The data on last year’s economic growth in India had one curious aspect. It was related to construction activity. Usually it is a sector that is highly correlated with the overall economy. It captures commercial and residential real estate, public and private infrastructure and decisions of millions of single home builders, as also their architects, masons, painters and bricklayers. If we had a better organised mortgage market and more transparent process of title registrations, we could also have used “housing starts” as a leading indicator of the economy. After all when home builders commit themselves to creating a housing asset, it represents a substantial long-term financial commitment and vote of confidence for the future. Hence, housing starts if properly measured are a good bellwether of what to expect in the economy. The proportion of decision makers who are building a single home (not a flat) is remarkably high in India, and if these decisions are aggregated systematically, they can be a good leading economic indicator. Last year, the construction services grew at only 8 per cent, below the GDP growth rate of 8.5 per cent. This is odd, since the services sector as a whole (which makes up two-thirds of GDP) usually grows faster than GDP, making up for slow growth in agriculture, and also industry that fluctuates around the mean. But even more curiously, the cement and construction material sector grew at less than 6 per cent, much below the GDP. This kind of negative divergence has not been seen for a long time. This abnormal deviation does not have one solid explanation. It seems to be a combination of several factors. Unseasonal rains caused some disruption. The protracted elections in five states caused many public projects to be temporarily suspended. The Telangana agitation and related uncertainty caused many construction-related investments to be put on hold. Subsequently, there is the impact of repeated interest rate increases which have affected private construction negatively. Many of these factors have appeared in previous business cycles, during which cement and construction still kept ahead of GDP growth. So, were there any new factors?
One new factor is the shortage of sand, owing to a ban on sand mining in certain key markets like Maharashtra. The ban was motivated, in turn, due to environmental damage. The second new factor is the shortage of labour. It is remarkable that several construction projects across the country have been hit by an acute scarcity of not just skilled but unskilled workers as well. These workers would be typically migrant labour from states like Bihar and Orissa, and also from eastern Uttar Pradesh. This shortage of workers has been an important supply bottleneck, which explains the shortfall in construction activity.
The Confederation of Real Estate Developers’ Association says they are facing a shortage of 10 million workers. The absence of workers is being felt in other sectors as well, such as rubber plantations of Kerala, or rice and wheat fields of Punjab, or garment units around Tirupur. Even diamond polishing and ship-breaking activities are running into labour scarcity. For a country with an impressive demographic advantage, this is a strange phenomenon. We have people but they are not available. And it is not as if there is an abundance of jobs that is causing this labour scarcity. Any government recruitment camp, whether it is the railways, or the police, or even cooks and gardeners for the Indo-Tibetan Border Patrol, attracts a stampede of applicants. There are hundreds of seekers for every low-level government job. So, there is a simultaneity of job and labour shortage.
For some time now, many employers have been muttering about the role played by the National Rural Employment Guarantee Scheme (NREGS) in the emergent labour shortage. Whether it is farmers in Punjab, or construction projects in Mumbai, or garment makers, they are all saying that the NREGS is keeping labour from moving out. If you can get minimum wages at home (with relatively less hardship), why would you venture out halfway round the country? This year the NREGS completed six years, and it is growing in strength. Social audits are getting better, leakage is reducing, women and Dalit participation is substantial. It is the world’s largest publicly sponsored employment programme, and it generated more than 2.5 billion person-days of work last year. But this makes up less than 2 per cent of all work, so how can you blame the NREGS for labour shortage? That’s because at the margin, it has a bigger impact. Thanks to this scheme, wages have risen by 30 to 100 per cent across sectors. In agriculture, higher farm wages, coupled with a need to introduce labour saving mechanisation, lead to much higher costs, causing higher food prices. Even though employment creation is only 2 per cent, the number of NREGS job card holders is 50 per cent of the workforce. Even highly urbanised states like Maharashtra and Tamil Nadu have a high number of NREGS card holders. The scheme was supposed to be an unemployment insurance proxy. But it has become an entitlement scheme, and is now manifesting as a distortionary labour market intervention.
It is time to tweak and reform the NREGS. The scheme was inspired by Maharashtra’s three decade-long successful experiment with the rural employment guarantee. But even in Maharashtra, the scheme was periodically tweaked. It was modified to include private sector activity (like horticulture) and higher capital outlay for better asset creation. The NREGS definition should now be expanded and private- sector employment like farm, garments and construction should be made eligible to be counted as NREGS. After all the government will not be paying this additional bill. Just as the public distribution system was modified in 1997, the NREGS can also be made region-specific (“targeted”). It was meant for the most backward districts initially, and that focus can be re-introduced. It was meant for only one adult member of every rural household, not all adults. Most importantly, the NREGS’ success is not to be seen as an end in itself to be pursued mindlessly. Instead, it is to be seen in terms of its long-term impact on rural livelihoods, productivity enhancement, asset creation, labour markets and, of course, public budgets. It is very important that NREGS converges back to being an unemployment insurance, and does not expand and swallow everything else.
The author is chief economist, Aditya Birla Group.
The views expressed are personal
