Nos. 44-46, April 2008
Nos. 44 - 46
II. How Capitalism Emerged in Europe
III. Colonial Rule: Setting the Pattern
2. The External Stimulus and Its Implications
3. Private Corporate Sector-Led Growth and Exclusion
4. The Condition of the People
5. The Agrarian Impasse and Its Implications
V. Unlocking the Productive Potential of the Entire Labour Force
India’s Runaway ‘Growth’: Distortion, Disarticulation, and Exclusion
Despite the clamour about the Indian ‘economic miracle’, the fact is that India has been unable to break decisively with its colonial past. Six decades after the transfer of power from British rule, the workforce remains predominantly agrarian. It is revealing that, in the sophisticated academic discussion going on regarding India’s take-off to high growth, the structure of employment (that is, in what sectors the workforce is employed), once a staple of development economics, is hardly mentioned.
As we saw in the earlier chapter on the ‘classical’ process of capitalist development, the shift of economic activity out of agriculture was accompanied by a shift of workforce. In the following section, we will describe how GDP growth of different sectors in India is disconnected from employment growth.As a way of focussing on the peculiar pattern of India’s current economic growth, it is useful to look back at a celebrated paper of 1954 by W. Arthur Lewis1, in which he had described the ‘dual economy’ in economies such as India. Terming one sector ‘capitalist’ (broadly identified with industry) and the other sector ‘subsistence’ (broadly identified with agriculture), he predicted that the ‘capitalist’ sector would grow, and finally eliminate this dualism. Lewis pointed out that the vast under-employed labour force in agriculture was available to industry at near-subsistence wages. This would make it profitable for capitalists to expand production, and hire more workers, ploughing back their entire profits into further expansion, until the excess labour force in agriculture was fully absorbed. This expansion, however, was contingent on a growth in productivity in agriculture, allowing it to supply increasing quantities of food at prices favourable to industry. For if it did not do so, the growth of demand from the growing number of workers would lead to higher food prices, and as a result higher wages, which in turn would reduce profits; and reduced profits, in Lewis’s scheme, would mean lower investment by capitalists, and lower growth.
However, it is clear that dualism in the economy (whatever be the terms one uses to describe it) has persisted, even hardened. Contrary to Lewis’s expectations, the vast under-employed labour force in agriculture, despite being available to industry at subsistence wages, has not been, and is not being, absorbed in industry. This fact stands out particularly starkly against the current boom in corporate profits and investment. Of the population between 15 and 64, less than 60 per cent was ‘usually employed’ in 2004-05. More than half of India’s workforce remains self-employed, and the share of wage employment in the economy has actually declined during the last decade.
Indeed the economy can be mapped as a number of overlapping types of dualism. For example: the non-agricultural sector and agriculture, organised and unorganised workers, large firms and small/household industry, developed and underdeveloped regions, urban and rural development, those with access to formal sector credit and those confined to informal sector credit, dominant and oppressed castes.
The disparity between each of these two poles is being reproduced, even widened, by the prevailing economic processes. Thus it makes all the less sense to talk in terms of average incomes or rates of growth. We need to break up each whole into its parts in order to make sense of the reality.
Missing links between, and within, sectors
The purpose of dividing the economy into sectors is to aid analysis; it does not imply that the different sectors develop separately. Rather, one expects the different sectors in an economy to be linked to one another, such that the growth in one sector leads to growth in the others. However, when we divide the Indian economy into different sectors, what strikes us immediately is certain missing links between different sectors. Indeed, certain links are missing even within sectors: For example, ‘manufacturing’ and ‘services’ are each composed of sub-sectors that bear little resemblance to one another. Let us look at the sectors one by one.
Agriculture: overcrowding and stagnation
Moreover, agriculture is not performing the role that Lewis believed it would, namely, supplying increasing quantities of food at lower prices, and thus aiding industrial growth. No doubt agriculture’s terms of trade in the past decade have been favourable to industry, as Lewis wished, but not because agricultural productivity has improved and cheapened agricultural goods.3 In fact, agricultural production has slowed, to the point where it is falling in per capita terms. The disparity between the growth rates of agriculture and non-agriculture has sharpened.
Earlier, one would have expected the poor performance of agriculture to hinder the corporate sector’s growth, since agriculture would be unable to supply growing quantities of raw materials for industry and food for growing numbers of industrial workers. However, the present distorted pattern of growth in the corporate sector, heavily dependent on elite consumption and on services sector growth, requires less agricultural raw materials, and less workers.4 And so the corporate boom goes on even as agriculture – the sector which employs the majority of the workforce – languishes.
