- What are the reasons for introduction of Fiscal responsibility and Budget Management (FRBM) act, 2003? Discuss critically its salient features and their effectiveness.
- What is meaning of the term tax-expenditure? Taking housing sector as an example, discuss how it influences budgetary policies of the government.
- Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth-services vis-a-vis industry in the country? Can India become a developed country without a strong industrial base?
- “While we flaunt India’s demographic dividend, we ignore the dropping rates of employability.” What are we missing while doing so? Where will the jobs that India desperately needs come from? Explain.
- The nature of economic growth in India in recent times is often described as a jobless growth. Do you agree with this view? Give arguments in favour of your answer.
- Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme.
- “Success of make in India program depends on the success of Skill India programme and radical labour reforms.” Discuss with logical arguments.
- How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country?
- Among several factors for India’s potential growth, the savings rate is the most effective one. Do you agree? What are the other factors available for growth potential?
- Account for the failure of the manufacturing sector in achieving the goal of labour-intensive exports rather than capital-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports.
- How are the principles followed by the NITI Aayog different from those followed by the erstwhile planning commission in India?
- How would the recent phenomena of protectionism and currency manipulations in world trade effect macroeconomic stability of India?
- Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.
PLANNING IN INDIA
Economy as a discipline deals with the production and consumptions of goods and services, money supply in the country. Economy also includes issues such as planning, budget, trade, growth, development, employment, inflation, investments, financial markets, industries, etc.
Indian economy is usually referred to as mixed economy, because it has features of both socialist (government ownership of factors of production) and capitalist (private ownership of factors of production) type of economy. Indian economy numbers and rank as per International Monetary Fund (IMF), 2019 is given below:
History of Planning in India & Origin of Five-Year Plans:Though the planned economic development in India began in 1951 with the inception of First Five Year Plan, theoretical efforts had begun much earlier, even prior to the independence. Setting up of National Planning Committee by Indian National Congress in 1938, The Bombay Plan & Gandhian Plan in 1944, Peoples Plan in 1945 (by post war reconstruction Committee of Indian Trade Union), Sarvodaya Plan in 1950 by Jaiprakash Narayan were steps in this direction. Five-Year Plans (FYPs) are centralized and integrated national economic programs. Joseph Stalin implemented the first FYP in the Soviet Union in the late 1920s. Most communist states and several capitalist countries subsequently have adopted them. After independence, India launched its First FYP in 1951, under socialist influence of first Prime Minister Jawaharlal Nehru. The process began with setting up of Planning Commission in March 1950 in pursuance of declared objectives of the Government to promote a rapid rise in the standard of living of the people by efficient exploitation of the resources of the country, increasing production and offering opportunities to all for employment in the service of the community. The Planning Commission was charged with the responsibility of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most effective and balanced utilisation of resources and determining priorities. The first Five-year Plan was launched in 1951 and two subsequent five-year plans were formulated till 1965, when there was a break because of the Indo- Pakistan Conflict. Two successive years of drought, devaluation of the currency, a general rise in prices and erosion of resources disrupted the planning process and after three Annual Plans between 1966 and 1969, the fourth Five-year plan was started in 1969. Initial plans had focus areas such as agriculture and rapid industrialization. Later the focus shifted towards growth, self-reliance, poverty alleviation, modernization and social justice. Planning in India till early 80s was characterized by lower rate of economic growth at around 3.6 %, which is mainly attributed to the import substitution strategy and the inefficiency of the public sector enterprises. During this period, our country made impressive progress in field of irrigation, agriculture productivity, basic industries, science and technology. On the flip side the poverty figures of the country didn’t see much of improvement due to the low growth and failure of the trickle-down policy. The employment opportunities created by the heavy industries could not match with the rate of increase in labour force, so the occupational structure remained unchanged. The 1990s economic reforms tried to undo many of the failures of Indian planning. The plans were in line with the Liberalization and Privatization of the economy. Later the concepts of indicative planning, governance issues, economic reforms and inclusive growth were incorporated into the planning. By this the GDP growth rate increased consistently that the decade of 2001 to 2010 average growth rate was 7.6%. Occupational structure got tilted in favour of service sectors. The number of people below poverty line also had shown improvement from more than 50% in 1950s and 1960s to 22% in 2012. But issues like regional imbalances, nutritional security, unemployment, etc are yet to be addressed comprehensively. The Eighth Plan could not take off in 1990 due to the fast-changing political situation at the Centre and the years 1990-91 and 1991-92 were treated as Annual Plans. The Eighth Plan was finally launched in 1992 after the initiation of structural adjustment policies. For the first eight Plans the emphasis was on a growing public sector with massive investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, the emphasis on the public sector has become less pronounced and the current thinking on planning in the country, in general, is that it should increasingly be of an indicative nature.
From 1966-69, three Annual Plans were devised. While the Fourth Plan was designed in 1966, it was abandoned under the pressure of drought, currency devaluation, and inflationary recession on the economy. Therefore, the government opted for an Annual Plan in 1966-67 and the subsequent two years. This is period is also called – Plan Holiday.
Annual Plan (1978-80):
Also called the Rolling Plan, it helped to achieve the targets of the previous years.
Eighth Five Year Plan could not take place due to the volatile political situation at the Centre. Two annual programs were formed in 1990-91& 1991-92
The Planning Commission was created in 1950 through a mere Cabinet resolution. It has no Constitutional sanctity. It came into being through a mere executive order and then it just continued to grow, taking over jobs assigned to other institutions like the Finance Commission. For example, allocation of funds to the States was the job of the Finance Commission, sanctified by the Constitution, but the Planning Commission appropriated this task to itself.
It even got into micromanagement of devolution of funds, how schemes should be run and even to the extent of how the states should spend those funds. The States were made to follow the “one size fits all” theory of the Planning Commission for the implementation of the schemes. The States wanted more flexibility; they wanted freedom to design their own schemes, the way they should be implemented and the way funds meant for various schemes should be spent.
The Planning Commission did try to inject some flexibility, but that did not have much impact. Also, the majority of the staff at the Planning Commission are generalists, not domain experts, which made it frustrating for the States to explain different issues.
Planning Commission was initially envisaged only as a think tank, but over a period of time it appropriated to itself the work of other institutions and started the tight-fisted approach of allocating funds between the Centre and the States and among different Central Ministries. This was a task which should have been done by the Finance Commission and the Finance Ministry, for which they are mandated, but the Planning Commission appropriated this job to itself.
Planning can never be a flawless exercise in a country which is vast and diverse like India. Lack of a long-term perspective and evaluation backed by data is one of the criticisms on Indian planning. Regional imbalances and sectoral skewedness were also attributed to the planning. Many parallel bodies such as Finance Commission, National Development Council also added to the complexity of planning.
In spite of these bottlenecks, Indian planning fairly succeeded in raising the annual GDP growth rate after 1990s, reducing the population under poverty line and had shown progress in many social indicators. Planning Commission set up in 1950 handed over the role to NITI Aayog which took the role of planning.
NITI Aayog – Old wine in new bottle?
On current evidence, NITI Aayog can best be described as a poor relation to the Planning Commission rather than a brave new initiative. As yet, no significant policy prescriptions have emerged from it, although it includes many experts who are world-renowned. Then the usual problems that beset government institutions are already surfacing. Some in it argue for more members to distribute the workload. There also appears to be some variance over the responsibility of the office bearers.
NITI Aayog’s mandate is very broad and sweeping. It has inherited the physical infrastructure as well as the manpower from the erstwhile Planning Commission. (It has, however, taken a number of experts/advisers laterally.) Yet, the underlying ecosystem that governs the thinking has not changed demonstrably.
