The financial crisis and recession have led to very low interest rates, but have also destroyed jobs, hamstrung economic growth and led to sharp declines in the values of many homes and businesses, said Ben Bernanke the American economist. Are we also in the same trap? Economic growth and Jobs, both seem to be crisis ridden. A cumulative market fall fells both economic growth and jobs. The growth decelerated to a five-year low at 5% in the last quarter. Almost 11 million lost their jobs during 2018, a report by the Centre for Monitoring Indian Economy (CMIE) said with vulnerable groups, the worst hit. The number of employed recorded in December 2018 was 397 million, 10.9 million less than 407.9 million a year ago. India thrives on massive unorganised sector, largely in rural India having two-thirds of the population, but accounted for 84% of job losses. An estimated 9.1 million jobs were lost in rural India while urban India lost 1.8 million. Economic growth is also determined by the rate of increase in labour force and productivity growth. If fewer people are working, unless there is a surge in new workers or everyone suddenly become more productive, growth slows.
Manufacturing growth almost collapsed at 0.6% in June quarter, against 3.1% in March quarter ringing alarm bells across the sector. Among services sectors, only trade, hotels and communication segment grew faster in the June quarter at 7.1%, compared to March-quarter of 6%. Both financial services at 5.9% and public administration services at 8.5% decelerated in the June quarter. The only sector that registered a robust pick-up was electricity, growing at 8.6% in the June quarter, from 4.3% in the preceding quarter. However, with so many subsidies in the sector, the net revenue only dipped.
GDP at 9.36% in July 2016 steadily fell to 5.99%, a year later, before rising to 8.1% in April 2018, and falling again to 5% in the first quarter of 2019. The cyclic behaviour could push it upwards from here on to at least 7%. However, for that to happen, sound economic principles must be adhered to, though it will be a struggle to keep it there amidst a global slowdown. This will need a better understanding of the fall in fortunes of the growth in economy.
The banks stopped lending, leading to a credit crunch affecting the ability to invest in expansion or even make good perceived losses, leading to a rise in unemployment quotient that created a negative multiplier effect. Two important drivers of economy, construction and manufacturing, that support more than 300 ancillaries, saw a tell-tale fall, leading to a negative wealth effect and fall in confidence. A sharp cut in spending, towards the end of the financial year by the government, though it did meet the fiscal deficit target of 3.4% of GDP, as revenue fell short of estimates, led to further crisis. The low wage growth or the real wages falling due to inflation rising to 3.05% in May 2019 compared to 2.99% in April 2019 did not help either.
How does the economy revive from here on? Do only ‘rich’ people have the ‘extra’ money to buy things and invest to create economic growth? Do we really want to tax that ‘extra’ money and give it to the government to spend? Does that make any economic sense outside of politics and our emotional desire to make everyone suffer equally through these tough times? The only choice for sustainable economic growth is investment in the right areas. Two main aspects to economic growth are aggregate demand that needs consumer spending, increased investment, increased government spending and a thrust on exports-imports and aggregate supply that needs raising productive capacity improving efficiency of economy and improving labour productivity. Aggregated demand can be raised by lowering interest rates, rationalising tax structures that increase real wages, increasing export spending, causing certain devaluation to make exports cheaper and imports more expensive, increasing domestic demand, boosting automobile industry by GST cuts, promoting hybrid vehicles rather than pure EV’s and boosting construction industry by suitable tax rate cuts, and massively promoting self-redevelopment through loan melas to kick start stalled projects. Of course, the aggregate supply will improve due to new technologies like the Internet, AI, ML, new management techniques, and rationalisation of Labour laws. Out of box concepts of skilling for the market and offering flexible working practices, working from home, promoting self-employment, encouraging workers with skills that are in short supply to migrate and raising retirement age will all help.
The government also must increase the public sector investment with improved infrastructure and increase spending on Education and Skills. Expansionary fiscal policies like cutting taxes to increase disposable income and encouraging spending and expansionary monetary policies like cutting interest rates to boost domestic demand must be explored. These However, can increase budget deficit leading to higher borrowing. But then what does one do when global recession is setting in.
Manufacturing, be it in whichever sector, is plagued by limited access to abundant raw materials and natural resources, competitiveness “within the factory gate costs” offset by the total cost of doing business, time and cost escalation due to long gestation periods for capital projects, poor logistics in infrastructure reducing overall competitiveness, low investment in R&D, MSME sector’s distress, where defaults are the highest across all credit classes, and complex policies and procedures. Though the government to its credit is addressing some of these concerns, it needs to do a lot more. It can, for it is the most stable today. The lack of proper infrastructure pulls down India’s GDP growth by 1% – 2% every year. Public investment supplemented by private sector investments, allowing foreign players to invest in infra-Projects must be encouraged.
Agriculture has been the bug bear and the milch cow in the same breath for a long time now. The sector needs serious introspection and proactive measures like use of cutting edge technology, promotion of cluster land banks with cold storage infrastructure, drip irrigation techniques, water conservation methods, use of high yielding hybrids, thrust on organic farming, massive cattle conservation and active promotion of ‘Farm to Home’ concept.
We need economic growth, not a growth of joblessness. A sustainable development framework for employment must include a job creation strategy. Growth is a spiral process. It doubles back on itself, reassesses and regroups. A sequel will explore new strategies and new employment opportunities.