It was once anticipated that with the spread of new technology from the original areas of the Green Revolution (Punjab, Haryana, western U.P., and pockets elsewhere) the rest of India would catch up with the growth in these original Green Revolution (GR) regions, and regional disparities in agriculture would diminish. However, the liberalisation period witnessed disparate trends: in the GR centres, growth slowed; in regions without irrigation but with heavy rainfall, crop prices collapsed and so farm incomes declined despite some production growth; and in dryland regions both production and incomes declined.5 Production in rainfed agriculture, which accounts for 60 per cent of cultivated area, is not only much lower than in the irrigated area, but is more or less stagnant. The bulk of growth has come from expansion of irrigated area and increased production of irrigated land; since the growth of irrigated area has come to a virtual halt under the neo-liberal policy of restricting public sector investment, agricultural disparities have widened.
Manufacturing: small organised sector workforce dwarfed by unorganised sector
Moreover, the official definition of a factory – 10 or more workers using power, or 20 or more workers not using power – encompasses a section of small scale industries. Of 129,000 factories existing in 2001-02, 105,000 were in the small scale sector (units with investment in plant and machinery of less than Rs 10 million). Thus medium and big factories – what the Ministry of Labour designates as organised sector employment – accounts for a very small amount of employment indeed, at best 1.5 per cent of total employment.
The following diagram helps to conceive of the structure of manufacturing sector employment:
Most of the manufacturing enterprises in the unorganised sector are ‘own account enterprises’ (OAEs), that is, they have no hired labour; they generally operate out of household premises. Even of those with hired labour, most have less than six workers, and a large proportion operate out of household premises.
In short, when we read the term ‘manufacturing workforce’ in official documents the first picture that should come to our mind is that of a worker making papads or rolling bidis in her own home. The overwhelming bulk of the workforce even in the manufacturing sector is working in primitive conditions, at very low wages, with backward techniques, producing traditional products like matches, bidis, handlooms, food products, and the like.
Even as medium and large industry accounts for a fraction of industrial employment, it accounts for around 60 per cent of industrial production. In other words, we have a small island of medium and large industry in which value added is high, surrounded by a sea of small industry in which value addition is low. At the same time, certain medium and large businesses use the unorganised manufacturing sector as a site for surplus extraction: goods such as bidis are manufactured by home-based workers, collected by contractors and sold under well-known brandnames.
Services too marked by extreme dualism
The share of the services sector6 in GDP has grown dramatically, by 14.4 percentage points, and is fast resembling the share of the services sector in a developed economy. Nevertheless the share of services in employment has only inched up 7.2 percentage points over the same period.
Here, the growth in services’ share of GDP and the growth in its share of employment are two separate processes. For this sector too is marked by an extreme dualism: on the one hand, a low-income high-employment segment (e.g., petty retail trade), which contributes most of the growth in the sector’s employment; and on the other hand a high-income low-employment segment (e.g., the information technology, ITES, financial and real estate services and media sectors), which contributes most of the growth in the sector’s income. For example, the category ‘finance, insurance, real estate and business services’ accounts for just 2 per cent of India’s employment, but earns 13.5 per cent of its GDP. The high-income segment has few backward linkages to the rest of the domestic economy; rather, it is linked to export of services and the elite market here.
The low-income sector of services is largely what is called ‘refuge employment’, under-employment, and does not represent true diversification from agricultural employment. Merely because a peanut vendor is struggling to make ends meet does not mean his struggle should be termed ‘employment’.
The income of the services sector – powered by the high-income sector – is growing faster than that of the sectors producing physical commodities. Many services are socially useful, and no economy can exist altogether without a services sector. A developed economy, in which productive forces have advanced so greatly that it is capable of meeting with ease the basic needs of all the people, can sustain at that stage a much larger growth of services. But in an economy where even the minimum needs of the vast masses are not met, the dominance of the services sector amounts to a form of parasitism. It means that (leaving aside the export of services, which earns income that can pay for imports of goods) the services sector claims a larger and larger share of the production of the sectors producing physical commodities.