The Aayog’s performance can be assessed with reference to what was promised when it was established. NITI Aayog was expected to address new realities of macroeconomic management that were missed by the Planning Commission.
The stated objective was that the States would be allowed to implement their plans or functions assigned to them in the Constitution without having to get them approved. To this limited extent of giving up the practice of formal approval of the State plans, NITI Aayog has delivered.
The official notification establishing NITI Aayog recognized the pitfalls of the one-size-fits-all approach inherent in Central Planning. It is not very clear in what manner this has been changed.
The notification also mentions the importance of making States the actual drivers of national development. However, most of the programmes initiated in the recent past were conceived and initiated by the Prime Minister and the Central Government, and the States have been more or less persuaded to implement them.
The major complaints of States in regard to the functioning of the Planning Commission remain unaddressed. The complaints have largely been on the perception that the Centre is encroaching upon the States’ responsibilities; imposing its own priorities while funding; assuming, without basis, that governance in States is weak despite the Union’s own dismal record in administering Union Territories; taking credit for schemes that are jointly funded; and continuing to advocate a one-size-fits-all approach in administration.
The CSS had to be reformed in the light of the recommendations of the Fourteenth Finance Commission. Though the NITI Aayog was involved in the process, the manner in which these schemes were modified shows that the effort was only to shift greater responsibility onto States in terms of financing. The reform does not in any manner reflect the qualitative change in the design and implementation of the Central schemes that was promised when the Planning Commission was wound up.
A second opportunity arose when the distinction between Plan and non-Plan was removed. At that point, the organization had an opportunity to insist on taking a sector-wise comprehensive view of capital and revenue expenditures. However, that has not been done.
The Fourteenth Finance Commission suggested a new institutional mechanism for transfers outside the recommendations of the Finance Commission in the interest of sound fiscal federalism. NITI Aayog could take advantage of the underlying logic of such institutional mechanisms and devise its methods in a manner consistent with the spirit of the recommendations.
NITI Aayog would have been in an ideal position to provide the government, which suffers the lack of a sound advisory establishment, with the crucial research heft and intellectual underpinning for its many policy initiatives, making it a genuine and powerful agent of transformation.
The NITI Aayog could be freshly empowered to serve as an advocate for progressive, market-friendly reform, so the political leadership has additional input on whatever policy proposals may emerge from the traditional bureaucracy.
MOBILIZATION OF RESOURCES
Monetary and fiscal policies in any country are two macroeconomic stabilization tools. However, these two policies have often been pursued in different countries in different directions.
Monetary policy is often pursued to achieve the objective of low inflation to stabilize the economy from output and price shocks.
On the other hand, fiscal policy is often biased towards high growth and employment even at the cost of higher inflation. For achieving an optional mix of macroeconomic objectives of growth and price stability, it is necessary that the two policies complement each other. However, the form of complementarily will vary according to the stage of development of the country’s financial markets and institutions.
By definition fiscal policy is “The government’s attempt to influence the economy by varying its purchases of goods and services and taxes to smooth the fluctuations in aggregate expenditure, use of the government budget to achieve macroeconomic objectives such as full employment, sustained long term economic growth and price level stability.”
Fiscal policy aims to increase the rate of growth and employment rate as well. Also, government tries to control fluctuations in aggregate demand through fiscal policy measures.
India’s fiscal policy architecture
The Indian Constitution provides the overarching framework for the country’s fiscal policy. India has a federal form of government with taxing powers and spending responsibilities being divided between the central and the state governments according to the Constitution. There is also a third tier of government at the local level.
Since the taxing abilities of the states are not necessarily commensurate with their spending responsibilities, some of the centre’s revenues need to be assigned to the state governments. To provide the basis for this assignment and give medium term guidance on fiscal matters, the Constitution provides for the formation of a Finance Commission (FC) every five years. Based on the report of the FC the central taxes are devolved to the state governments.
The Constitution also provides that for every financial year, the government shall place before the legislature a statement of its proposed taxing and spending provisions for legislative debate and approval. This is referred to as the Budget. The central and the state governments each have their own budgets.
The central government is responsible for issues that usually concern the country as a whole like national defence, foreign policy, railways, national highways, shipping, airways, post and telegraphs, foreign trade and banking.
The state governments are responsible for other items including, law and order, agriculture, fisheries, water supply and irrigation, and public health. Some items for which responsibility vests in both the Centre and the states include forests, economic and social planning, education, trade unions and industrial disputes, price control and electricity. There is now increasing devolution of some powers to local governments at the city, town and village levels.
The taxing powers of the central government encompass taxes on income (except agricultural income), tax on supply of goods and services (other than alcohol), customs duties, and inter-state sale of goods.
The state governments are vested with the power to tax agricultural income, land and buildings, sale of goods (other than inter-state), and excise on alcohol.
This process is steered by the Planning Commission. The main fiscal impact of the planning process is the division of expenditures into plan and non-plan components. The plan components relate to items dealing with long-term socioeconomic goals as determined by the ongoing plan process. These funds are generally in addition to the assignment of central taxes as determined by the Finance Commissions.
Non-plan expenditures broadly relate to routine expenditures of the government for administration, salaries, and the like. Resources are the means with which the government implements the plans to increase the rate of growth and employment rate. The receipts of government are of two type, revenue and capital receipts.
Revenue receipts include Tax revenue and Non-Tax revenue. Tax revenue constitutes Direct and Indirect Taxes. Direct taxes include income tax, corporate tax, wealth tax, etc. Indirect taxes include the Goods and Services Tax (GST). Non tax revenues include interest and dividend receipts, receipts for services provided by the government enterprises, other fees and royalties from government own properties.
Capital receipts in turn are of two type, non-debt receipts and debt receipts. Non debt capital receipts are mainly recoveries of loans and advances. Debt capital receipts are various types of market loans, short term borrowings, external loan, etc. Disinvestment of Public Sector Enterprises comes under Non debt capital receipts.
The Union government’s revenue expenditure comprises money spent on revenue account — the amount spent on running its elaborate machinery. All grants given to state governments and Union territories are also treated as revenue expenditure, even if some of these grants may be used for the creation of capital assets. In India, the payment of subsidies is also included in revenue expenditure.
Union government defines capital expenditure as the money spent on the acquisition of assets like land, buildings, machinery, equipment, as well as investment in shares.
Capital expenditure is the part of the government spending that goes into the creation of assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports and seaports. Capital expenditure also includes investment by the government that yields profits or dividend in future.
Why is Capital Expenditure important?
High capital expenditure usually means more investment by the government towards the creation of infrastructure and other assets that are crucial for rapid economic growth. Capital expenditure means construction of roads, highways, dams, bridges, ports, airports and railway lines.
India experienced low growth rates for decades as it failed to develop physical and social infrastructure, the key to achieving high economic growth.
Purchase of new weapons and weapon systems such as missiles, tanks, fighter jets and submarines require extensive capital investment. Nearly a third of the central government’s capital expenditure goes into the defence sector, mostly for weapon purchases. Though defence spending is counted as capital expenditure, it does not result in the creation of infrastructure that can facilitate economic growth.
Capital expenditure versus revenue expenditure debate
In India, both the Union government and state governments are criticized for incurring very high revenue expenditures that leave little money for developmental spending.
In the case of Union budgets, 85-90% of the money spent goes into revenue expenditure. Note that high revenue expenditure impedes developmental efforts.
High revenue expenditure means that the government machinery is spending too much money on sustaining itself, rather than creating assets required to achieve high economic growth.
In India, up to a fourth of the Union budget goes into interest payment. It means that the government borrows Rs 6-7 lakh crore every year just to meet its interest payment liabilities, leaving very little for creation of assets.
