The basic function of growth is to provide employment, says Pronab Sen, former chief statistician and former chairman of the National Statistical Council, adding that from an average annual unemployment rate of around 3%, we now seem to have permanently moved up to 6.5%-plus. In an interview with Surabhi, Sen also cast a cautious outlook for the economy next fiscal, noting that the fundamentals don’t justify a growth rate of over 6%, given the fall in the savings and investment rates. The current WPI inflation of 5% will reflect on the CPI with the usual lag, he says, adding he doesn’t think “there is any reason (for the RBI) to hike the repo rate further” in the current cycle, given how it could jack up working capital costs.
What is your outlook on the economy for the next fiscal?
By and large, the macro parameters look reasonably stable, except the current account deficit, which is an issue. The problem is the nature of the growth. My sense is that it is skewed.
One of the strengths we had was a balance between corporates and MSMEs and I think that is getting distorted. This isn’t good for the country, because we have a fast-growing labour force with 9 to 11 million potential workers added to it every year. The corporate sector doesn’t provide that many jobs. And unless that balance is maintained, we will have a problem. The other part of it is that even the corporate growth becomes a little suspect.
It is the MSMEs which used to do the initial on-the-job training of most fresh people in the labour force, who then moved on to the corporate sector to more productive jobs. If that process doesn’t work, the corporate sector will face a serious issue of skilled manpower. I think it is already starting to appear, but it is going to get worse.
What is your expectation on economic growth?
The fundamentals of the economy don’t justify a growth rate anywhere above 6%. In the coming fiscal 2023-24, I expect the growth to come to sub-6% at 5.5% or even lower, and then settle somewhere at the 5-6% range in the next few years. This is because both the savings and investment rates are much lower than what they used to be.
Why has the savings and investment rate gone down and what can be done?
It’s difficult to say. We always believed that the rich saved more than the poor or the middle class. But what has been happening is that income distribution has been getting worse. The household savings rate has been coming down. So we have to re-think our assumptions about saving behaviours of different categories of people. As far as investments are concerned, MSMEs were hit badly both with demonetisation and the introduction of the goods & services tax, and later with the lockdown. The revival of growth in the sector has been slow. A lot of the demand that came from the MSME sector for investment has been retarded quite significantly.
What is your expectation on the Budget, given the limited fiscal space?
The fiscal space has to be seen in the backdrop of the fall in the savings rate. The effort of the government has been on public investment, which has crowded out private investment. If you don’t create space for savings, even if investments want to come in, there won’t be space. The government has to see whether it wants to continue with the stimulus to encourage more investments or whether it wants to create more space for investments to come in. If it is the latter, it needs to bring down the fiscal deficit quite sharply. If it is the former, then the glide path can be quite gradual.
What is your view on the discussion around unemployment and jobs data?
As a country, we were used to an unemployment rate of around 3%. We now seem to have permanently moved up to 6.5%-plus. This may simply be a reflection of the fact that agriculture no longer absorbs so many people. But the data is telling us something different. Today, agriculture is absorbing more people than it did in the past. Since agriculture continues to be a sector which absorbs people, not because they’re productive there but essentially, as a last resort, this is not a good sign. It means we are not being able to absorb our labour force productively enough.
The sensible thing to do is to look at the growth of unemployment relative to the growth of GDP. Over time, the number of jobs created per GDP growth has kept falling. We must know how much it is and what we need in terms of growth to keep our workforce employed.
How does the delay in census impact policy making?
It impacts everything. One of its core inputs for any scheme is population and its various manifestations. If the population data itself is wrong, then there is a problem. And it’s not a question of the total population — we have a fairly decent measure of the total population of the country, because of the sample registration system. The real issue is the distribution of the population between states, between districts. The way resources are allocated gets badly distorted if the numbers are not right.
The second part is that almost all the data that we use, which comes from surveys, are based on the census. The census provides the frame from which samples are drawn. Now we’re looking at a frame which is already 12 years old and the population distribution in the country has changed dramatically. So our survey samples are not very accurate at all at the moment, but we have no choice.
What is your outlook on inflation?
We seem to have forgotten about the wholesale price index (WPI). Earlier, we used to look at the WPI, and then see what it meant for the consumer price index, with a lag. When WPI inflation was at 14%-15%, CPI inflation was at about 5%-6%. Since the WPI is at about 5% now (4.95% in December), the CPI will follow, with the usual lag.
What is your expectation on interest rates in the upcoming monetary policy review?
What the RBI does is difficult to say. But I don’t think there is any reason to hike the repo rate again. A repo rate hike pushes up the lower end of the interest rate and that affects working capital costs the most. This is not the time to muck around with working capital. In fact, we should be discouraging retail loans, which have gone up. You should make the yield curve steeper than it is today.