India’s GDP growth rate, even prior to the pandemic, was a five-point- someone. It really needs to grow. In order to grow, as we’ve discussed, we need less scared and more aspirational folks. People who demand are the ones who can stimulate industry to grow and invest. People need to find reasons to believe in the better.
But where to begin? In policy terms, one should begin with where the problem is the worst.
Something needs to be done for agriculture and needs to be done urgently. The agricultural sector still employs roughly 2/3rds of the population (currently about sixty percent), its contribution to total income (GDP) is 1/5th though at roughly about 15%, only about three percentage points down from 18% in late 2004-2005.
Nothing has changed much for the average farmer on the earning front. There are two ways to look at this, the first is to understand that the agricultural sector contributes only so much to the GDP, the second way is to recognise that it also only earns so much! The reason that this distinction is vital is because, ordinarily, if a bigger economic pie was all that mattered, then who contributes how much to a GDP is an irrelevant question. Unfortunately, the size of the pie is not all that matters – in this case it means that 2/3rds of the Indian population earns only 1/5th of the GDP, which is the amount of income available to them. Far too little to support 2/3rds of a billion plus people.
India’s agriculture sector also faces a whole host of other issues, such as a drastically depleting water table in the rice bowl of India i.e. Punjab and Haryana, smaller and smaller land holdings, Arhatiyas or money lenders and huge casteism, even in 2020.
There are obvious insights in economics that can help guide policy. One of these is the idea of Ceteris Paribus which states that all other things being equal (do remember though that in reality things are not equal), if you increase a factor of production, output will rise at a declining rate till such time until it absolutely declines. What does this mean?
To produce anything one requires different kinds of inputs - some obvious ones include labour or effort, technology and since we are talking about agriculture, there is also land. Given a finite amount of time there are somethings that cannot be increased, at least in the short-term, a great example of this is land. The amount of land under cultivation at a given period of time is relatively fixed. It is much easier - for a land-owning farmer for example, to increase or decrease the amount of labour, water, seeds or other technology than it is to acquire new land.
Now if this were true, theoretically a farmer (or the owner of any industry/enterprise) could theorectically go on adding more labour or other inputs while holding one factor of production constant and get better and better output. This is what technology does by and large. Those of us who work with technology, understand this phenomenon as productivity or value for money i.e. doing more for less. Unfortunately economics is a also a very dismal science, so all good things come to an end.
The ending is caused by something called a rise in disutility or the law of diminishing returns. This idea is one the most important parts of of a law that economists like to cal, most obtusely, "the law of variable proportions". Disutility is easy to understand in a pandemic. For instance, when lockdown began we were all excited (even if anxious) about working from home, at least for a few days or a week, things felt like a holiday. Now everyone is sick of the pandemic. This feeling of progressively getting sick of a constant supply of something over time -is disutility.
Disutility is the trouble or lack of satisfaction caused by having too much of something i.e. the opposite of utility (or happiness/satisfaction). Now the law of diminishing returns, in the context of disutlity, is like the cramp you get with every additional peice of cake you eat despite already being stuffed. That is to say, if I was to chart your levels of satisfaction (in units of satisfaction called utils) as against every morsel of binge eating, I could show you that the amount of happiness or utlity you are getting out of every additional morsel, is falling.
What this suggests is that dumping more inputs (say more landless labour being employed on smaller land holding by rich farmers) onto the same piece of land, will in the short-term, cause total agricultural output to go up, but at a falling rate till the whole thing stops to work. Now combine that with the another idea from economics -- the idea that wage rate is equal to the marginal productivity of labour.
Both these aspects put together demonstrate why the Indian agricultural scenario complicated and is something that needs looking at.
Say what? Let's try again.
Under a market economics system (our capitalist system) the amount of money earned by a worker is determined by his/her productivity. This idea is called the demand for labour and on the face of it seems quite simple and perhaps correct too. Why? Because this idea allows firms to determine the optimal number of workers to employ. In a situation where increasing a principal input such as land, is not an option and labour is available for cheap and in plenty, wages fall to the bear minimum affecting quality of life.
