Govt’s top priority: Jobs growth

The first priority for the new government is to raise the rate of creation of productive jobs in the economy. The choice of words is deliberate and crucial — ‘raise the rate’, not ‘create’.

While different tiers of government do have to expand their services, productivity often is higher in contract and outsourced government jobs. For employment growth to rise many parts of the economy have to participate.

He who forgets history is doomed to repeat it. So in addition to focusing on what should be done, I will remind us of past traps that are best avoided.

First priority

Employment is the first priority because it is necessary to prevent the economy from degenerating into the competitive sops of the seventies and all the economic distortions and stagnation they produced.

In the 1970s the one party dominance that had held after independence was lost at a time of sharp international oil price shocks. As intense multi party competition set in, populist schemes multiplied. User prices of many public services were fixed, maintenance, investment and quality deteriorated. The rot in electricity distribution and overuse of water in farms all started at this time. High marginal tax rates created a large black economy. Talent fled the country.

Elections over the past year have again seen many populist schemes on offer. Although voters largely rejected them, especially in the State elections, they had some success in the national elections. If most voters can look forward to participating in and benefitting from development they are less likely to fall for short-term populist agendas.

For a 1.4-billion population, with the largest share of youth, creating more high-productivity jobs requires working on multiple fronts.

The Preconditions

Sustaining high growth with a focus on labour-intensive sectors, however, is a pre-condition. Manufacture, services, agriculture all have to grow and export. A major reason populous China succeeded in this was that it first improved agricultural productivity sufficiently to keep food prices low.

Recurrent food price shocks moderated Indian growth, while choices to subsidise both producers and consumers strained government finances and distorted resource allocation.

There are indications that productivity is finally rising with better infrastructure, adoption of agritech and some crop diversification. But much more needs to be done to improve crop choices, marketing and logistics especially since the weather is likely to be erratic in the future. Climate proofing of agriculture is necessary.

Better integrated and flexible markets should be able to expand supply in response to food price shocks, through procurement from diverse geographical regions.

Above actions will raise rural jobs and incomes also, a key objective for the government, while relieving pressure to make more transfers for consumption, including to farmers. Such transfers in the late 2000s, as high growth and buoyant revenues encouraged government schemes to raise consumption, without improvement in food supply, only led to high inflation.

This in turn raised rural wages and started a wage-price cycle. Consumer price inflation remained high well into the 2010s. The period culminated in the double deficits, slow growth and macroeconomic fragility of 2013.

Balance

Rising revenues today should be used to carefully balance stimulating private activity with expanding capacity and to make progress on fiscal consolidation. This would reduce risk premiums and the cost of borrowing as well as build counter-cyclical buffers. If the general government deficit falls below 7 per cent, India is likely to get a ratings upgrade.

Policies should be complementary to and reinforce each other. Rising revenues that go with a larger size of the economy and the shrinking size of the poor make well-targeted DBT affordable. But policies should also remove obstacles in the supply of goods that will then be demanded. Targeting must be updated.

Social welfare schemes that create assets for the poor will reach saturation, releasing funds that can be re-allocated towards other public services. As urbanization increases, municipal reform including more delegation of funds and functionaries becomes urgent. All this empowers the poor, who are more dependent on public services.

Smoothing shocks

In the post-pandemic period, despite fiscal consolidation, better composition of government expenditure provided stimulus. It contributed to short- and long-term supply-side reforms that brought down costs and reduced inflation, allowing monetary policy to keep real rates low enough to stimulate growth yet high enough to credibly anchor inflation expectations. Such monetary-fiscal coordination needs to continue.

Along with improvements in production, the weight of food in consumption itself is falling and its components becoming more diverse, which will reduce the impact and size of future food price shocks. International oil markets are also becoming better at absorbing shocks with multiple supply sources.

As a result, commodity price shocks become transient. They do not have persistent effects on inflation, especially with a more credible inflation target. This was the experience in the past few years, despite many post-pandemic shocks.

Outcomes were better also because policy was countercyclical and smoothed shocks. Indian post liberalization growth was volatile unlike the smooth Chinese double digit catch-up growth. Reasons included its sensitivity to commodity price shocks and the numerous global shocks in this period.

But also domestic policy was often pro-cyclical and magnified shocks. There was over-stimulus that continued too long after the global financial crisis and then over-tightening after that. These are also traps to be avoided.

What reforms?

Continuity of volatility-reducing policy is important. A virtuous growth momentum should be allowed to build with steady supply-side improvements, a stable financial sector and supportive flexible implementation of inflation targeting. Drastic reforms must be resisted since their high political costs make growth volatile. Taking advantage of India’s federal structure, factor market and farm reforms are best left to competition among States with nudges from the Centre.

Effective reforms would build on India’s technology and youth advantage. All tiers of government must be induced to participate in order to improve delivery in health, education, environment, courts, policing as well as in infrastructure through better coordination with and incentives for States.

Industry also has a major role in expanding skill-sets for employability, through on the job training as well as collaboration with educational institutes to fine-tune their syllabi and offer students work exposure. CSR policy can be tweaked to contribute.

The writer is Emeritus professor, IGIDR