REFORMS, JOBS AND POVERTY

Need For Reforms With A ‘Human Face
By J. FELIX RAJ

Investment generates many good things, and one of them is employment, which, like income, is a residual benefit resulting from the economic growth dynamics. As Ratan Ghoshal of the Bengal Chamber of Commerce explains, the relationship between the two, however, is not linear. There are two critical factors: the choice of investment technology and investor’s policy decision with regard to employment. Investment is the determining causation factor for employment generation while the choice of investment technology and investor’s policy are the shaping up factors behind the creation of the actual extent of employment

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Economic reforms are becoming a universal phenomenon and are proclaimed particularly by Bretton Wood Institutions as indispensable for rapid and balanced development. It involves both macroeconomic stabilisation and structural (microeconomic) reforms.

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Privatisation
Acceptance of the World Trade Organisation regime by most countries has since led to gradual abolition of quantitative restrictions and reduction in duties and removal of restrictions on inter-country trade. As a result, the relevance of the state in providing resources for various commercial activities and protecting the interests of consumers has been considerably reduced. Many less developing countries are cutting their budgetary subsidies by privatising PSEs. There is a transition in the traditional role of the state in commercial and business activities

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No doubt, the rollback of the state has taken place in different countries at different points of time. For instance, the Conservative Government of Margaret Thatcher introduced these reforms first. It took the shape of privatisation (selling nationalised industries), simultaneously accompanied by the introduction of regulatory measures. In the USA , it started with deregulation measures, particularly during President Carter’s era and intensified later. In Italy , it was more in the nature of the leading financial holding companies divesting the shares of their subsidiaries. In France , it was in terms of deregulation by the government vis-a-vis the public enterprises through instruments, such as planning contract.

Malaysia showed a strong interest in privatisation during the 80s and 90s, in part because of the examples of Singapore and Hong Kong , and in part because of the then Prime Minister’s personal interest. In Singapore , privatisation was a long-term government policy that had broad effects on the structure of the economy and the lives of Singaporeans. In China , the private sector grew at the expense of the state sector implementing a market-oriented social system. Many other countries followed suit and the policies of reform were pursued in the capitalist, socialist and mixed economies. However, the process of reform did not take place simultaneously in all countries. There have been differences in the sequencing, approaches and modalities of the reform process.

The drive towards a review of the state’s role in economic activities had both political and economic dimensions. Political considerations were against the growing political interference in the functioning of public enterprises and poor departmental leadership. The economic dimension related to macroeconomic performance in general and in particular, to fiscal deficits, inflation and high cost of welfares. This period also coincided with globalisation of financial markets and evolution of new, flexible and varied financial instruments.

Reforms
Reforms amount to a radical change in the functioning of the economy that requires substantial complementary institutional and structural changes. Reforms are aimed at removing several constraints (on domestic production and investment, on foreign trade and on foreign investment). As Joseph Stiglitz observes (Globalisation and its Discontent, 2002), reforms entail struggles because of the adjustments that they impose; forcing change in the ways business is conducted. Reforms cannot be imposed from the outside, and this is part of the reason for all widespread failure of reform measures in many developing countries.

In the broad setting of reforms in many countries in the 1980s, India was an apparent anomaly. She was at the crossroads, facing a macroeconomic crisis that required immediate attention. The crisis had been simmering since the mid-1980s in spite of occasional minor reform measures, attempted by the governments led by Prime Ministers, Rajiv Gandhi, VP Singh, and Chandrasekhar, respectively. The macroeconomic crisis provided the opportunity and the necessity to address meaningfully the inefficiencies in our policy framework that had altered our economic performance and to begin constructively the task of undertaking the necessary microeconomic or structural reforms that had long been overdue. The actual reform process began in India in 1991, when PV Narasimha Rao and his finance minister, Dr Manmohan Singh, moved swiftly and announced a programme of macroeconomic stabilisation and structural adjustments.