If your goal, as a firm, is to make the most profit you can, you will hire workers up to the point where the marginal revenue product is equal to the wage rate, because it is not efficient for a firm to pay its workers more than it will earn in revenues from their labor.
When you think about it, this system is grossly violent. What it suggests is that the amount anyone should get paid (such as you or a farmer or me) should be determined by the additional value/profit we create for a business owner via our labour and effort. Not commensurate with experience, skill, basic human needs, standards of living or costs, ONLY based on what a business gets out of us. What is wrong with this? Only everything.
This is exactly why agriculture and farmers are in a sad situation. Agriculture is India's back-up default work option. There is much more labour than there is prodcutivity in land or in agricultural work per se. The money, to be made, per worker (as per the wage idea we just discussed) is minescule.
So what can be done about agriculture? What needs to happen is the creation of sustained local production or transition industries to absorb and create remunerative jobs for unskilled or semi-skilled labour. The current farm bills/laws made by government do neither, to understand why, read Vivek Kaul's excellent analysis on the issue.
The second priority should be manufacturing and exports. Not domestic demand but exports. Income needs to come into the hands of small manufacturing firms and exports are a great way to do this. The third, oft-talked about, and yet always disregarded, aspect is the pipeline of skilled workers for the services industry and semi-skilled workers for the manufacturing sector.
India’s youth is at a whopping 35 per cent of its entire demography and yet many are unemployed. Of the total number of people in India who decide to study at all, only 10 per cent reach collegiate levels. Most drop-out at primary or secondary school, the vast majority being women, but a substantial absolute number is men too. For these people, small-scale industries can and should provide employment but don’t. On paper 85% of Indian manufacturing firms employ less than 50 workers. This of course can’t be true, but it definitely suggests regulatory costs that these industries are unwilling to bear.
Nobel laureate Abhijit Banerjee’s prescriptions for curing unemployment focus on putting money into the hands of the Indian public, whether that is through raising the wages for India’s employment guarantee schemes, raising prices for farmers and letting the rupee slide. He also advocates clearer regulation that does not depend on the government controlling what people think or how they act. Much of what he says makes for common sense, and one of those solutions might be better than all of the others. That solution is creating jobs for the majority of India’s workforce, rural migrant labour.
The solution is strengthening MNREGA - the implementation of the radical idea that the majority of India's people, the poor, need safety nets because the biggest risk to life is absolute poverty.
The MNREGA has been in the news quite a bit recently. The Indian Express examined data on the MNREGA portal and concluded that the pandemic has been terrible for rural distress, the economy as a whole and much worse for women, in particular. Brinda Karat extolled the virtues of MNREGA in this piece in the Hindu, calling it no less than a ‘lifeline’ for the working poor.
In early May 2020, finance minister Sitharaman allocated an additional Rs 40,000 crore as part of the economic stimulus package to MGNREGA, ostensibly acknowledging its importance as a policy instrument. The Mahatma Gandhi National Rural Employment Guarantee Act, the legally enacted version of an employment guarantee scheme, has been an Indian labour law and social security measure that aims to guarantee the ‘right to work’, since 2005.
The act aims to enhance livelihood security in rural areas by providing at least 100 days of wage employment in a financial year to every household, whose adult members volunteer to do unskilled manual labour.
The most important part of MGNREGA’s design is that the ‘employee guarantee’ is justiciable in that it is a legally backed guarantee that is enforceable by court, and is available to any adult in rural India. The guarantee works in such a way that any adult demanding work must be given some work, within 15 days of demanding it. This demand-based trigger enables the self-selection of workers and gives them an assurance of wage employment. The act provides a vital safety net for the poor. Since 2006, it has expanded to cover all districts in India, providing work to 50 million rural households at a cost of US $8.9 billion.
