The issue of unemployment is back again, and conveniently so. Critics are quick to point out 'jobless growth' as the most important reason for the surprise defeat of the National Democratic Alliance in the general elections.
Also, argue the critics, the divestment of public sector enterprises has hurt the sentiments of the people (apart from a potential employment loss) and this may have contributed to the NDA's downfall.
In this article, we explore the relative merits of such an argument and in the process discover that there are more myths than clarity on these issues.
It is true that the current employment situation has worsened. In fact, the overall employment projections have consistently fallen short of the projections in the earlier Plans.
For example, the Eighth Plan had envisaged an employment growth rate of 2.6 to 2.8 per cent generating 17 million to 19 million jobs. However, estimates suggest that employment grew by 2.29 per cent between 1992 and 1995, lower than the target growth rate; this added to the backlog of 23 million unemployed in 1992-93.
The Ninth Plan had projected that the growth of labour force was to accelerate to 2.5 per cent during the Plan period (1997 to 2002). But more importantly, the Plan projected that if the economy was to achieve full employment by 2002, GDP growth should be 8 per cent.
In effect, this would have meant that the growth in work opportunities and the addition of 53 million people to the labour force were evenly matched. This would have ideally meant that unemployment was to be negligible by the end of the Ninth Plan.
State-level data shows that the unemployment scenario in the states that recently went to polls is a pressing problem.
Notably, for Andhra Pradesh, the numbers are revealing. Additionally, the growth of unemployment has been much higher in rural areas; males (62 per cent men turned out to vote as against 54 per cent women in the 13th general elections) have suffered more compared to females.
Similarly, all these states have witnessed a substantial slowdown in the growth rates of employment during the post 1993-94 period.
Although some of the constituents of the non-agricultural sector registered high growth rates in the reform period, it has not compensated the sluggish labour absorptive capacity of agriculture. So there is enough clarity on this issue of unemployment.
However, the myth starts here. The relative increase in unemployment is often attributed to the declining public investment in agriculture. However, public investment in agriculture has been declining since the Fifth Plan and this is not a one-off phenomenon.
If that was the case, then how can one explain the decline in the number of unemployed for the decade ending 1993-94 and a sharp increase in the number of unemployed for the decade ending 1999-2000?
One possible reason could be that increasing shares of total public expenditure on agriculture are now allocated to input subsidies (on fertilisers, electricity, irrigation and credit, for example), rather than to productivity-enhancing investments such as research, building canals, rural infrastructure and watershed development programmes.
For instance, the share of input subsidies in public expenditure increased from 44 per cent in the early 1980s to 83 per cent by 1990.
Scaling down the input subsidies provided for water, electricity and fertiliser is likely to augment the resources available for investment in irrigation, rural roads, prevention of land degradation and so on.
Studies in the Indian context show that the current universal or non-targeted subsidy regime is not only fiscally burdensome, but it also leads to inefficient input use, apart from failing to address redistributive objectives.
Coming to the contentious issue of divestment, the myth is that the reduction of fiscal deficit as has been envisaged in successive Budgets, crucially hinges on the Fiscal Responsibility Act.
The FRA, in turn, encompasses an increase in the pace of divestment (interestingly, the recently-released common minimum programme envisages zero revenue deficit by 2009).
In this regard, we can readily draw a comparison with New Zealand, from where the concept of the FRA was borrowed.
In effect, a closer look at New Zealand's economy shows that the situation prior to the adoption of the FRA was not exactly the same as it is currently in India and the divestment of public sector enterprises has been a necessary condition for the success of the FRA in New Zealand.
So, how we go about fiscal consolidation, without divestment, or for that matter, restructuring of government enterprises (which was crucial to the success of the FRA in New Zealand)? Your guess is as good as mine.
Elections in Bihar, West Bengal and Tamil Nadu are due sooner or later. If the trends in employment are to believed then the incumbent governments in these states face serious challenges.
Soumya Kanti Ghosh is an economist at ICRA. The views expressed here are personal.
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