Deficits: Resource mobilized may fall short of the budgetary requirements of the financial, this brings as to the topic of deficit. There are three types of deficits.
- Revenue Deficit
- Fiscal Deficit and
- Primary Deficit
Revenue deficit: By definition, revenue deficit is the excess of revenue expenditure over revenue receipts. A revenue deficit occurs when actual revenue collected by government falls short of Budget estimates. In Budget 2019, the revenue deficit was estimated at Rs 4,85,019 crore in 2019-20, up 18 per cent compared to revised estimates of Rs 4,10,930 for the previous financial year.
Fiscal Deficit: When the total budget expenditure is more than the total receipts (excluding the borrowings), the difference is fiscal deficit. The deficit is financed by borrowings. Increasing fiscal deficit may lead to inflationary pressures, more debts and interest payments.
Fiscal deficit, by definition, is the difference between a government’s revenue receipts plus non-debt capital receipts (NDCR) and its total expenditure.
But what does that mean? Fiscal deficit occurs when a government collects lesser money – in terms of personal and corporate taxes, GST, market loans and NDCR (money received from sale of old assets) etc. – than it spends, on items such as central sector schemes, salaries of employees, subsidies, payments to states and so on. In other words, a deficit occurs when a government spends more money than it receives.
But why is there so much emphasis among economists to contain fiscal deficit at a certain level?
A higher fiscal deficit will consequently push the government to borrow more, thereby putting pressure on bond yields which could result in higher overall lending rates as well.
Higher government borrowing also reduces the pool of available funds which could be lent to or invested in other businesses, thus increasing the risk of crowding out private investment.
For example, the Union Budget worth Rs 27.86 lakh crore presented in July 2019 pegged fiscal deficit at Rs 7,03,760 crore (3.3 per cent of GDP). The lion’s share of that was estimated to be funded by market borrowings, such as government securities and treasury bills worth Rs 4,48,122 crore.
Besides market borrowings, components such as securities against small savings, state provident fund and external debt also help a government meet its fiscal deficit, or the shortfall in the money required for meeting expenses.
Primary deficit: Primary deficit is fiscal deficit less interest payments. In Budget 2019, the primary deficit was estimated at Rs 43,289 crore in 2019-20 over interest payments of Rs 6,60,471 crore. (Rs 7,03,760 crore – Rs 6,60,471 crore = Rs 43,289 crore).
The fiscal deficit may be due to the interest payments of the past loans. So, in primary deficit the interest component is negated in order to quantify the deficit due to current year operations alone and is considered as the measure of financial prudence of the present government.
What happens when you spend more than your means?
You borrow or sell your assets to spend more. Deficit Financing is the term by which a government who spends more than its income funds and runs the machinery and borrowings is usually a large part of deficit financing. But what is wrong if there is a deficit? Regular deficits mounted over years can create a fiscal imbalance.
The fiscal imbalance has resulted in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affected the growth of economy. Fiscal imbalances over decades will result in fiscal crisis.
The consequences of fiscal crisis i.e. sustained high fiscal deficits are as follows:
A.Debt Trap: Maintaining sustainable levels of government debt is critical to sustained high macroeconomic outcome. In fact, typically the fiscal rules under the fiscal responsibility and budget management framework entail assessment of what is usually a sustainable level of public debt for the country. With increasing levels of borrowing for financing activities, which have zero or low yields, interest payments increase at faster rate. Thus, non-productive expenditures rise, give rise to higher and higher revenue
B.Cut in Capital Expenditure: Because of debt service payments forming a higher proportion of expenditures, all other activities of the government suffer. The main sufferer in this process is government capital expenditure in both economic and social
C.No Increase in Expenditure on Education and Health: High debt service payments also prevents increase in or even maintenance of real expenditure on social services, i.e. on education and public
D.High Interest Rates: The continued high level of public borrowings has an effect on the rest of the economy through prevalence of high interest
E.Slow Economic Growth: The fiscal imbalance affects economic growth in the country. Fiscal imbalance first affects capital formation which in turn affects the economic
F.Other Consequences: Some other consequences of fiscal crisis are:
- Fiscal imbalance may also lead to inflation in the economy.
- High fiscal deficit may discourage foreign investment in the country.
- The government has to borrow additional funds to solve fiscal deficit, which put extra burden on the government for payment of interest. It further worsens the fiscal imbalance.
- The fiscal imbalance however still continue as the Government has failed to reduce its own expenditure. The extravagant expenditure done by politicians and minister continues without any restriction. The populist policy followed by the Government, failure to reduce fertilizer subsidy, and massive burden of interest payment has still not taken out the Indian economy from a situation of severe fiscal imbalance.
What has the Government done so far?
While these institutional arrangements initially appeared adequate for driving the development agenda, the sharp deterioration of the fiscal situation in the 1980s resulted in the balance of payments crisis of 1991, which would be discussed later.
Following economic liberalisation in 1991, when the fiscal deficit and debt situation again seemed to head towards unsustainable levels around 2000, a new fiscal discipline framework was instituted. At the central level this framework was initiated in 2003 when the Parliament passed the Fiscal Responsibility and Budget Management Act (FRBM Act). But the road to FRBM Act was not so simple. Let’s see how it evolved.
It would be useful to distinguish the three phases of fiscal reforms i.e., pre- liberalisation era, post-liberalisation till FRBM Act and Post FRBM Act.
While India is considered a mixed economy, until 1990-91 the balance of the economic structure was titled more towards socialism. The country needed significant expenditure into key long-term industries and projects which the private sector was not allowed to undertake as these initiatives had long gestation period.
As a result of a protectionist approach most of the capital expenditure was being funded by the government sector and this funding for these put a lot of burden on the government to continue incurring capital expenditure and thereby running high level of fiscal deficit.
During the period 1980-81 to 1990-91, the contribution of interest payments and subsidies as percentage of the revenue expenditure rose from 18% and 14% in 1980-81 to 29% and 17% in 1990-91 respectively. For the same period, the contribution of defence and other revenue expenditure has declined from 23% and 45% in 1980-81 to 15% and 39% in 1990-91 respectively.
By 1990-91 the Indian economy was quite weak, it was burdened with heavy debt rising interest costs and deficits. India traditionally had a current account deficit with significant portion of the imports being that of oil and petroleum products. The weak economic situation further worsened with the Gulf-war.
The country’s foreign exchange reserves had depleted significantly and the level of reserves was only sufficient to finance imports of another three weeks.
India had to arrange for emergency funds from the IMF to avoid default on external obligations. In response to the crisis the government headed by Prime
Minister Narasimha Rao commenced on the path of economic liberalisation whereby the economy was opened up to foreign investment and trade, the private sector was encouraged and the system of quotas and licenses were dismantled.
Fiscal policy was reoriented to cohere with these changes. In order to augment the receipts, the government undertook to reform both the direct and indirect taxes and for the first time the country embarked on the policy of disinvestment. The measures proposed above to meet the crisis are often referred to as the New Economic Policy of 1991. These measures could broadly be classified under three heads viz. liberalisation, privatisation and globalisation.
Under liberalisation many industries were freed from the licensing requirement, the investment limit in small scale industries was enhanced, free determination of interest rates by commercial banks and abolition of restrictive trade practices.
With privatisation, the government invited the private sector to own and manage part of Public Sector Enterprises.
And among the measures for globalisation included reducing tariffs, partial convertibility of the currency and increasing limits of foreign investment in India.
In addition to the above, the government also brought in reform in the tax structure and reduce the noncapital expenditure like subsidies. The reforms were calibrated to bring about revenue neutrality in the short term and to enhance revenue productivity of the tax system in the medium and long term.
