P. V. INDIRESAN

Neither jobless growth nor growthless jobs is desirable. Growth-plus-jobs requires a two-pronged approach: One, reduce the `incremental capital to output ratio' for hi-tech, high-skill, high-wage employment. Two, increase the `marginal propensity for consumption' of those in unskilled jobs, says P. V. INDIRESAN.

Critics have reacted to the Planning Commission's Draft Approach Paper to the Eleventh Five Year Plan on expected lines: The Commission is obsessed with growth rates and neglects equity.

As a matter of interest, the States that have the highest incidence of poverty (Bihar, Orissa, Uttar Pradesh) are also the ones that have the slowest growth rates. Evidently, and not surprisingly, absolute poverty goes with slow growth.

Since Independence, we have operated in the belief that equity and growth constitute a win-lose game; we can have either one or the other but not both at the same time.

On the other hand, successful countries have used growth to enhance equity; those that concentrated on equity to the neglect of growth have all done poorly.

Thus, equity and growth is a win-win game, provided we are good managers.

Trickling prosperity

Latest figures show that jobs are increasing faster in the rural areas than in urban ones. Yet, the rural-urban disparity is increasing.

Evidently, what we are witnessing in therural areas is growthless jobs. Prosperity is trickling down, but it merely trickles; it does not gush.

Instead of tackling growthless jobs, much noise is being made about jobless growth. Jobless growth is inevitable whenever a country starts correcting decades of reckless expansion of the labour force. Further, modern technology is capital-intensive; it crowds out the consumption of labour-intensive consumer goods. As a result, productivity increases faster than the aggregate demand. The solution is not calling a halt to globalisation or modernisation or rationalisation but using less capital for the same growth in output, reducing the Incremental Capital to Output Ratio (ICOR).

No demand creation

Critics could have taken the Planning Commission to task for not doing more to reduce ICOR. Instead, they are insisting on traditional, largely discredited ideas such as increasing subsidies at the expense of higher fiscal deficit. Their system of poverty alleviation inevitably leads to growthless jobs — jobs with such low wages that there is next to no increase in disposable incomes. That reduces the Marginal Propensity for Consumption (MPC) to virtually zero. Then, few new demands are created; there is no addition to prosperity. The Rural Labour Employment Guarantee Scheme is a classic example of growthless jobs.

Neither jobless growth nor growthless jobs is desirable; we need a plan for growth-plus-jobs. That requires a two-pronged approach: One, reduce the ICOR for hi-tech, high-skill and high-wage employment. Two, increase the MPC of those having unskilled jobs.

Hi-tech employment is burdened by high ICOR in two ways: One, unavoidable cost of expensive machinery; two, avoidable cost of locating in expensive cities. Then, the risk of growthless jobs is minimised when hi-tech employment is induced to shift to locations where real-estate prices are low, that is, away from expensive cities.

Doubly blessed

It is rarely realised that perquisites are like government expenditure. As the whole of every perquisite is consumed, its MPC is one.

Further, suppliers of perquisites face zero risk of market failure. Thus, perquisites are doubly blessed: One, higher MPC, increased aggregate demand; two: lower production risk, increased supply. Growth increases both ways.

Provident fund and healthcare are widely enforced perquisites. For two reasons, adding housing to that obligatory list (and possibly transport to work) will reduce jobless growth. One, housing and transport have high employment elasticity, and generate jobs at all levels from the unskilled at the bottom to entrepreneurs at the top.

Two, when employers are bound by law to find houses/transport for their employees they will move to areas where land prices are low, where purchasing power of money is high. Hence, perquisites in the form of housing and commuting facilities will increase MPC directly and ICOR indirectly. Social benefits that accrue when employees are well housed and travel to work comfortably are a bonus of even greater value.

In the informal sector, where there are no obligations to provide even healthcare or provident fund, perquisites can only be in the form of public goods. Unfortunately, government finances are already strained; there is little scope for allocating additional funds for more public goods to benefit the poor, who can neither pay user-charges nor taxes.

Public-Private Partnership can overcome this difficulty. For instance, take the case of the Rural Labour Employment Guarantee Scheme. Suppose, instead of hundred days of employment, poor families are provided vouchers of the same monetary value, which they can exchange for basic needs such as potable water or sanitation or smokeless fuel, or education or healthcare or bus travel, or Internet access. In that case, new demands will be created for these basic needs which the poor will not demand otherwise. Then, even the poor will contribute to growth.

Outsourcing job creation

In effect, government outsources the creation of work: It lets private enterprises create jobs instead of doing so directly. Thanks to competition among suppliers (and lower overheads than in government management), efficiency will be higher; the ICOR will be lower. As monitoring of the delivery of these needs is easier than checking muster rolls, corruption will be less. Thus, for the same outlay from the government, this form of Public-Private Partnership will result in higher growth.

Apart from poverty, poor civic services are a major impediment to rapid growth. They also bring shame to the country. In truth, not a single civic administration is working satisfactorily. Concentration of planning, execution, inspection and regulation in one common body is the main reason for this failure. The solution is to extend the principle of Public-Private partnership to civic administration too.

For centuries, in the City of London, employers have been providing civic services at their own cost. That is better and cheaper for the employers than using the municipal authority as the middleman. Instead of paying taxes to an ineffective and highly politicised municipal body, and then hope that body will deliver the goods honestly, employers save on taxes and supply the services directly.

Civic management

Wherever employers run campuses, they do so far better than any municipal authority does and do so at less cost too. Planners may think that civic management is peripheral to the issue of growth. That is not correct; efficient civic management is vital for rapid growth.

The Eleventh Plan Approach Paper is by no means perfect; it can, and should, be improved but not the way vociferous critics are saying. The problem with the Approach Paper is not poor economics but insufficient concern for improved management; its overemphasis on quantity to the neglect of quality. It has dwelt little on the bottlenecks that retard growth, such as the astronomical increase in house prices or the over-concentration of investment in frightfully expensive cities with their exponentially decaying civic services. Improved housing, diversion of investment away from expensive cities, and modernising civic services will improve the condition of the poor; will reduce rich-poor, rural-urban disparity better than utopian economics will.

HDI measure

Growth rate is a measure of quantity, not quality. Instead of the growth rate, the Approach Paper should use Human Development Index as a measure of its performance. It is not more subsidies, higher fiscal deficit but better management, and better quality services that will increase growth rates and simultaneously curtail the rich-poor disparity too.

The Approach Paper dreams of 10 per cent growth rate. Critics dream of banishing poverty. Both can become a reality if it is made worthwhile to invest only where land is cheapest, not where it is costliest, as is happening now.

(This is 180th in the Vision 2020 series. The previous article was published on July10.)

(To be concluded)

(The author is a former Director of IIT Madras. Response may be sent to: indiresan@gmail.com)

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