The state of the economy - Why the Economic Survey should not be ignored

Ashok V. Desai

March 17 , 2015

The Economic Survey is presented the day before the budget; and the budget has to be assessed as soon as it is presented. So it is impossible to write immediately about the Survey. But this year saw the arrival of a new Chief Economic Advisor from Washington, who put much effort into the Survey. More important, there is a disconnect between the Survey and the budget. The Survey reflects the high spirits with which the government came to power - the Prime Minister's ambition to Make in India and turn India into an economic superpower. The exuberance was missing from the budget; it was such an insipid, plodding, boring affair. The Survey must have gone to the finance minister some weeks before the budget; but he did not seem to have opened it, or at any rate to have got its message. It is difficult to believe that the CEA was not part of the team that made the budget, or that he did not articulate to the budget team the message of his Survey. So I have to conclude that the finance minister has been selectively hard of hearing. But whatever his choice, the rest of us should not ignore the Survey. It is written in good English and a cheerful style; the CEA quotes various eminences such as Jorge Agustín Nicolás Ruiz de Santayana y Borrás and Karl Emil Maximilian Max Weber. Even laymen would enjoy reading it.

Arvind Subramanian began with his reading of the CSO's figures of GDP growth; I was reassured that he was as mystified by them as I was. But he had to make some sense of them; he decided that they suggested a recovering, rather than a surging, economy. To me, they convey nothing; they are a complete mess. Manufacturing growth in the CSO's new figures is 5 per cent higher in 2012-13 and 6 per cent higher in 2013-14 than in the old figures. The only difference between the old and the new figures is a change in weights; such rebasing simply cannot change figures so substantially. If I were CEA, I would call in the CSO statisticians and ask them to explain this absurdity. Maybe he did, and they went away in a funk; for I tried to consult the national accounts division of the CSO on the web, and got the message: "404 - File or directory not found. The resource you are looking for might have been removed, had its name changed, or is temporarily unavailable."

Undaunted by his experience with GDP figures, the CEA went ahead and attacked employment figures; he compared figures from the census, National Sample Survey, Labour Bureau, the Economic Census, and Annual Survey of Industries. His reading is that the census and the economic census show a fall in employment growth from 2 per cent in the 1990s to 1.4-1.8 per cent in the next decade, whereas the ASI shows a massive rise in employment growth from 0.6 to 5.1 per cent. He refuses to believe these last figures, and infers that employment growth slowed down in the 2000s, and was lower than population growth in both decades. Thence he concludes: "Creating more rapid employment opportunities is clearly a major policy challenge."

I am afraid he needs to think again. In a country without social insurance, everyone who can work has to work; so total employment will grow about as much as the labour force, which will grow as much as the sum of adult men and women weighted by their work participation rates. If the census shows a slower rise in employment than in population, it can be due to a change in the proportion of the young, the old, and women in the labour force. It tells us nothing about the employment situation.

There is nothing incredible about the 5.1 per cent annual rise in ASI employment figures. GDP growth registered the highest rates in India's recorded history - over 9 per cent every year - between 2005-06 and 2007-08; GDP doubled in the decade between 2002-03 and 2012-13. Industrial production rose 8.3 per annum; 5.1 per cent growth in employment is quite consistent with it. And the coverage of the ASI is less than 100 per cent; the rapid rise in employment may only reflect a rise in coverage

To sum up, the 2000s saw an unprecedented boom led by industry; the boom required workers. India is closed to labour migration, except for Bangladeshi workers who manage to slip past lazy or corrupt border security forces. So the workers required by booming industry and complementary services had to come from agriculture. According to the NSS, the share of workers in the primary sector amongst rural workers came down from 70 per cent in 2003 to 59 per cent in 2011-12. This is the fall in villages; if migration of workers from villages to towns were taken into account, the fall in the share of primary workers would be even sharper. The corresponding rise was in workers in industry and services.

This is reflected in the course of wages. According to Ministry of Agriculture, the growth in daily wages between 2001-02 and 2010-11 was 6.3 per cent amongst workers covered by the ASI, 8.5 per cent amongst ploughmen, and 9 per cent amongst harvest workers. Hence in my view, the CEA's conclusion, "Creating more rapid employment opportunities is clearly a major policy challenge," is mistaken. There is little involuntary unemployment; workers have been moving away from low-paid agriculture into better paid occupations.

Will that continue? It would depend on whether the unprecedented boom of the 2000s can return and continue. Industrial growth, which spurred that boom, has collapsed; it is close to zero. Can it be revived? Maybe, but it would require a policy stimulus. If there is one, should it concentrate on industry, or should it try to stimulate overall growth? There is nothing economically desirable about industry per se; the government should promote growth without worrying about its structure. There can be non-economic reasons for favouring industry. For instance, wars require lots of hardware - guns, tanks, helmets, bullets etc - so a government that wants to prepare for a war may decide to promote particular industries. But that is political strategy, not economic policy.

There can be a less aggressive form of industrial promotion, which I have written earlier about: India should seek to become a maritime power. It should seek to stimulate marine trade and movement; with that object in view, it should build ships, ports, warehouses and logistics connecting the ports with their hinterland. That is my idea. There may be other strategies. But they must be spelt out and debated.

For the moment, the government is sold on making things in India, but has no idea what to make and why. There is a lot of exuberance, but no sense of direction. India has done extremely well in the past decade, and the momentum could carry it far. But unless the government chooses the direction wisely, it could easily waste this opportunity. It will help if the CEA thinks more deeply. But that would not be enough; the rulers themselves have to be more sensible.