The overall thrust was to decrease the share of trade taxes in total tax revenue, increase the share of domestic consumption taxes by transforming the domestic excises into a VAT, and increase the relative contribution of direct taxes.
However, given the large debt burden, the interest component would not reduce significantly or at a rapid pace as desired. The proportion of interest to total revenue expenditure rose form 32% in 1991-92 to 36% in 2000-01, which was compensated by fall in subsidies at 10% from 15%.
The economic policy had fairly significant positive impacts on the revenue and primary deficits as well. The new economic policy brought with itself a fresh approach, the government not only liberalised the licensing it also began with the disinvestment of the public enterprises and its holding.
This had a twin effect; firstly, it led to lowering the capital expenditure and secondly, it increased the capital receipts.
Thus, post 1991 there was steady decline in the primary deficit as percentage of GDP.
The period from 1996-97 to 2002-03 was characterized by large rise in public debt involving large interest payments year on year which led to the diversion of resources from investment to debt servicing.
Fall out of the Asian crisis of 1996-97 which gridlocked cheaper money from external sources, the high and rising fiscal deficits during the period from 1996- 97 to 2002-03 which resulted in larger government borrowings from the market. The government incessantly tapped the markets for borrowings and very little fund was available for the private sector investment. This is often referred to as the “crowing-out” effect and was one of the major reasons for slowdown in economic growth.
Now the economy was literally strapped for fresh investment, on one hand the government vide its economic policy had taken the stance of reducing the role of public sector and encourage private sector and on the other hand the private sector was not able to access the resource pool as the government was utilising most of resources for funding the revenue deficits.
Moreover, given the high deficits the government could not afford to undertake investments on its own. The focus at that time was to reduce the fiscal deficit and not increase it. However, the interest burden continued to mount and thus the difference between the fiscal and primary deficits rose.
The second phase of fiscal consolidation during 2004-09 is regarded more robust due to two very important factors. First, it has taken place under the guidance of a rule based fiscal framework (FRBM Act, 2003 and FRBM Rules,
2004). Secondly, the period is characterized by a sustained elevated real growth of the economy. Empirically, low level of fiscal deficit in India has been associated with high level of real GDP growth and vice versa.
As a result of the efforts taken, fiscal deficit as a proportion of GDP started declining.
The macroeconomic environment has been under stress since 2008-09 when the global economic and financial crisis unfolded, necessitating rapid calibration of policies. Fiscal expansion that followed in 2008-09 and 2009-10 did yield macroeconomic dividends in the form of a sharp recovery in 2009-10. In course of 2010- 11 the non-tax revenues from auction of telecom spectrum (3G and broadband) resulted in higher than anticipated receipts.
The continuance of the expansion well into 2010-11 had macroeconomic implications of higher inflation, which necessitated a tightening of monetary policy and gradually led to a slowdown in investments and GDP growth that resulted in a feedback loop to public finances through lower revenues. The fiscal deficit of 4.91 percent in 2012-13 was achieved by counter balancing the decline in tax revenue, mainly on account of economic slowdown, with higher expenditure rationalization and compression.
What is fiscal consolidation?
Government reforms the fiscal policy through fiscal consolidation. Fiscal consolidation refers to the steps taken by a government in the form of policies to narrow the fiscal deficit. The Union government improves its financial health by way of fiscal consolidation.
RBI Attempts towards Controlling Borrowing: In September 1994 an agreement (without legislated sanction) was signed between the central government and the Reserve Bank of India (RBI) to phase out the system of ad-hoc treasury bills by 1997- 98. Ad-hoc treasury bills facilitated automatic monetization of the budget deficit. This ad-hoc Treasury bill was replaced with Ways and Means.
Government of India’s Debt-Swap Scheme: Government of India (GoI) formulated a Debt Swap Scheme (DWS) realizing the mounting burden of interest payments on the states, and to supplement their efforts towards fiscal advances management. The scheme was in operation from 2002-03 to 2004-05.
The central government used the proceeds of debt swap to effect prepayment of its debt to the National Small Saving Fund (NSSF) at lower interest rate. This had the effect of bringing down centre’s overall debt as well as its effective interest rate. The debt-swap scheme was only a small step in the direction of dealing with the unsustainable deficit faced by the states. It covered only 15 percent of their total debt.
Here, again, the scheme merely aimed at reducing the cost of servicing the debt, and not extinguishing it. Though there was a benefit of Debt-Swap Scheme in terms of reducing pressure on the state by way of lower interest rate but it led to loss of revenue for centre as the high cost loan were brought to lower level.
Efforts by Finance Commission: In the tax devolution process time to time different Finance Commissions have taken certain criteria and have assigned them certain weights, considering the urgency of fiscal consolidation. Two such notable efforts are introduced in 10th and 11th Finance Commissions.
Tax Effort: Tenth Finance Commission (TFC) for the first time took tax effort as criteria for tax devolution to state. It worked as an incentive among the state to raise tax potential capacity. Tax effort was measured by the ratio of per capita own tax revenue of a state to its per capita income.
Fiscal Discipline: Eleventh Finance Commission for the first time introduced the fiscal discipline criteria for tax devolution. The index of fiscal discipline was arrived at by relating improvement in the ratio of own revenue receipts of a state to its total revenue expenditure to average ratio across all the state.Weight of fiscal discipline was increased in the subsequent Finance Commissions.
Under deficit principles a group of deficit indicators, viz, Revenue Deficit and Gross Fiscal Deficit have been identified and targeted. FRBM Act gave a medium-term target for balancing current revenues and expenditures and set overall limits to the fiscal deficit at 3% of GDP to be achieved according to a phased deficit reduction roadmap.
The FRBM Act enhanced budgetary transparency by requiring the government to place before the Parliament on an annual basis reports related to its economic assessments, taxation and expenditure strategy and three-year rolling targets for the revenue and fiscal balance.
It also required quarterly progress reviews to be placed in Parliament. The Act aimed at reducing the gross fiscal deficit by 0.5% of GDP in each financial year beginning on April 1, 2000.
Is the FRBM Act a miracle cure?
While the FRBM Act is a good attempt at fiscal consolidation both at the centre and in the states, its design has certain flaws. It lacks clear accounting definitions to target fiscal indicators. This has allowed for creative accounting. For example, off-budget bonds have been issued to finance subsidies and have thus been excluded from the definition of the FRBM Act-relevant deficit variable. Budget preparation is opaque.
Numerical targets have not been supported by comprehensive expenditure reform plans. Expenditures have consistently been underestimated in recent years, and particularly so if off-budget bonds are included.
In addition, the assumptions underpinning the budget do not always include annual forecasts for key macroeconomic variables, and the discussion of fiscal risks is limited. Historically, budget projections have been subject to systematic forecast errors.
The FRBM Act focuses on a current balance target. This allows weaknesses in budget classification to be exploited, by misclassifying current expenditures as capital expenditures.
Targeting the current balance may also bias spending against education and health, which have a large current expenditure component. In addition, the international experience illustrates that deficit-type targets, such as the current balance, are more likely to reduce incentives for fiscal savings in good times, and to force adjustment in bad times (i.e. procyclicality). There are no explicit automatic penalties for missing fiscal targets and/or not following budget procedures under the FRBM Act or the provision for an independent assessment of compliance with the FRBM Act.
Numerical targets under FRBM have not been supported by comprehensive expenditure reform plans. Despite rapid economic growth and buoyant revenues, India’s inability to contain expenditure growth led to modest declines in the general government debt. Since the enactment of the FRBM, general government debt fell by only 7-8 per cent of GDP and, at 80 percent of GDP, is high by emerging markets standards.