The island of the organised sector and the fall in the share of wages
As an economy develops, one would expect the organised sector to replace the unorganised sector in industry and services. However, the overwhelming majority of India’s workforce remains in the unorganised sector, trying somehow to eke out a living. Indeed, the organised sector is able to draw on the unorganised sector as a method of exploiting workers: Since the 1990s, the purchase of finished goods has risen steeply in the overall costs of Indian organised sector firms, even as the share of wages has fallen; this indicates the growth of sub-contracting. Further, employers have adopted a systematic policy of replacing permanent staff with contract or temporary workers. Thus within the organised sector, the number of organised workers (i.e., those who enjoy legal rights such as security of employment, minimum wages, sick leave, compensation for work-related injuries, right to organise, etc) has fallen and that of unorganised/informal workers has risen during 1999-2005. The share of organised workers in the total workforce has fallen from an already very low 8.8 per cent to 7.6 per cent during this period.7
The effect of these changes is to reduce the organised sector’s wage bill and increase its profits. This underlines the stake of organised sector firms in maintaining overall conditions which generate a large unorganised pool of workers.
It is striking that the National Sample Survey (NSS) of 2004-05, during a corporate sector boom, shows a decline in real wages for urban workers (male and female, regular salaried and casual) over the previous Survey (1999-2000),8 which was carried out during an corporate sector slump. Wage levels of workers are declining not only in the unorganised sector but also in the organised sector. While employees in the information technology-related sectors are earning relatively high wages, and managerial and technical staff in organised industry have secured a large increase in wages, real wages for workers in organised industry stagnated or declined. According to one report, “The wage share in our organised industrial sector has halved after the 1980s and is now among the lowest in the world.”9 Correspondingly, the share of profit in value added in the organised sector is rising. The decline in wages, of course, is not the only contributor to growing profits: decline in interest payments and tax rates, and handsome subsidies provided under various guises by Governments, have boosted profits. The Economist10 puts Indian corporate sector firms’ average profit margins at 10 per cent, or more than twice the global average; the RBI’s sample of private corporate firms shows a rise in the ratio of gross profits to sales from 10.3 per cent in 2002-03 to 15.6 per cent in 2006-07, and profits after tax to sales from 4.2 per cent to 10.7 per cent in the same period.11
On the other hand, small, relatively labour-intensive, independent or semi-independent small firms are being crushed under a multiple assault – such as the entry of large firms as well as imported goods into their markets (i.e., with the reduction of reservations for small scale industry and with trade liberalisation); the disappearance of already meagre bank credit for the small sector; the appreciation of the rupee with speculative inflows (which makes imported goods cheaper in rupee terms); and the growing poverty of the vast majority of the people, who buy the bulk of cheap, lower-quality goods produced by these firms. No wonder, according to the latest data the number of workers in unorganised manufacturing enterprises actually fell from 37.1 million in 2000-01 to 36.4 million in 2005-06.12
Despite these trends the unorganised sector – and within this the tiny/household sector – continues to employ the bulk of the non-agricultural workforce. Employment in unorganised non-agriculture has grown by 60 per cent, absorbing over 60 million new workers, since 1993. But this sector has been unable to increase significantly either its capital-labour ratio or labour productivity – in other words, it lacks the funds to improve its abysmally backward conditions of production.13 “These two disparate private sectors in non-agriculture, the unorganised and organised, now produce about 50 per cent and 25 per cent of all non-agricultural value-added respectively, with 87 per cent and 4 per cent respectively of the non-agricultural workforce.”14 Thus the ‘employment growth’ in the unorganised sector is deceptive: it is largely a form of under-employment.
What makes this situation all the more remarkable is that the top section of Indian industry has in recent years displayed the technological resources and entrepreneurial ability to compete in international markets in high-technology fields such as pharmaceuticals, biotechnology, and engineering goods (including automobiles). There are indications that the software industry too, once solely a provider of cyber-coolies performing low value-added tasks, is developing the capability to perform more sophisticated, higher value-added work. This corporate sector growth is no doubt increasing opportunities for well-educated urban middle and upper class youth, to the point where white collar salaries have risen sharply and the bureaucracy and armed forces complain of their inability to recruit officer cadre. But this growth is failing to draw the wider economy into its sphere.The advocates of the existing policies paint a rosy picture of India’s future on the basis of what they call its ‘demographic dividend’: the ratio of total population to working age population in India is low, and will shrink further in years to come. Hence, they argue, each working person will have to share her/his income with fewer dependents; on a larger scale, the economy will have a smaller number of non-working people to care for. However, this is meaningless if working age population does not get work! The official definition of ‘employment’ is being “engaged in any economic activity”, regardless of whether that activity yields a living. But even by this strange criterion, the NSS of 2004-05 reveals that less than two-thirds of the 15-64 age group is employed (and only 60 per cent is ‘usually employed’).15
Moreover, 56.5 per cent of the rural population and 43.3 per cent of the urban population is dependent on self-employment, up from 55.4 and 38.8 per cent a decade earlier. The growing share of self-employment is a sign of the backwardness of the economy, its inability to produce sufficient jobs, and the desperation of the unemployed to eke out a living somehow or the other.
