Boost labour income to revive growth

Prime Minister Narendra Modi in July this year dismissed as professional pessimists those who questioned the $5-trillion economic goal. The Budget also gave little thought to the growth slowdown. But when that became obvious, the policymakers started panicking and came up with proposals like the corporate tax cut without thinking through whether that would deliver quick results. The government’s policies for growth revival seem to be based on hunches rather than analysis. There is also the att­empt to suppress uncomfortable data like the fall in household consumption and the refusal to accept the accuracy of the employment report.

In this environment, relying on doctored official data to present an alternative revival option is difficult. Hence this column relies largely on reliable non-government data, the most important source being the KLEMS (Kapital, Labour, Energy, Materials, and Services) database, a truly rich and reliable resource. 

The KLEMS database is sponsored by the Reserve Bank of India and prepared by a team of researchers at Delhi School of Economics. Given the professional freedom they have, this data can be treated as reliable. This database, prepared for total factor productivity calculations, includes gross output; gross value added (GVA); intermediate inputs of energy, materials, and services; employment; labour quality index; labour income; and capital income. It has been built up from the data for 27 sectors and the economy totals are entirely consistent with the sectoral numbers. I would consider this a more reliable source for growth calculations. 

Illustration: Ajay Mohanty

Let me illustrate this with a comparison of GVA growth rates estimated by the back casting exercise undertaken by the Central Statistics Office, or CSO, (now National Statistical Office) and the KLEMS database, which is coherent and more reliable.

As this comparison shows, the CSO numbers tend to underestimate the growth rates during the UPA regime and overstate the growth rates in the NDA years.

The government’s belief that pumping money into corporate coffers will boost investment and growth is mistaken. Companies invest when they see the prospect of demand growth. That there is a slowdown in demand growth is now obvious. As Rathin Roy has argued convincingly, some of it is structural because the elongated S-shape curve for some products, particularly vehicles and durables, is going past the high-growth trajectory into saturation mode because the number of consumers entering this middle-income category is not growing fast enough.

But the argument in this column is connected but different. I believe the principal demand impetus for growth comes from the bottom half of income distribution. Look at the chart for FMCG growth — high FMCG growth in the boom years 2004 to 2010, the sharp drop in 2012, the slight recovery in 2017, and the steady decline since then.

FMCG demand comes mainly from rural consumers and urban wage- and salary-earners. The slowdown must be because their incomes have not grown at the required rate. First, take the rural consumers. The average rate of growth of agricultural wages for males was 16 per cent between 2007-08 and 2014-15. In 2015-16 and 2017-18, it dropped to 5 per cent. The terms of trade for farmers improved from around 85 to more than 100 between 2004 and 2010. Since then they have fallen. The more extreme rural distress we have seen last year is probably weather-related and could reverse this year. But the deeper problem of marketing reform, including in minimum support price and public procurement, will take much longer.

In urban areas, what matters is growth in jobs and wages. Using the KLEMS database between 2004 and 2010, the growth rate of employment in manufacturing was 2.46 per cent and in services was 2.8 per cent. Between 2011 and 2017, this dropped to 1.40 per cent in manufacturing and 2 per cent in services. As for labour earnings, the pattern is similar, with higher growth in the earlier period and lower in the second period. Growth in manufacturing employment earnings dropped from 8.13 per cent to 5.38 per cent. Growth in services employment earnings dropped from 7.18 per cent to 6.09 per cent. 

The slowing of employment growth is well understood, despite the attempts to question PLFS (Periodic Labour Force Survey) 2017-18. Growth in the index of industrial production slowed after 2010-11. In the case of labour-intensive industries, it fell sharply from 5.7 per cent in the six-year prior to 2010-11 to 0.1 per cent in the six years after 2010-11. There was also a decline in the capital-intensive sectors from 10.6 per cent to 4.60 per cent.

The purpose of subjecting the readers to all this data is to suggest that the key problem of the Indian economy is the inadequacy of labour incomes. The share of labour income in manufacturing value-added has been going down steadily from the mid-sixties and more sharply after 1990-91. It is now 30 per cent. In the services sector, this share is 52 per cent.

The only focus of labour policy seems to be to reduce the degree of protection offered and bring in something which should help owners of capital by easing hiring and firing. There is little evidence that companies have been constrained in reducing the size of the workforce by the paper provisions limiting this right. We forget that 71 per cent of regular wage- and salary-earners do not have a written contract, and that casual and contract labour is replacing regular employment.

The reality is that instead of running a welfare state for people we have been running a welfare state for owners of capital, rescuing them from wrong decisions. For instance, the most recent example of this is the corporate tax reduction, which involved a sacrifice of more than Rs 1 trillion of tax revenue in the mistaken hope that this would stimulate investment and growth. And now to make up for the revenue loss, the government is planning to sell some of its most profitable public-sector enterprises. If the large amounts gifted to the corporate sector and stock market speculators had been used for the enforcement of minimum wage legislation and providing more employment under the Mahatma Gandhi National Rural Employment Guarantee Programme, we may well have seen results now.

Investment is stimulated primarily by expectations of demand growth. In the current context, the most reliable way of doing this is to boost labour income.

Contact:  nitin-desai@hotmail.com