As a consequence there has been a higher proportion of labour in public sector enterprises than in the private sector. Public enterprises were known for disguised unemployment (excess manpower). All things being equal management often take the social value as the criterion for choosing production technology, while the private sector takes its market value, which is usually higher. Public enterprises are also under political pressure to offer employment. In this context, a transfer of a public enterprise to private sector would reduce employment and might improve welfare schemes.

Total employment in India was 356.7 million in 1991, which increased to 402.5 million in 2001. Investment supporting retention of this workforce was Rs 274,114 crore as of 31 March 2001 . In India nearly 90 per cent of employment is in the informal (unorganised) sector, such as agriculture, self-employed (60 per cent), and casual labour (30 per cent), many of whom are poor. Over 70 per cent of the labour force in all sectors combined is either illiterate or educated below the primary level. During the 10-year period, 1991-2001, the rate of growth of employment dropped below 1 per cent per annum, while it was 2.07 per cent in the 80s.

Negligible
In the organised sector where the public sector reform process was introduced, the annual rate of growth of employment was 0.60 per cent during the post reform period (1990-91) to 1999-2000) as against 1.73 per cent in the pre-reform period. The employment rate in the organised sector has been steadily declining during the reform period and in two years it was even negative, largely due to decline in the public sector employment. True, the organised private sector had registered good growth in some years, but its total impact has been negligible, as it does not account for a significant place in the total scenario. In spite of massive investment, the industrialisation process in India has not improved employment generation. The post-reform period has witnessed a general decline in employment.

The contradiction in public expenditure and the consequent reduction in aggregate demand had adversely affected employment in the organised sector, both non-agricultural rural employment and urban informal sector employment. The reforms made benefits of small-scale sector available to the big industrial houses. As observed by the National Council of Applied Economic Research, deregulation of the big industries and withdrawal of license system had exerted adverse impact on the small-scale industries affecting employment. The economic reforms laid excessive reliance on foreign investment not only for industrial development but also to solve the unemployment problem.

Reforms expose the Indian industry to the vagaries of international markets, which can have negative effect on employment in the long run. Export thrust unmindful of the demands of the domestic requirements is quite harmful. A concrete example in this context is the cotton thread case in Andhra Pradesh, where large-scale export of the coarse cotton thread had catapulted 110 weavers to starvation deaths.

The rate of growth of employment has been a dismal 1.13 per cent under the NDA rule. Of the 41 million registered job seekers in the employment exchange in 2002-03, only around 99,000 got jobs. Existing employment was being done away with. There has been a decline of 8.34 lakh jobs in the organised sector between 1998 and March 2002. According to the Planning Commission, an estimated 16 per cent of the youth will be unemployed at the end of the Tenth Plan. In the rural sector, agricultural workers and women are facing with reduced workdays per year.

Challenge
Take Mumbai. The trend has shifted from the manufacturing sector to service industry, thus rendering millions out of job. In the textile mills, once the backbone of the city’s economy, the 2.5 lakh workforce in 1981 has drastically dwindled to 20,000 now. The employment growth is estimated to be around 2.3 per cent, while the labour force is growing at the rate of 2.5 per cent annually. Plan achievements have always fallen short of targets. The unemployment scene has continued to be the same with more than seven million every year, and around 18.5 million of accumulated backlogs. The country is facing a challenge of not only absorbing the fresh entrants but also clearing the backlogs. Reforms may have given a boost to industrial productivity and investment, but they have not generated enough jobs.

The impact of reforms on poverty is a widely debated issue today. There are sizable disagreements among economists on the issue of the actual trend in poverty during the post reform period. The percentage of people below the poverty line declined from 44.48 per cent of the total population in 1983 to 35.11 per cent in 1990-91. The absolute number of persons below poverty line sharply declined from around 323 million in 1983 to 291 million in 1990-91. But thereafter, during the post-reform period, the proportion of people below poverty line went up from 35.1 per cent in 1990-91 to 37.23 per cent in 1997. In absolute terms, the number of poor rose from 291 million to 349 million in the aggregate. The number of poor remained stable at around 320 million between 1983 and 1997, due to a countervailing growth in population or employment.