FRBM has emphasized on current balance target. This allows weaknesses in budget classification to be exploited, by misclassifying current expenditures as capital expenditures.
Targeting the current balance may also bias spending against education and health, which have a large current expenditure component. Focus on current deficit type targets such as the current balance are more likely to reduce incentives for fiscal savings in good times, and to force adjustment in bad times.
FRBM Act in India need to be accompanied by an overarching structural reform effort covering intergovernmental fiscal relations, public sector employment, subsidies, and the financial system.
For achieving transparency clarity in institutional arrangements (intergovernmental fiscal relations, relations between the government and the so-called public accounts, relations between the government and public utilities), in fiscal reporting (including timely, accurate and comprehensive financial statements) and in accounting (in particular through accruals-based treatment). In India sharing of tax powers between Central and state Government is also a source of complexity and the expenditure framework needs to be strengthened by clearly distinguishing between current and capital spending and by placing more emphasis on performance audit.
A big reason for India’s precarious fiscal position has been its struggles with tax collection. The tax-GDP ratio for centre and states combined was 17.1% for India in 2018-19, lower than the EM average (20.9%) is behind the bigger economies such as China, Brazil and Russia. More crucially, India’s tax revenue growth has plateaued in recent years.
One major constraint for India has been its narrow tax base. Since an overwhelming majority of Indians do not pay income taxes, Indian tax revenues remain largely dependent on indirect tax collections, which include all taxes on spending (such as GST). These indirect taxes account for over two-thirds of total tax revenue in India, the largest such proportion among the 10 EMs. But even India’s indirect tax collection has suffered recently because of persistent issues with the implementation of GST.
Zooming into spending, at 27.1% of GDP in 2019, India’s total government spending, which includes central and state governments’ expenditure, is close to the average of all EMs (27.7%). Over half of the government’s expenditure in India goes towards subsidies and other programmes but even this ratio is far behind Russia and Brazil. India also spends a substantial amount on interest payments. At 2017 levels of expenditure (the latest data available for cross-country comparisons), 6% of GDP went towards interest payments, a proportion only behind Brazil.
Higher proportion of interest payments are a direct outcome of the debt levels accumulated by the Indian government. India’s debt-to-GDP ratio at 69% of GDP is the second-highest in among the EM economies, again trailing only slightly behind Brazil. Most of this debt has been domestically sourced. India’s external debt levels (20% of GDP) is the second-lowest among the EMs.
This, though, has been a consistent pattern: India’s fiscal deficit has been consistently higher than the most other EMs over the last decade. But this fiscal excess seems to have had little discernible effect on economic growth: India’s growth rate, too, has been consistently higher than most other EMs over the last decade. The relationship between fiscal deficit and growth is among the most contentious issues in economics but in budget 2020, the Indian government chose to lean towards austerity. As growth dries up across the EMs and in India, only time will tell if this was the right choice.
Way forward: There are two methods of restraining fiscal deficit. First, if the government decreases its expenditure, second, if it increases its revenue.
There are again ways to achieve on both the ends.
SALE OR CLOSURE OF SICK UNITS – India is a center for the public sector undertakings (PSUs). Several of these PSUs are not making profits and demand more than giving. So, selling or closing the non-viable, sick industry would decrease the government spending on them.
REDUCE SUBSIDY PAYMENTS – The subsidy bill is more than 10% of GDP, of which the non-merit subsidies add up to 5.7%. Rationalization these could free up to 6% of fiscal space.
REDUCE INTEREST PAYMENT – India’s government is paying a lot of interest in previous years loans. Approximately one-fourth of the Indian spending of the budget went to interest payments. Therefore, government borrowings need to be reduced in order to decrease interest payments resulting in lower expenditure.
II.Increase in Revenue
PREVENT EVASION AND INCREASE TAX REVENUE – Government needs to take measures to stop tax evasion and streamline the process of tax so that taxpayer base of the country widens which will lead to higher taxation.
Agriculture could be included in the tax net, because distinguishing jobs cannot be the criterion for not paying tax, but rather it should be centered on high and low income. In fact, people for evading taxes disguise their non-agricultural income as agricultural income.
DISINVESTMENT – Disinvestment is PSUs offers the government funding to cover the fiscal deficit and also has long-term advantages, as this money can be spent or invested in productive uses that would generate jobs, increasing revenue and taxpayers. The government has targeted mobilizing 1.05 lakh crores by the means of disinvestment.
ECONOMIC GROWTH – Business promotion will help the economy to flourish. If the economy grows, the government tax revenue increases. It includes setting up a framework conducive to businesses and environmental improvement.
DEVELOPMENT IN INDIA
Economic development as a concept deals with the qualitative aspects of the economic growth. It covers areas such as reduction of inequality and poverty, increase in employment opportunities and welfare of the masses rather than quantitative figures like GDP growth rate or per capita income.
Social, cultural and political entitlements of individuals also get covered under the notion of development. While growth is only pertaining to economic domain, development is a multidimensional concept. The purview of development keeps widening and includes issues like food security, nutritional security, good education opportunity, high health standards, gender equality, environmental sustainability, etc.
Measurement of development got a fillip when UNDP came out with the first Human Development Report in 1990 which included several key innovations. First, it offered a new narrative of development based on the human development paradigm, thereby challenging the sole focus on economic efficiency and per capita income.
Multidimensional Poverty Index (MPI), also developed by UNDP, is another measure available on development. The World Bank and the International Monetary Fund (IMF) have come with Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs) which are accounting for hundreds of factors in order to give a direction to the world economies.
Human Development Index (HDI): Out of all measures, Human Development Index (HDI) by UNDP is mostly used for the purpose of gauging development of a country. The index covers mainly three dimensions of human well-being.
- A long and healthy life, measured as Life expectancy at
- Education, measured as Mean years of schooling and Expected years of schooling.
- A decent standard of living, measured as Gross National Income per capita (PPP US$).
India – a Paradox among developing countries:
India has the most unusual growth pattern for a developing country. It was not the manufacturing sector that led India’s growth but the services sector. India topped the chart of nations in terms of services sector growth and this was primarily because of the information technology sector, in which the country
excelled, but there is more to the story. The growth story of India’s services sector is an outlier in terms of the experience of developing countries across the world.
It has been argued that the services sector growth tends to occur in two waves: one which takes an economy from the low- to middle-income category, and a second one which occurs in middle-income economies, giving them a further boost. The first consists of various informal sectors growing rapidly, whereas the second gets its boost from more sophisticated sectors, such as information technology and finance, triggering the overall services sector growth. It is this second-stage services sector growth that happened in India, rather early and with a vigour rarely seen anywhere else.
Between 1980 and 2009, India’s services sector growth was so large that it picked up 85 per cent of the decline in share of agriculture. That the share of agriculture will decline in the process of development is normal. What this statistic shows is both the remarkably good performance of India’s services sector and the remarkably poor performance of India’s manufacturing sector.
The factors that drove India’s success in the services sector are several and make for interesting economic analysis. First, there was an early policy shift that was rooted in politics but had an unintended, beneficial effect. This had to do with the computing sector. Following a spat with IBM in 1977, India asked the company to leave the country. This caused big disruptions to the computing sector in India, but it also became an inadvertent application of the infant industry argument, whereby India was forced to make its own innovations and advances in this sector. This prepared the initial ground and then, when the economic reform of 1991–93 happened, India’s information technology sector was ready for take-off.
