In order to tackle the twin problems of low GDP and unemployment, policymakers need to address the root cause of lack of productive industry.
By Neeti Shikha & Rahul Prakash
The recent elections may change the government in Bihar, but not its fate. The state suffers from acute malaise of low productivity, unemployment, low growth rate, etc. The condition has only aggravated due to the pandemic. Immediately after the lockdown in March, Bihar witnessed major reverse migration. In April, the unemployment rate in Bihar increased to a high 46.6%. It is amongst the poorest states in India and political parties have constantly demanded a special status. Surprisingly, when India got independence, Bihar’s GDP per capita was 80% of national average. But there has been a secular decline in relative GDP per capita. The state GDP per capita in 2018-19 was almost 33% of national average.
There is a strong correlation between low GDP per capita and high unemployment and low wage rate. Reasons for low state GDP per capita can be explained by many factors, but low total factor productivity (TFP) remains the most dominant one. Low TFP is due to several reasons, including misallocation of resources among different sectors; 20% of state GDP comes from agriculture, but this sector employs almost 80% of its workforce. This gets reflected in lower per capita output of the agricultural sector. Bihar’s GDP per capita in agriculture is Rs 7,000; in Punjab it is Rs 70,000!
In 2018-19, agriculture, manufacturing and services sectors accounted for 20%, 19% and 61% of the economy, respectively. The growth rate of these sectors was 0.6%, 6.3% and 13.3%, respectively, for the same year. Why are people not moving from agriculture to non-agriculture? There is something that holds back intersectoral labour mobility in the state. A reason is low wage in manufacturing due to high cost of lending for the sector. Credit-deposit is 34 for Bihar, while the national average is 75.6. It means savings deposits of the state are being used to provide credit somewhere else and credit requirement of Bihar is being met at a higher rate of interest from other informal sources of financing, which increases the cost of doing business in Bihar. This high cost will leave much lesser residual profit for the business to provide a good wage premium on labour cost.
Bihar’s government does provide special incentives to MSMEs because they are labour-intensive. The government keeps a particular ceiling, in terms of plant and machinery cost, to classify certain categories of industries as MSMEs. These industries then get various kinds of incentives and subsidies. It prohibits the expansion of these industries and they lose out on economies of scale, which adversely affects their efficiency and productivity. They don’t adopt newer technologies and lose out on competitiveness. As they lose efficiency and productivity, there is downward pressure on wage rate to workers. This situation is even more precarious in Bihar where small industries account for 92% of the total manufacturing output, thus keeping the wage rate in the manufacturing sector abysmal low. There is lesser incentive for labour mobility from the unproductive agricultural sector to manufacturing.
In order to tackle the twin problems of low GDP and unemployment, policymakers need to address the root cause of lack of productive industry. Considering that most factories in Bihar fall under the category of micro to small scale and don’t need high credit, new thinking in terms of financial instruments and interest rate disbursal is required. Also, banks raising deposits in Bihar should be encouraged to lend to local industries. Since the state is mostly engaged in agriculture, modernisation of agriculture is required for access to finance, newer insurance products, and access to a larger market for its produce.
Any government that comes to power in Bihar needs to address these structural issues to generate good employment opportunities. It needs vision and political capital. It needs focused economic reform, which may be painful in the short term and politically unpopular. The government alone can’t provide jobs; it can only act as an enabler for job creation. The Centre has made some laudable changes in the area of labour, land laws and agriculture. The new government needs to use the flexibility these laws have given to the state government and use it for the benefit of its people.
Shikha is head, Centre for Insolvency and Bankruptcy, Indian institute of Corporate Affairs. Prakash is an econometrics modeller and PhD candidate at the University of Texas, Austin. Views are personal