Priorities for the next govt

It must deliver on policies required for equitable growth

Regardless of who wins the election, the new government’s primary focus will be implementing what has been promised in its election manifesto. Much of this will involve funding of new welfare schemes in the Budget, which will be presented in the middle of the year. However, the real need is for redesigning development strategy to bring us closer to the goal of growth with equity.

There are some long-term deficiencies in our development performance and some shortfalls that recent data indicates, which require measures:

(i) to stimulate the growth of private consumption and corporate investment;

(ii) to promote the growth in productive jobs; and, related to this, a policy for small and medium industries that encourages them to grow;

(iii) substantial improvements in education, skill development, and healthcare to make our labour force more suitable for newer occupations; and

(iv) connected with all this, greater respect for the need and the benefits of effective federalism.

First, let’s consider the need to stimulate private consumption. The most recent National Accounts Statistics (NAS) show a drop in the annual rate of growth of consumption from around 7 per cent between 2011-12 and 2018-19 to a little over 4 per cent in the past five years.(Table 1.1 NAS 2024).

In fact, the second advance estimate for 2023-24 shows only a 3 per cent growth in private consumption. In a large country like India, a slowdown in private consumption growth will affect corporate investment. That is why the recent NAS shows a drop in the annual rate of growth of private corporate investment from a little over 10 per cent between 2011-12 and 2015-16 to under 5 per cent in the years since then until 2022-23. (Table 1.11 NAS2024).

This may be due partly to the slowdown in exports of goods and services (as a percentage of gross value added, or GVA, down from 28 per cent in 2013-14 to 20 per cent in 2019-20 with some recovery in the post-Covid year). However, except for a few sectors, corporate investment is driven by domestic demand growth, which is shaped by what happens to private consumption.

What could the slowdown of growth in private consumption be due to? It is not higher savings, as the NAS (Table 1.14 NAS 2024) shows a decline in household savings as a percentage of household income from 29 per cent in 2011-12 to 23 per cent in 2022-23. In my view, it is because of a shift in income to higher-income groups, reflected in the rising demand for higher-end durables and consumer products. The slower income growth of lower-income groups probably is the main factor behind slow consumption growth.

The assessment of income inequality in India is widely diverse, particularly in recent years, perhaps due to its political fallout and data deficiencies. But let me point out one obvious element in income distribution — the fact that according to the Periodic Labour Force Survey (PLFS) of 2022-23, about 46 per cent of the workers are in agriculture, while the share of agriculture in the national level  GVA is 18 per cent, with a significant part of it accruing as returns to land ownership.

Add to this another group of widely exploited workers who are generally casual employees: The workers in construction, who were also badly affected by the Covid shutdown in March 2020. They account for 13 per cent of the workforce and have access only to a part of the 8 per cent share of construction in GVA. One can add more to support the thesis of low bargaining strength of workers — the fact that only 21 per cent of those employed have regular wage/salary income and 18 per cent are just helpers in a household enterprise (Statement 6, PLFS 2022-23). Note also that in the non-agricultural sector, 74 per cent of the workers are in proprietary and partnership enterprises (Statement 8, PLFS 2022-23), many of which are  beyond the control of labour laws.

Enforcing laws about worker’s rights does matter and should be done. But the key answer is a development policy that aims at creating new productive jobs at a rate higher than the growth of the working-age population for about a decade.

This will stimulate the shift of workers out of agriculture and improve the wage market environment for the bulk of workers. Such an effect can be seen in the earnings of workers in regions where productive job creation exceeds local working population growth or where social factors strengthen the bargaining power of labour. One example of this is the difference in the daily wages of male non-agricultural workers in Tamil Nadu relative to the national average. (~482 against ~348). The difference is also large in other migration-dependent states in the South and the North-West1. Migration can help and, according to the Census, this increased from 33 million workers in 2001 to 51 million workers in 2011. But migration is not a sufficient answer for the expected growth in the working-age population, particularly in the North. The key lies in accelerating the growth in productive jobs in the North.

I believe a major factor is the dynamism of small enterprises. The more dynamic ones can be startups in new areas arising from demand growth and technology changes, either as  input suppliers or as initial final product suppliers for local demand. However, the policy incentives given to them, particularly by way of exemptions from control regulations, tend to persuade them to remain small. This should be avoided, and they should be encouraged to expand from small to medium and even medium to large. 

The other dimension of productive job creation is systematic attention to national value chains, which, with our steadily improving physical and digital infrastructure, can connect the northern states, where job creation is a more acute necessity, to the higher-growth southern and western states.  The rapid emergence of e-commerce and digital payment systems can also help in this.

Effective job creation requires the availability of adequately qualified workers. This will require a more effective system for skill development than what we have had so far. One can go a step further and work also to improve the quality of education and healthcare, which provide not just greater equality but also a better basis for the availability of an effective workforce. 

These measures can lead to a rise in incomes because of a higher rate of productive job creation, particularly in regions where the need for a shift from agriculture to manufacturing and services is more necessary. It will stimulate consumption demand, and through that, investment and growth, benefitting all states. But one qualification is important. Most of the measures required will have to vary significantly from state to state. Hence, our national policies should really formulate just a broad strategy and leave sufficient financial and decision-making room for states to design and implement more specific measures. 

Therefore, my request to the new Union government is to fulfil your hand-out promises. But also, undertake the measures required to accelerate growth with equity and understand and respect the geographical variation of needs and possibilities in the country.

1. RBI, Handbook of Statistics of Indian States,  2022-23, Table 113

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