work. India has amongst the lowest rates of Labour Force Participation Rate (LFPR), which was 49.8% in 2018. During the same year, LFPR of Bangladesh was 59, and Srilanka 52.6. LFPR is the proportion of working age population (more than 15 years and less than 65), looking for jobs.

Unemployment data in India is unclear, because NSSO's quinquennial Employment - Unemployment Survey (EUS) was discontinued after 2011-12. After more than 5 years, in 2017-18 a new form of survey, Periodic Labour Force Survey (PLFS) was started. So, the unemployment related data is not comparable. According to PLFS India's unemployment rate was 6.1% in 2017-18. According to the 9 rounds of NSS EUS during 1972-73 to 2011-12, the unemployment rate was ranging between 2% to 3%.

The next question before us is as to what can be done through labour policy to increase productive employment, or to reduce job losses. Labour reforms, or say, cannot produce jobs. They can only reduce the restrictive effect of regulation. When the economic situation is fragile and fluctuating, flexibility in labour protection would, therefore, obviously help.

Minimum wages should also be kept on hold for some time, because the higher the wage. The greater is the risk of lay off during economic slowdown.

Prosecution of employers should be avoided through advisory and consultative role of labour machineries of state and central govts.

Some flexibility in locking up investible resources as employer's GPF contribution at the rate of 12% of salary bill, could, perhaps, be kept on hold, to increase investment and job opportunities.

During economic slowdown, those with lower skills and lower productivity are the ones who suffer most. So, up-gradation of vocational skills will help. Polytechnics and ITIs have been providing vocational skills. But we have yet to establish any institutions of repute in the field of vocational skills, like, for instance, the IITs. Up-gradation of our polytechnics and ITIs should, therefore, be taken up as an urgent project.

In sum, more capital expenditure by govts., productive investment by companies, and flexibility in the enforcement of labour regulations appears to be the need of the hour.