According to the controversial 55th round of NSS, the percentage of BPL population had come down to 26.1 (27.09 per cent in rural areas and 23.62 per cent in urban areas) in 1999-2000. According to the Economic Survey 2001-02 the number of poor came down by 60 million in the last seven years ending 2000-01 and that the trend was likely to continue due to slowing down of population growth coupled with improving prosperity.

Disheartening
It, however, said: “Reduction in poverty would further accelerate with the implementation of second generation economic reforms that would promote employment growth in agriculture and industrial sectors and help in achieving Tenth Five Year Plan (2002-07) target of 5 per cent decline in poverty ratio.” The latest estimate of CIA Fact Book reveals that the BPL population has come down to 25 per cent in 2002.

What about the trend in inequality? The situation seems to be all the more disheartening. A study by Ragbendra Jha confirms a sharp rise in rural and, particularly urban inequality. To quote the study: “It is interesting to note that in neither sector is there a tendency for this diversity to fall. Further, the onset of economic reforms does not seem to have made much difference to this phenomenon. In particular, it is disturbing that the divergence across states in the incidence of rural poverty has actually increased significantly after the onset of economic reforms.”
Abhijit Sen, using NSS data, has come to the conclusions that the reforms have only benefited the elite and affluent classes (Analysis of per capita consumption expenditure since 1980 in rural and urban India). He has shown that top 20 per cent richest persons have increased their consumption by around 40 per cent over the period from 1989-90. This observation, both for rural and urban population, is totally contrary to the findings of these economic classes during the period 1965-66 to 1987-88.

While SS Bhalla (Crying Wolf on Poverty) has reached conclusions which are totally different from other researches, that the poverty declined between 1983 and 1999 sharply and stood at less than 15 per cent in 1999-2000, World Bank Estimates show that the incidence of poverty, which fell from 54.3 per cent to 34.1 per cent between 1972-73 and 1989-90, did not decline further in the 1990s. It never went below the 1989-90 level, while Government of India measured it at 26 per cent.

India ’s success at reducing the incidence of poverty during 1970s and 1980s was halted, if not reversed, during the 1990s. SP Gupta (Economic Reforms and its Impact on Poor) has found that there was even greater increase in rural poverty during the 1990s. But the estimates of incidence of poverty by Chaturvedi and Upadhyay in a paper presented at the 18th European Conference on Modern South Asia Studies, reveal that the poverty ratio was 38.9 per cent in 1987-88, 36 per cent in 1993-94, and 26.1 per cent in 1999-2000 and is expected to be 19.3 per cent in 2006-07. The absolute number of poor remained constant around 322 million from 1974 to 1994. It was 26.3 million in 1999-2000 according to government estimates, and is expected to reach 220.1 in 2006-07.

Hope
The reform measures that predominantly affect the poor people are reduction in the budget and fiscal deficit, cut in subsidies, food insecurities, devaluation of rupee, export-orientation and privatisation. Thee measures also contribute to inflation, which hits the poor the hardest. Considering the pattern of the budgetary outlays of the government, the fiscal contraction inevitably has resulted in a disproportionate cut in capital expenditure, which has had a depressing effect on the rural sector.

The UPA government has reiterated its commitment to economic reforms. The Prime Minister has categorically stated that economic reforms were needed, but reforms with a “human face” that give India ’s common man a real hope. “We need economic and social development for all, not just for a few. The purpose of reforms must be to do as much as possible to help the average man” and redeem him from the clutches of poverty and unemployment.
The success or failure of any economic reform process should be judged by the social and economic well-being or the quality of life of the people. Poverty is a pressing problem in India . It affects all spheres of activities and therefore deserves more attention than any other aspect of reforms. Poverty reduction should be the most important objectives of socio-economic progress. It signifies improvement in standard of living and a better environment of shelter, health and education of particularly those below the poverty line.