Flood of investment, drought of employment
India’s rates of saving and investment stagnated during the 1990s, but has soared thereafter. Savings rose from 23.5 per cent in 2001-02 to 32.4 per cent in 2005-06 and an estimated 34.7 in 2006-07; investment rose from 24 per cent of GDP in 2001-02 to 33.8 per cent in 2005-06 and an estimated 35.1 per cent in 2006-07.16 Both look set to rise further. Even the figure for 2001-02 is much higher than Lewis’s cut-off point. Yet the pattern of employment and the standards of living of the vast majority in India in no way resemble those of a developed economy.
The reason is that, while investment in the organised sector grew, so did its capital intensity (that is, the proportion of capital to labour). While the private organised sector grew at an annual rate of 10 per cent after 1993, employment growth was negligible, and in fact fell after 1998. Capital intensity in the organised sector grew so fast that the real capital stock per worker is now three times what it was in 1993. If GDP grows, as projected, at 9 per cent during the Eleventh Plan, it is estimated that the real capital stock in the private corporate sector will increase at about 13-14 per cent per annum during this period; but, assuming past trends of capital-labour ratio continue, the organised sector will absorb at most 2 million more during this five-year period.17 So the dazzling growth of investment is largely useless for creating productive employment, which is the core of genuine economic development.
Moreover, apart from the higher capital intensity within each sector, there is a growing disproportion in investment between different sectors. The vast majority of the workforce is trapped in sectors which are starved overall of investment: Agriculture accounts for the majority of the workforce and almost one-fifth of GDP, but accounted for only 6 per cent of total investment in 2005-6 (down from 9.5 per cent in 2001-2).
Higher savings and investment on the basis of growing inequality
The boom did not extend to the whole of the private sector: the share of investment by the vast unorganised private sector shrank. The private corporate sector’s share of investment rose from 23 to 38 per cent in this period, even as the share of the unorganised sector, which employs the overwhelming bulk of the workforce, fell from 49 to 32 per cent.
Regional disparity related to disarticulation between sectorsZ
Secondly, the urban-rural disparity too has sharpened during this period. The ratio of urban per capita income to rural per capita income grew from 2.34 in 1993-94 to 2.85 in 1999-2000; given the fact that agricultural growth fell further thereafter, and that growth was concentrated in the private corporate sector, this proportion would have shifted much further in favour of urban areas thereafter. There appears to have been a dramatic decline in Government employment in the rural areas: Whereas in 1993-94 the rural areas accounted for 42 per cent of ‘community, social and other services’ GDP (largely the salaries of Government employees), in 1999-2000 they accounted for just 29 per cent of it.22
Significantly, it is not necessary that a state with large metropolises and high urban income rank have a high rural income. Nor is it necessary that a state with a relatively high rural per capita income have the largest and most prosperous cities. Punjab and Haryana are at the top of the rankings in per capita income because of their better-off agricultural sector, whereas Andhra Pradesh and Tamil Nadu have large prosperous metropolises but merely average per worker income in agriculture. In Maharashtra, which stands first or second in per capita income, agriculture and allied activities still employ half the workforce, but GDP per capita in the agricultural sector has been falling continuously in per capita terms for more than a decade; remarkably, industrial GDP per capita too has stagnated; only services sector GDP per capita has risen rapidly, concentrated in the metropolitan pocket of Mumbai-Thane-Pune. The percentage of agricultural labourers in Maharashtra with wages below the national minimum wage is roughly the same as in the most backward states of the country – Bihar, Chhattisgarh, Madhya Pradesh and Orissa23
Neither is rural growth leading to urban growth, nor does urban growth get diffused to the rural areas. This reflects once again the lack of organic links between the agricultural and non-agricultural sectors.
A study of some of the states at the centre of the current boom – such as Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu and Gujarat – would reveal a particularly sharp urban-rural disparity, uneven regional spread of growth, low employment growth, and so on. Further, even within backward states the disparity between agro-ecological sub-regions has worsened.24
We have sketched a picture of the different sectors of the economy as the economy undergoes dazzling growth. Let us turn to the impetus for the recent spell of rapid growth.
