Jobs, jobs, jobs

India needs to optimise capital allocation for enhanced employment opportunities

There’s an alternative. There’s always a third way, and it’s not a combination of the other two ways. It’s a different way — David Carradine

The Government of India is actively promoting startups and spending heavily on infrastructure and on incentives for manufacturing for economic growth and job creation. However, these policies have not had a major impact on the very important issue of high unemployment, substantial underemployment, and “voluntary” low labour force participation. Some critics are pressing for services-led growth instead. Others have emphasised both manufacturing and services. This column will not get into this debate. It takes a different approach.

Let’s apply first principles. India has abundant labour, so optimal technologies should include capital-intensive methods in a few areas and labour-intensive techniques in many others. This approach should minimise unemployment, but it’s not happening. Why?

In many cases, there are various subtle, direct and indirect policy factors that are having adverse side-effects on employment. An in-depth diagnosis in each case can lead to an understanding of where exactly the prevailing policy is inadvertently contributing to unemployment. With a long series of patient “small” policy corrections, we can increase employment; this is particularly useful for the poor families.

There should be no misunderstanding. If the policy framework is appropriate and we have optimal technologies, then some shift to labour-intensive methods can compromise the growth of gross domestic product (GDP). However, if the policy framework is inappropriate and it tends to encourage capital-intensive methods, then a correction towards labour-intensive technologies does not reduce GDP; it can instead enhance GDP.

This column considers one particular case — the case of automated teller machines (ATMs). These are capital-intensive. Though useful for developed economies, a reconsideration is worthwhile in India. This is not to say that a variety of other “machines” like computers, aeroplanes, and ultrasound machines are in question. They are not. But ATMs are different.

Of course, given that cash is still  important in India, the use of ATMs is understandable. However, there are other solutions. Banks can have many more tellers but that is, of course, costly. Alternatively, banks can make arrangements for, what are called, micro-ATMs with local retail stores, chemist shops, petrol pumps, etc. The small and very economical micro-ATMs are used for verification and recording, while cash is handled by the “stores”.

Micro-ATMs or their equivalents have been around for a while but they have not become popular. ATMs continue to be important. Why? ATMs are widely used not just because these are convenient but also because the facility is by and large “free”. However, banks charge implicitly for the facilities by paying a low interest on deposits. And, it is often not realised that the inflation-adjusted interest rate can be even negative. So, the demand for the facility of ATMs (and other facilities) is partly due to a lack of transparency.

The demand for ATMs is what it is because of the prevailing policy framework. The latter includes the inflation policy, and the policy of letting the banks charge implicitly for the facilities provided. The solution is clear. Even if the inflation policy is retained, it helps to have a policy where banks raise the interest rate on deposits and charge explicitly for various facilities provided. Many price conscious Indians will then not choose ATMs. Note that the policy suggested here is not to ban ATMs but to address the excessive presence of ATMs in certain locations.

If the policy were different, with explicit pricing for ATM usage leading to lower demand, and if banks had invested in fewer ATMs, they could have directed those investments or loans elsewhere. Banks could have directly or indirectly financed the purchase of, say, the good old quasi-proverbial sewing machines. A much simplified but indicative calculation is that if there are 2,50,000 ATMs, 1,50,000 are “unnecessary”, an ATM costs Rs 4,00,000 (gross), a sewing machine costs Rs 8,000, and one person can be employed per sewing machine, then there could have been 7.5 million more jobs!

In the case under consideration, the additional employment related to the sewing machines is over and above the additional net employment associated with micro-ATMs that substitute for the “unnecessary” 1,50,000 ATMs. There is still a larger point. A partial shift from ATMs to micro-ATMs and the “unrelated” sewing machines is just one example! There are many, many more.

A move towards optimum allocation of scarce capital is a correction towards labour-intensive technologies and more employment. This is not taking India backwards; this is what the economics dictates here. And, the suggested solution is through public policy, not public finance. 

The writer is an independent economist. He taught at Ashoka University, ISI (Delhi), and JNU.
email: gurbachan.arti@gmail.com; X: @gurbachan_econ