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Economy Jan 2, 2013

How UPA’s populism may have entrenched jobless growth

By R Jagannathan

This is one bit of statistic that should have the BJP-led NDA jumping over the moon with joy. But it probably won't, because it does not know why it has been the recipient of this good news.

One of the enduring legacies of Manmohan Singh's liberalisation has been jobless growth. The reasons are obvious to everybody: while reforming industrial licensing and capital markets, no reforms were done in the land and labour markets.

Thus while output grew, jobs didn't. People simply used more capital and machines to get production up.

GDP growth matters, but the quality of GDP growth may be more important than its quantity. Reuters

But the one exception to this rule was 1999-2004, which broadly corresponds to NDA rule. This does not mean the NDA was the author of this beneficial change, for the big growth in job creation may have been the result of the previous government's efforts or some exogenous factors, but the numbers are clear.

Writing in Business Standard, Abheek Barua tells us that during 1993-2009, employment growth in the Indian economy was just 1.7 percent, down from 2.4 percent in 1972-83, and 2 percent in 1983-1993.

This would have been worse but for the NDA period's 2.8 percent growth. What caused this jump? Barua is happy to leave this as an unexplained spurt. He says the "post-liberalisation average was shored up by a somewhat spectacular and unexplainable blip in employment growth to 2.8 percent between 1999-2000 and 2004-05."

But Barua's very next line tells us that this phenomenon needs close examination, for, as he points out, "in the 2004-05 to 2009-10 period, in which GDP growth hit historically its highest levels, job growth collapsed to virtually zero."

The big question is: why did the NDA time bring jobs growth at a time when GDP was growing slowly (5-6 percent), and why did higher growth in the next five-year period bring almost no jobs growth?

Is jobless growth a UPA curse or was the NDA surge the result of something it cannot claim credit for?

One can speculate about the answers.

The 1998-2004 NDA period was a period of high interest rates and slow growth. The only external variable that could have helped was the Y2K phenomenon which would have pushed up IT jobs phenomenally. But, as against Y2K, we also had the dotcom bust, the Kargil war, and the US-led sanctions against India after the Pokharan-2 nuclear blasts.

Net-net, nobody can claim the NDA had better operating conditions for creating more jobs than the UPA.

In the next UPA-1 period, global growth winds were extremely positive (the George Bush tax cuts, the liquidity binge) and India directly benefited from it as GDP grew to 8-9 percent consistently. It seemed we have arrived.

And yet, jobs did not grow.

It is not possible to imagine any exogenous variable affecting jobs growth back home. Clearly, if jobs were not growing when GDP was, the faults have to be sought within.

The one major change during the UPA regime was the huge transfer of resources to rural welfare schemes, especially NREGA and farm loan waivers.

Did these impact jobs growth?

The one thing NREGA did for sure is create a wage-price spiral. It pushed more farmers to opt for farm mechanisation. Higher wages and loan waivers may also have allowed farm labour to seek more leisure time rather than work in the short run. Since rising rural wages also upped urban wages, it may have had the effect of increasing the capital-intensity of Indian industry, though we don't know this for sure.

The only conclusion we can draw from the stats is this: GDP growth matters, but the quality of GDP growth may be more important than its quantity. A corollary could be: welfare is fine, but if welfare leads to a reduction in jobs, what is the net benefit to the country?

It is also interesting to speculate about the possibility that if the NDA had not lost the 2004 elections, we could have had explosive jobs growth since its core economic philosophy was not welfarist. Unfortunately, the UPA's electoral success in 2004 and 2009 has forced all politicians to think welfare and giveaways. Are we in for more jobless growth growth?

by R Jagannathan

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