Two of India’s big stumbling blocks, a cumbersome bureaucracy and poor infrastructure, explain a significant part of both its success in the services sector and stagnation in the manufacturing sector. The manufacturing sector, which needs to transport its products over roads and use the nation’s ports to ship goods out for global sales, and has to negotiate the bureaucracy to pay taxes and get permits, was naturally stunted. The services sector, and in particular IT products, on the other hand, was initially largely tax exempted and so did not have to interact much with the bureaucracy.
Further, its outputs did not, for the most part, have to be carted across roads or negotiate ports since they could be digitally sent to the user. Hence, this sector could bypass the nation’s two big stumbling blocks.
Another interesting connection is between democracy and services sector growth. Second wave of services sector growth has a connection with democracy, with more vibrant democracies having an advantage. They create an ethos of openness and connectivity that are crucial to this sector. One obvious factor is internet connectivity. Many nations with severe top down state control place restrictions on digital connectivity to thwart dissent and the amassing of popular opinion. Fortunately, India had the advantage of a democratic system, and it is arguable that this played a significant role in the success of its services sector and, hence, in its overall economic development.
This pattern of growth, coupled with India’s over-production of engineers through the 1960s, 1970s, and 1980s, had an interesting political fall-out. As Silicon Valley took off and there was growing need of expertise in the USA, India became its main partner in this segment of the economy. This caused a warming of relations between the USA and India, which had hit rock bottom at the time of Bangladesh’s independence in 1971 when Indira Gandhi refused to toe Nixon’s line. This political development has been of great help to both the United States and India, with FDI flowing in both directions between the two countries and greater geo-political cooperation between them. With Indians getting more than 50 per cent of the H1B visas (the category meant for professionals) that the USA issues, these links have continued to grow. All these drivers had fallen into place by the early years of this millennium and, by 2003, India seemed to have moved another step up the growth ladder.
India has grown. But. Has it developed!
To complete the picture of how India has developed overall, it is important to look at other primary indicators of progress: literacy, poverty, inequality, and health. The story here has been less encouraging. For a nation committed to equality and socialism, as discussed above, India did surprisingly poorly on these important indicators of overall development. Literacy is a striking example. In higher education, India did remarkably well for a developing economy (though it has, of late, been losing rank), as could be seen from the large presence of Indians in international gatherings of science, engineering, and other areas of higher learning and research. Yet, in terms of basic literacy, it trailed behind much poorer nations.
Given that it is easier to make progress on a low base, the performance was very disappointing up to 1991. It has been moving up more substantially since then. It is also worth noting that there is a great deal of variance across the country, with two states—Kerala and Mizoram—having over 90 per cent adult literacy, whereas in several states it is barely above 60 per cent. These figures hide large gender differences in most parts of India. There is only one state where female literacy is over 90 per cent. This is Kerala.
At the other end, there are states with abysmally low female literacy, such as Rajasthan (52.7 per cent) and Bihar (53.3 per cent). The above numbers are symptomatic of other social indicators, like poverty, health, and malnutrition. Poverty has been declining, with an especially sharp fall after 2009, but with over 20 per cent of the population living on less than $1.90 a day and 60 per cent living on $3.20 a day or less, there is still a great distance to go.
For a nation growing as well as India has in recent years, these indicators provide little comfort and the nation cannot be unmindful of the fact that they can become a drag on overall development and even GDP growth.
Finally, turning to inequality. The numbers here are dismaying and reveal that socialism in India was mainly a rhetorical exercise. The Gini coefficient of income or consumption inequality is high but there are other measures, based on wealth and the tracking of the difference between the super-rich and the median person. This shows very high and worsening inequality, which is likely to have negative spill overs in the long-run, and maybe not that long. In a nation that now has several individuals listed among the world’s wealthiest individuals, the numbers on poverty quoted above tell us that India does have work to do in reversing some of these inequality trends.
Growth ≠ Development:
While India’s growth has picked up in the last few decades, and especially since 2005, as just discussed, India still faces formidable challenges—of deep-seated poverty, endemic corruption, growing inequality, and other anxieties of early growth. How should the nation deal with these challenges? How should India turn the march of technology that is happening around the world and creating turmoil in so many places to its advantage? Is that at all possible? How should it attend to the disquiet of the disenfranchised class, a necessary concomitant of high inequality? As noted above, India did poorly in terms of basic literacy, which resulted in large segments of the population being left behind, causing inequality to rise beyond what would have happened otherwise.
Basic literacy is beginning to catch up now but there is a tendency towards a slide in terms of higher education and research. The country has to bring new, innovative ideas for spreading basic and higher education without breaking the back of fiscal expenditure.
There are four particular areas where India has work to do:
1.Bureaucratic costs: In India, the cost of transactions with the bureaucracy is too high. This curbs enterprise and especially handicaps small businesses, which cannot afford to operate large legal departments to deal with government sanctions and permits and navigate other bureaucratic hurdles. India’s disadvantage in this is caught well by the World Bank’s Doing Business indicator, which is explicitly designed to capture how hard it is for small businesses to do their essential transactions with the government. Among the 190 countries studied by the World Bank, India currently has a rank of 100 in terms of the ‘ease of doing business’
Consider, for instance, the number of days it takes to get the basic permits to start a small enterprise. In Singapore it takes 3 days, in South Korea 4 days, in Bangladesh 20 days, and in India a full month.
A person will hesitate to bring foreign exchange into a country that does not allow foreign exchange to be taken out of the country; similarly, an enterprise pondering whether to start a new business will consider how difficult it is to close it and exit, should the business fail. For this reason, one of the 10 indicators that make up the overall ease of doing business is the time it takes to resolve insolvency and close down a firm. The data on this are quite remarkable. Resolving insolvency in Singapore takes 9 months, in Malaysia 1 year; in India it takes 4 years and 3 months.
The story is similar for the time required to enforce a contract and the time needed to obtain export clearance and customs clearance for imports. In the light of all this, it is not hard to understand why India’s manufacturing sector has failed to take off. Removing cumbersome and unnecessary bureaucratic hurdles is one of the cheapest ways to give the manufacturing sector a boost.
In reality there are thousands of dimensions to measuring a business environment. The aim must not be to target the World Bank’s indicators and work specifically on them. Yet there is a tendency in contemporary India to do just that, because the Doing Business ranking has suddenly become a visible and much-talked about indicator. That can move a nation up the World Bank’s chart and yet miss the substantive improvements the indicators are supposed to approximate.
Also, it is important to remember that ease of doing business is not the same as overall welfare. It would be foolhardy to concentrate on ease of doing business to the exclusion of other measures of a nation’s welfare. One important dimension of human life is how difficult or easy it is for ordinary people to interact with the government. How easy is it to get a driving licence, to pay one’s electricity bills, or to file an income tax return? Doing Business measures the ease of business groups’ interaction with the state, but there is also a need for a measure that captures ordinary people’s ease of interaction with the state. Such a ‘living life’ index would capture an important dimension of economic life alongside what is measured by the Doing Business index.
Finally, the need to eliminate unnecessary hurdles must not be equated with a call for doing away with regulation. No modern economy can run well and for the well-being of its overall population if it is left entirely to the dictates of profit making. We need regulation to direct the economy, and we certainly need laws and controls to curb environmental damage. We cannot allow enterprises to choke our rivers, lakes, and oceans with plastic and chemicals on the grounds of free-market efficiency. But what has happened in India is a stacking-up of old and new rules, many of which serve no purpose other than to slow down decision making and fuel corruption as people are forced to cajole and bribe those in authority to get the necessary permissions.
2.Corruption control: Many observers make the mistake, looking at the corruption all around them, of treating corruption as an inherent part of society. This expresses a rather pessimistic view, and nurtures a sense of helplessness in the face of corruption. Fortunately, there is enough evidence now that corruption can be controlled.