1.“Economic Development with Unlimited Supplies of Labour”, Manchester School, 1954. (back)
2. In this section we have used the ‘Usual Status’ measure for the various employment shares. There is a slight difference in the employment shares by the ‘Current Daily Status’ measure, which does not affect our point. The GDP figures used are for the triennium ending 1983-84 and the triennium ending 2004-05. The same applies to Charts 2 and 3. (back)
3. The reason for agriculture’s worsening terms of trade was that it was opened up to agricultural imports amid a global fall in agricultural commodity prices, even as various aspects of the neo-liberal economic policies raised input costs and depressed domestic demand for agricultural products. (back)
4. As noted by C.P. Chandrashekhar, “The Progress of ‘Reform’ and the Retrogression of Agriculture”, www.macroscan.org. (back)
5. Planning Commission, Mid-Term Appraisal of the 10th Plan, p. 193. (back)
6. That is, trade, hotels, transport and communication; financing, insurance, real estate and business services; and community, social and personal services. We have not included construction. (back)
7. Calculated by the National Commission Enterprises in the Unorganised Sector (NCEUS) from NSS data (Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector). However, using Ministry of Labour data for the organised sector with the figure for total usual status employment derived from the NSS, one would get 7.1 per cent and 5.8 per cent for 1999-2000 and 2004-05. (back)
8. Unni, J. & G. Raveendran, “Growth of Employment (1993-94 to 2004-05): Illusion of Inclusiveness?”, Economic and Political Weekly (EPW), January 20, 2007. (back)
9. National Commission on Enterprises in the Unorganised Sector (NCEUS), Financing of Enterprises in Unorganised Sector, April 2007, on the basis of Annual Survey of Industries data; emphasis added. (back)
10. “Marauding maharajahs”, March 29, 2007. (back)
11. Reserve Bank of India (RBI), Annual Report 2006-07, Table 1.16. (back)
12. National Sample Survey (NSS), Report no. 525. (back)
13. An OECD study found that while the ratio of fixed assets to labour rose in firms with 100 or more workers between 1998 and 2004, it actually fell by 14 per cent in smaller firms. That is, the drought of investment in small firms actually worsened in this period, which would have worsened their labour productivity. Alok Sheel and Sean Dougherty, “Constraining labour gains”, Business Standard, 28/10/07, citing OECD Economic Surveys: India, 2007. (back)
14. NCEUS, Financing of Enterprises. (back)
15. By the Current Daily Status measure, which captures the extent of under-employment better, total employed as a percentage of the 15-64 age group comes to only 56.5 per cent. (back)
16. The figures for savings and investment are somewhat lower if we ignore ‘valuables’ and ‘errors and omissions’, but the rise is still dramatic. (back)
17. NCEUS, Financing of Enterprises. (back)
18. The effective tax rate on corporate sector profits is now just 20.6 per cent, according to the Receipts Budget 2008-09. Within this, the effective tax rate on public sector firms is 23.4 per cent, and on private sector firms, 19.5 per cent. (back)
19. Taking GDP at current market prices and assuming the effective rate of corporate taxation in both years to be 20.6 per cent (see Receipts Budget 2008-09). The private corporate sector’s share of total profits is put at 72.75 per cent by the Receipts Budget. (back)
20. S.L. Shetty, “Growth of SDP and Structural Changes in State Economies: Interstate Comparisons”, Economic and Political Weekly (EPW), December 6, 2003. (back)
21. Ibid. (back)
22. EPW Research Foundation (EPWRF), “Net Domestic Product at Current Prices in Rural and Urban Areas”, EPW, 8/3/08. (back)
23. There is no mandatory national minimum wage. The recommendation of the Central Advisory Board on Minimum Wage was Rs 66 with effect from 2004; the National Commission on Rural Labour’s norm for rural minimum wage works out to Rs 49 at 2004-05 prices. In 2004-05, 97.8 per cent of agricultural labour in Maharashtra received less than Rs 66 per day and 77.4 per cent less than Rs 49. This was worse than Bihar or Orissa. NCEUS, Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector, August 2007, p. 124. (back)
24. See the collection of essays on Madhya Pradesh by Mihir Shah and others in EPW, November 26, 2005. (back)
NEXT: IV. (2) The External Stimulus and Its Implications
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