Today's Editorial

13 April 2018

 

It is not lack of jobs but lack of governance

Source: By V. Anantha Nageswaran: Mint

It is well known that humans use reason to validate their judgements, not to arrive at judgements. That is, we rationalize but not reason. Some reactions to the work of Pulak Ghosh of the Indian Institute of Management, Bangalore, and Soumya Kanti Ghosh of the State Bank of India, on the estimation of jobs on payrolls in India, fall in this category. Notwithstanding re-elucidation of the conservative assumptions they had made in their calculations and other logically correct responses, the Congress party described their work as “compromised research”—an unfortunate choice of words.

India’s problem is not whether jobs on payrolls have expanded or not. Whether formal or informal, Indian jobs do not lead to a decent living income for workers. Consequently, households are unable to save and create capital assets as much as they used to. That is the real problem. First revised estimates of national income, consumption, savings and capital formation for 2016-17, in January 2018, have brought home this challenge starkly.

This release gives us the breakdown of gross fixed capital formation (GFCF) by sectors. The compounded annual growth rate (CAGR) of the GFCF of the private corporate sector (financial and non-financial) between 2011-12 and 2016-17 is 13.8%. In the same period, the CAGR of nominal GDP was 11.8%. It compares quite well with the “investment and growth boom” years between 2004-05 and 2010-11. The growth figures for GFCF of the private corporate sector and nominal GDP are 16.6% and 15.7%, respectively, between 2004 and 2011. So, who has really brought down the overall GFCF in the economy? It is the household sector.

Notwithstanding the unusually large cliff dive in the amount of “machinery and equipment” investment by the household sector in 2013-14, and, similarly, in investment in dwellings in 2015-16, we will make do with the Central Statistical Office (CSO) figures that we have. The CAGR of GFCF in the household sector has been a paltry 0.2% between 2011-12 and 2016-17. What could be the reason?

There are several possibilities. Maybe, households’ real incomes were squeezed by the cumulative 85% rise in the cost of living between March 2008 and March 2015. Or, maybe, they have jobs but they are not paying them well. Or, they have got hooked to conspicuous consumption thanks to the easy availability of credit from non-government owned banks. Or, they do not wish to save because homes have become so unaffordable anyway. According to a Reserve Bank of India (RBI) paper (Affordable Housing In India, RBI Monthly Bulletin, January 2018), monthly payments on a home mortgage in 20 of 49 cities in the country will absorb more than 30% of the gross income even for households in the middle-income group (annual income of Rs12-18 lakh).

Or, as Rohit Saran points out, the need to find market solutions for a public services failure has squeezed household savings and capital formation. This has meant an alarming decline in the household savings rate, from a peak of 25.2% of gross domestic product (GDP) in 2009-10 to 16.3% in 2016-17. The overall national savings rate is down to 30% because of this. With this savings rate, it is impossible for the economy to sustain growth rates of above 7% at best. Occasionally, one can get to 8% but that would involve blowing out the current account deficit, with adverse consequences.

The government has many touch points —macro and micro—that influence productivity. For capital productivity, the low floor space index for buildings and land use conversion are big hurdles. They are relatively low-hanging fruits. Then, there is tax terrorism. T.V. Mohandas Pai and S. Krishnan have shown with data that tax terrorism is out of control under this government. The income-tax department has imposed huge economic costs on the country and likely imposed political costs on the ruling party. Of course, there is the Indian judicial system that renders investments unproductive by shuttering production in entire sectors, leaving investments idle for long periods.

Governance improvement—at the level of the local administration—will improve savings and capital formation even as it makes a big difference to people’s quality of living. Whether the drain is flowing properly, whether it is clogged, whether sewage flows on to the street, whether mosquitoes are a menace or not, matter; whichever chief minister pays attention to governance at the local level will reap political dividends too. It is about empowering local governments with finances, talent, and with the freedom to hire experts permanently or on a project basis. It is about holding themselves accountable to the public for transparent improvements in their daily lives.

If these things improve, people’s need to spend on things that are currently not provided by public services will go down. They can save more and their savings rate will rise again. That will lead to an increase in national savings and national capital formation. This is how small things can lead to improvements in the macro picture too. Attention to local governance issues is both sensible economics and smart politics. The path to electoral success for politicians is paved with the realization that better public service delivery is the key to lifting India out of “subsistence economy” status.

 

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