There are examples of economies where corruption has gone down over an even shorter period— a couple of decades. Singapore and Hong Kong are good examples. According to Transparency International’s data, Singapore has less corruption than the UK and USA; Hong Kong less than the USA.
Much of the challenge of corruption control arises from unrealistic assumptions about the behaviour of the agents of the state. Once we recognize that they are human, with their own motivations and aims, we can attempt to draft appropriate laws. This is essentially a problem of mechanism design.
To put the problem in perspective, it may be pointed out that these three countries have ranks of 96 (Brazil), 81 (India), and 77 (China) in terms of the perceived level of corruption among the 180 countries analysed by Transparency International, the least corrupt country (New Zealand) having a rank of 1 and the most corrupt (Somalia) a rank of 180.
The problem is the fact that a determined leader has a surfeit of options when it comes to deciding where to start cleaning up corruption. This leads to a special political challenge of selecting a path and once again forces the economist to trespass from markets into matters of politics. To understand this, consider a nation where corruption is endemic. This can be because there is a natural self-reinforcing element to corruption: if lots of people are corrupt, it seems fine for you to be corrupt. And this logic can lead to a corruption trap (World Bank 2015).
There is also the problem of nations with a complex history of law-making, such as India, where there has been such a build-up of layers of law and custom that it is now virtually impossible to avoid violating the law.
Between central government and the state governments, India has over 30,000 laws, a disproportionate number gathering dust and, worse, occasionally invoked to harass opponents. Therein lies the problem.
What begins as an anti-corruption policy becomes an instrument of disciplining the opposition and the media. It is an important reason why corruption persists and why the persistence of corruption is not necessarily a sign of the leader not being serious about removing corruption but simply a manifestation of a political-economic trap in which nations tend to get caught. And India is no exception.
One way for a leader serious about crime control to handle this is to set up some broad parameters and hand over corruption control to an autonomous authority, with the explicit commitment that, once this authority begins to function, it will have full autonomy, in the way a nation’s supreme court is supposed to have. In Asia, Indonesia is the only country that has had some experience of this kind of institution, though even it has run into problems recently.
3.Norms and institutions: Turing to broader issues, the challenge of mitigating corruption entails thinking of the state as an endogenous institution consisting of individuals with their own objectives and motivations. In controlling corruption, the design of incentives with which economists have been concerned matter, but the social and political setting is just as important.
Even when our norms and culture are fixed, knowing how they intertwine with economic variables enables us to think of new policy interventions and assess more accurately the costs and benefits of interventions. As illustration, consider the problem of teacher absenteeism in government- run schools, which has reached epidemic proportions and is representative of much that is wrong with the bureaucracy. Several studies show that, when it comes to playing truant from school, Indian teachers are a very good match for their students.
A multi-country study in which researchers made surprise visits to government-run primary schools shows that in terms of teacher truancy, India is second only to Uganda—and by a short head. At any time, 25 per cent of teachers are found missing from government-run schools in India; the figure for Uganda is 27 per cent. Further, the authors found that only 45 per cent of teachers in India were actually teaching at the time of the surprise visits.
For one thing, we know that our behaviour is affected by group think and notions of social stigma. It is otherwise hard to explain why, though teachers are paid the same salary and subjected to the same rules of economic incentives and punishments across the nation, teacher truancy is Jharkhand is about three times as high as that in Maharashtra, as studies show. Our behaviour is often guided not by monetary considerations but by notions of dignity, pride, and self-respect. And these can be shaped and guided.
An interesting recent study checks this out by artificially creating the social norm in a laboratory setting, and measuring people’s behavioural response. The study sorts people according to their corruption propensities and then pairs participants—some with more corrupt and some with more honest partners, letting them know what kind of people they are paired with. It is found that the probability of offering a bribe doubles when the subject is paired with a more corrupt partner rather than a more honest partner. The social setting influences individual behaviour.
The moral quality of leadership in society can make a difference. And there is now a large body of literature which outlines social and institutional interventions that can be as powerful as economic incentives in changing some of these adverse behaviour patterns in society.
4.Technology and labour: Turning finally to the challenge of technology and labour, for India this is as yet a problem in its early stages, but it may come to be the dominant problem in the medium to long term. Worldwide and in high- and upper-middle-income countries the problem is acute. Thanks to the rise of two kinds of technology—the ‘labour-saving’ kind, which is leading to machines and robots replacing labour, and the ‘labour-linking’ kind, which is allowing workers in low-wage nations to do some of the work for rich economies without having to leave their shores—there is a clear trend of wage shares falling and inequality rising.
It is possible that United States will become more and more protectionist and also put brakes on H1-B immigration, which will affect India, since it is the biggest beneficiary of this category of immigration. India’s aim should be to create links with other nations, such as Germany, the UK, Japan, and even China, so that these countries can use India’s skills via labour-linking technologies, and out-compete the United States in the global goods market.
However, to continue to be competitive in this dimension, India will have to build skills and continue to improve and modernize its education system. As recent data shows, not only is India’s labour force very poorly educated, the distribution of education is also abysmal. This will cause a large problem because the demand for unskilled work is bound to go down.
Mechanical work will soon not need labour because machines will out- compete labour, but when it comes to creative work and research, human skills will continue to be critical, at least in the foreseeable future. This is what takes us back to what was stressed above—the importance of education, especially the development of creative skills.
To absorb labour, it is also important to grow and nurture both the agricultural and manufacturing sectors. India’s services sector, the engine of India’s good performance, is virtually on auto-pilot now. Attention needs to be directed to the other sectors, which also happen to be more labour intensive. For this, work is needed in two areas that have already been mentioned: namely, creating better infrastructure and cutting down bureaucracy.
Since India has the natural advantage of cheap labour—and that will not be lost soon—the government does not have to do much more than remove the stumbling blocks and these sectors will grow and create jobs. There will be a challenge later when wages rise and India becomes part of the global story. India will need radical reforms such as some form of profit sharing across the population.
First, agriculture as a share of value-added in GDP has over the last 50 years become quite small but it is still a vital sector that employs around half of the nation’s labour force. Even a small decline in its production can cause food inflation, large welfare losses among the poor, and even political instability. Therefore, agriculture as a sector will continue to need nurture.
Second, as pointed out above, while technology will eventually create a global challenge that will affect India as well, for some time still to come India will be able to take advantage of its cheap labour and boost its manufacturing sector, which is a powerful absorber of labour. But to nurture this sector more investment is needed in infrastructure, the reduction of bureaucratic costs, and also good macroeconomic policy, because a wrong exchange rate policy can blight the nation’s scope for greater manufacturing exports.
Third, and a closely related problem, is the matter of inequality. If the working classes are not endowed with more creative skills, there is the danger that, even if India continues to grow, all its growth will be concentrated at the top end. India does have a growing inequality problem, and unless it invests in health and education, and also taxes the rich and curtails dynastic inter-generational transfers in a more comprehensive way, it may have growth but at the cost of true development. This will be a problem for India for some time to come.
With its early investment in the political institutions of democracy, secularism, and openness to ideas, as well as in good universities and institutes of higher learning, including science and engineering, and in its more recent improvements in savings and investment rates, India, with its enormous size, has the potential to be in the frontline. There are policy corrections to be made, there are pitfalls to be avoided, as discussed, but, with all those caveats, the prospects look good for what lies ahead.
EMPLOYMENT IN INDIA
Employment generation is one of the main objectives of the government planning. The opportunities created need to take of the backlog unemployment and also keep creating new jobs to take care of the new addition to the labour force. The economic reforms of 1990s ushered considerable economic growth but failed to increase the employment opportunities. Scholars termed such phase as “Jobless Growth” phase.