Since 2012, an average of 18 per cent of the annual budgetary allocation for MGNREGA has been spent on clearing pending liabilities from the previous years. This year too, the financial year began with pending wage and material liabilities of Rs 16,045 crore. The allocation in FY 2020-21 has been highest since this law was passed; Rs. 1 lakh crore. Given that the MNREGA has been a much-criticised policy measure with controversies surrounding fake muster rolls and even questions on its efficacy, one has to wonder why the sizeable allocation?
The answer is obvious when one looks at what the 1 lakh crore can buy. According to estimates, 1 lakh crore will help generate employment for about 400 million unorganised workers who have been worst affected by the pandemic and the consequent lockdown nationally and thereafter by states.
According to the MGNREGA website, around 3.5 million new job applications have been made as of May 2020. Last year, during approximately the same period, the applicants were only 1.8 lakh. This trend indicates a clear picture of rural economic distress, applications have increased by over twenty-five times. National data also shows that cumulative job applications as on May 20 stood at 43.3 million people and only half of them have been provided work so far. The maximum increase in demand for job cards has been from Uttar Pradesh, Bihar, Rajasthan, Chhattisgarh and Odisha, states which have received the greatest number of migrant workers from various parts of the country.
According to the Centre for Monitoring Indian Economy, rural unemployment rose from 8.49% to 22.67% in the wake of the pandemic. Despite this, there is a lively debate around whether MGNREGA provides a vital social safety net for the poor or merely burdens the economy. Given the current state of the economy, worsened by the pandemic, there is good reason to believe that even additional allocation to MNREGA may fail to pull people out of poverty traps.
There is precedence for this idea, for example – Nobel laureates Esther Duflo and Abhijt Banerjee’s work on the ultra-poor clearly demonstrates how a package of interventions covering health, education and importantly, livelihood skills and an economic asset, provides the big ‘push’ to pull families out of poverty and keep them out of it.
Employment guarantee schemes and even minimum wages or the idea of a universal basic income work to achieve much the same goals – provide a floor of social security to those who need it the most. In all cases, the mechanism is either based on self-selection or is simply universal, removing the losses of inefficiencies acquired through the costs of trying to identify and accurately target the poor.
The MNREGA allows true atma-nirbharta (self-reliance) in a way that focusses on the individual. In stronger and better implementation of MGNREGA, the potential for Gandhi’s ‘country of self-reliant villages’ could truly be realised. Given that work allocated under MGNREGA is fundamentally local, gram panchayats (village councils) could play a key role directing and leading the planning process of MGNREGA works, bottom up.
MGNREGA could benefit from labour and safety standards, insurance, basic welfare nets including medical-aid, schooling for children on-site and so on. Other demand enhancements of its capacity to smoothen income risks from agriculture, to increase remittances during a lean agricultural season and to encourage the development of low-skilled or semi-skilled manufacturing, could also be worthwhile pursuing.
Given that the MNREGA is a national scheme, its potential to do good during the unprecedented migrant crisis could also have been huge. For instance, states could have regulated its provisions such that unemployed migrant labours were not crowded out of the programme. Features such as flexible work options, on-site speedy grievance redressal mechanisms and the provision of work for persons with disabilities (PWDs) and the elderly, as appropriate, would constitute social safety nets for a class of informal workers who hitherto have never had any welfare support.
The Economic Survey of 2019-20 suggested that MGNREGA data, offers an ‘early warning’ window into rural distress. Along with that, it also offers a solution for different kinds of employment arrangements, that if timed right and targeted better, already focuses on the right sector of the economy with the potential to pull the rest of the economy out of distress.
None of this is difficult or impossible to do - even in a situation where the government is not stimulating spending and demand as much as it should, simply because it has run out of the money to do so.
Surely this is common sense? Imagine India, our country, with safety nets for those who need it the most. Did that make you smile?