Productivity and inclusive growth

If the employment elasticities thrown up in the NSSO 61st round (2004-05) are projected forward taking into account the 9% growth in recent years, the Indian employment scenario is okay. The NSSO figures, however, indicate that the entire incremental job creation was in the less productive informal and unorganised sectors. The greatest incremental job creation (about 50%) and employment elasticity (1.52) was in agriculture and allied services, which is the slowest growing segment of the economy. While per capita labour productivity increased on average by 5.5% per annum in real terms between 1993-94 and 2004-05, in agriculture it grew by just 1.5%. What has been the impact of the employment bias in favour of the less productive sectors of the economy on income growth and inequality?

Income growth is contingent on productivity improvements. Robust economic growth and productivity gains over the last two decades have more than halved the proportion living below the poverty line since the early 1980s. However, employment in the more productive organised sector, has remained unchanged at around 26 million between 1990 and 2005. Unorganised sector employment has meanwhile expanded by about 53 million, its share in total employment rising from 92% in the early 1980s to 94% in 2004-05. In manufacturing, over 90% firms have less than 10 employees, compared to about 5% in China. It is unsurprising, therefore, that the August 2007 Report of the National Commission for Enterprises in the Unorganized Sector (NCEUS) concludes that while absolute poverty has declined, average incomes continue to be very low, with 77% of the population showing consumption expenditure of under Rs 20 per day. Since it is common knowledge that consumption expenditure collected via NSSO surveys has an increasingly downward bias when compared to national income estimated by the CSO, NCEUS may have underestimated incomes. The big picture, though, is still bleak. The World Bank says that about 80% of Indians live on less than Rs 80 per day.

The implications of the bias towards informal sector employment on inequality are less clear. In a recent study using the Gini coefficient, Debroy and Bhandari have shown that inequality in India has worsened since 1983, especially in urban areas. By the Kuznet?s curve, inequality is expected to increase during the early stages of development as the workforce shifts from lower productivity jobs in agriculture and traditional industry to organised manufacturing and services, where productivity is higher. Income inequality would tend to decline after the structural shift has taken place. A staggered structural shift out of agriculture, as appears to be happening in India, would tend to have a moderating influence on the Kuznet?s curve but also keep median incomes low.

Labour productivity growth in India in recent times has been higher than in most OECD countries, although lower than that in China. Much of the productivity gains may be on account of better technology in the formal sector. A recent OECD survey of India found that the organised sector is becoming more capital intensive. Between 1998 and 2004, constant price fixed assets per employee rose by 21% in firms with 100 or more workers, while it fell by 14% in smaller firms. What has constrained median labour productivity growth in India is the weakness of labour intensive manufacturing despite labour costs being as competitive as in China. Even Bangladesh has a better record than India in labour intensive manufacturing, such as garment making. Both these neighbours have shown faster declines in poverty rates.

?The writer is a civil servant. These are his personal views