Unemployment figures include those persons not employed but willing to work and actively looking for a job. In India, we get the unemployment statistics compiled once every five years by the Ministry of Labor and Employment, primarily from sample studies conducted by the National Sample Survey Office (NSSO).
Unemployment numbers as per Employment & Unemployment survey report 2013-14:
Centre for Monitoring Indian Economy Pvt Ltd, the unemployment rates in January 2020:
High unemployment levels in a country may lead to other social problems like poverty, income inequality, social unrest, high property offences, etc. The causes of unemployment in society include increase in population, lack of skill development, cultural issues, deficient investment and capital inadequacy, etc.
Pradhan Mantri Kaushal Vikas Yojana (PMKVY), Start-up India Scheme, Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), etc are some of the steps taken by the Government in order to address the employment related issues in the country.
Employment and labour reforms:
To capitalize on its demographic dividend, India must create well-paying, high productivity jobs. Of India’s total workforce of about 52 crores, agriculture employed nearly 49 per cent while contributing only 15 per cent of the GVA. Comprehensive modernization of agriculture and allied sectors are needed urgently. In contrast, only about 29 per cent of China’s workforce was employed in agriculture.
Industry and services accounted for 13.7 and 37.5 per cent of employment while making up for 23 per cent and 62 per cent of GVA, respectively. A significant number of workers, currently employed in agriculture, will move out in search of jobs in other areas.
This will be in addition to the new entrants to the labour force as a result of population growth. By some estimates, the Indian economy will need to generate nearly 70 lakh jobs annually to absorb the net addition to the workforce. Taking into account the shift of labour force from low productivity employment, 80-90 lakhs new jobs will be needed in the coming years.
Micro and small-sized firms as well as informal sector firms dominate the employment landscape in India. As per the National Sample Survey (NSS) 73rd round, for the period 2015-16, there were 6.34 crore unincorporated non-agricultural micro, small and medium enterprises (MSMEs) in the country engaged in different economic activities providing employment to 11.10 crore workers.
A large majority of these firms are in the unorganized sector. By some estimates, India’s informal sector employs approximately 85 per cent of all workers.
India also exhibits a low and declining female labour force participation rate. The female labour force participation rate in India was 23.7 per cent in 2011-12 compared to 61 per cent in China, 56 per cent in the United States. Recognizing the high cost of compliance with existing labour regulations and the complexity generated by various labour laws at the central and state levels, the central government has recently introduced policies to make compliance easier and more effective.
They are also simplifying and rationalizing the large and often overlapping number of labour laws. These measures include moving licensing and compliance processes online, simplifying procedures and permitting self- certification in larger number of areas.
One of the government’s key initiatives is to rationalize 38 central labour laws into four codes, namely wages, safety and working conditions, industrial relations, and social security and welfare. Of the four codes, the one on wages has been introduced in the Lok Sabha and is under examination. The other three codes are at the pre-legislative consultation stage and should be completed urgently.
The government has put in place several schemes to help generate employment. These include the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), MUDRA Yojana, Prime Minister’s Employment Generation Programme and Pradhan Mantri Rojgar Protsahan Yojana. Additional initiatives aid job creation through providing skill development, easing access to credit and addressing sector specific constraints.
The government also made the EPFO premium portable so that workers can change jobs without fear of losing their provident fund benefits. The government has recently made publicly available the data on employment collected by the Employment Provident Fund Organization (EPFO), Employees’ State Insurance Corporation (ESIC) and National Pension Scheme (NPS). With MOSPI collecting employment data through its enterprises and household surveys – particularly the Periodic Labour Force Survey – and the focus on improving payroll data, the effort is to vastly improve availability of reliable employment data and release it on a regular basis.
Productivity across all sectors: A large share of India’s workforce is employed in low productivity activities with low levels of remuneration. This is especially true of the informal sector where wages can be one twentieth of those in firms producing the same goods or services but in the formal sector.
Protection and social security: A large number of workers that are engaged in the unorganized sector are not covered by labour regulations and social security. This dualistic nature of the labour market in India may be a result of the complex and large number of labour laws that make compliance very costly. In 2016, there were 44 labour laws under the statute of the central government. More than 100 laws fall under the jurisdiction of state governments. The multiplicity and complexity of laws makes compliance and enforcement difficult.
Skills: According to the India Skill Report 2018, only 47 per cent of those coming out of higher educational institutions are employable.
- Employment data. India currently lacks timely and periodic estimates of the work force. This lack of data prevents Government from rigorously monitoring the employment situation and assessing the impact of various interventions to create jobs.
1.Enhance skills and apprenticeships
- The Labour Market Information System (LMIS) is important for identifying skill shortages, training needs and employment created. The LMIS should be made functional urgently.
- Ensure the wider use of apprenticeship programmes by all enterprises. This may require an enhancement of the stipend amount paid by the government for sharing the costs of apprenticeships with employers.
2. Labour law reforms
- Complete the codification of labour laws at the earliest.
- Simplify and modify labour laws applicable to the formal sector to introduce an optimum combination of flexibility and security.
- Make the compliance of working conditions regulations more effective and transparent.
- The National Policy for Domestic Workers needs to be brought in at the earliest to recognize their rights and promote better working conditions.
3.Enhance female labour force participation
- Ensure the implementation of and employers’ adherence to the recently passed Maternity Benefit (Amendment) Act, 2017, and the Sexual Harassment of Women at Work Place (Prevention, Prohibition and Redressal) Act. It is also important to ensure implementation of these legislations in the informal sector.
- Ensure that skills training programmes and apprenticeships include women.
4.Improve data collection on employment
- Ensure that data collection for the Periodic Labour Force Survey (PFLS) of households initiated on time
- Conduct an annual enterprise survey using the goods and service tax network (GSTN) as the sample frame
- Increase the use of administrative data viz. EPFO, ESIC and the NPS to track regularly the state of employment while adjusting for the formalization of the worforce.
5.Ease industrial relations to encourage formalization
- Increase severance pay, in line with global best practices.
- Overhaul the labour dispute resolution system to resolve disputes quickly, efficiently, fairly and at low cost.
- Strengthen labour courts/tribunals for timely dispute resolution and set a time frame for different disputes.
- Make compliance with the national floor level minimum wage mandatory.
- Expand the Minimum Wages Act, 1948, to cover all jobs.
- Enforce the payment of wages through cheque or Aadhaar-enabled payments for all.
7.Working conditions and social security
- Enact a comprehensive occupational health and safety legislation based on risk assessment, employer-worker co-operation, and effective educational, remedial and sanctioning. Workers housing on site will help to improve global competitiveness of Indian industry, along with enhancing workers’ welfare.
- Enhance occupational safety and health (OSH) in the informal sector through capacity building and targeted programmes.
- Ensure compulsory registration of all establishments to ensure better monitoring of occupational safety as well as recreation and sanitation facilities.
- Enhance transparency in the labour inspection system by allowing online complaints and putting in place a standardized and clear mechanism.
- https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/weorept.as px?pr.x=27&pr.y=6&sy=2017&ey=2021&scsm=1&ssd=1&sort=country&ds=. &br=1&c=534&s=NGDPD%2CPPPGDP%2CNGDPDPC%2CPPPPC%2CPCPIPCH &grp=0&a=
- http://hdr.undp.org/en/content/human-development-indices-and- indicators-critical-evaluation
- https://www.wider.unu.edu/sites/default/files/Publications/Working paper/PDF/wp2018-124.pdf
- https://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/— publ/documents/publication/wcms_615594.pdf