Category: Informal Sector

The Indian Constitution and Human Dignity: for Economists

The field of law and economics is a glamorous one with economists such as Ronald Coase, Gary Becker and Richard Posner. It was Coase who provided the inspiration to law and economics through his introduction of ‘transaction cost economics.’ And Becker was the one who extended the domain of economics to virtually any social phenomena. Issues such as law, crime, marriage, family, etc came to be studied by economists. Although, the tools used never varied. It was the same old microeconomic baggage of neoclassical economics. Suddenly, neoclassical economics started feeling successful all over again. Their theory of value and pricing started explaining various social and cultural processes in the economy. However, this post is not a commentary on law and economics that is practised. For an excellent commentary on its origins and methodology, see the article by William Davies ‘Economics and the ‘nonsense’ of law: the case of the Chicago antitrust revolution’ in Economy and Society published in 2010.

The content of this post certainly falls under the label of law and economics. However, this post discusses certain aspects of the Constitution of India in the the light of economic policies undertaken-that of liberalization. The quotations in this post are from Dr. Durga Das Basu’s Introduction to the Constitution of India, reprinted in December 2009.

Economic Justice

The banishment of poverty, not by expropriation of those who have, but by the multiplication of the national wealth and resources and an equitable distribution thereof amongst all who contribute towards its production, is the aim of the State envisaged by the Directive Principles. Economic democracy will be installed in our sub-continent to the extent that this goal is reached. In short, economic justice aims at establishing economic democracy and a ‘Welfare State’.

The idea of economic justice is to make equality of status meaningful and life worth living at its best removing inequality of opportunity and of status-social, economic and political.

That is, an increase in growth rate is seen as the way to banish poverty. This principle is certainly based on the idea that growth trickles down. As has been witnessed in India, all that liberalization has achieved is ‘jobless growth’. Hence, the need for policy documents to shout for ‘inclusive growth’.

Now, all those who contribute to wealth by being producers are supposed to be compensated. It is on this class, that the burden of development falls. For, they do not have the adequate social and economic voice to demand for ‘just distribution’.

Can India claim social justice just by making opportunities equal’ Equal opportunities perform their function only in an already just and equitable society, and not in countries where inequality of income and wealth is so skewed. Thus, an active intervention is necessary at the level of production as well as distribution of GDP.

Nehru’s idea of Socialism is that ‘every individual in the State should have equal opportunity for progress.’ However, this idea cannot hold any water until the institutions in the State are examined- judiciary, executive, military, private enterprise, unorganised sector, etc. For instance, some groups of people are exploited as producers, where they are paid less than minimum wages. Therefore, as a consumer, they get exploited as well. This then passes on to their access to health, schooling, sanitation, housing, and so on.

Individual Liberty

The Preamble, therefore, says that the State, in India, will assure the dignity of the Individual. ‘All citizens men and women equally, have the right to an dequate means of livelihood, just and humane conditions of work, and a decent standard of life and full enjoyment of leisure and social and cultural opportunities.’

When economists and policy makers talk of ‘inclusive growth’, it is the dignity of the individual which is at stake. Often, India’s characteristics such as high reliance on agriculture, a large percentage of unorganised sector, immobility of labour and the like are labelled as detrimental to India’s growth and development. One cannot help but ask: Whose growth’ Such perceptions by the academia are largely a result of the manner in which human beings figure in micro and macro economics. If you take a moment to think about it, you will realise that poor people-who are a heterogeneous group- is absent from our theoretical edifice. Why’ Who are we analysing’ And to discuss poverty, we have created a sub-discipline called ‘development economics’.

In any case, human dignity appears to be of lesser importance than the computation of growth rates using yearly and quarterly data. We are satisfied to decipher whether stock market exhibits volatility or not’ Or whether market A is co-integrated with market Z. Does this satisfaction come from the fact that stock market data is easily available’ What about the farmers, the child labourers, the migrant labourers who are forced to leave their place and family, of street vendors, and all the others who actually engage in production’

Until dignity of human life features implicitly or explicitly in economics, it will continue to be a lifeless endeavour. Sadly enough, we are taught economics is the study of choice’ Whose choices’ Those who have the ability to choose’ It is time we discarded such economics and re-visited economists such as Adam Smith, Joan Robinson, Amit Bhaduri, and others whose works show a concern for humans.

Model Building and Planning in India

Ever since the First Five Year Plan, we have utilised models in order to channel resources for achieving objectives of higher growth, establishing strong capital base, strengthening import substitution, reducing poverty, increasing foreign exchange resources and so on. The early plans made use of Harrod-Domar model and the Feldman-Mahalanobis models. The models used for planning purposes were largely taken from economic theory, which were then adapted (hopefully) by the Planning Commission. Owing to changes in the structure of the Indian economy, the nature of modelling has also undergone various alterations. This post highlights certain issues in the macro-modelling that was done for the 11th Five Year Plan, chiefly based on the publication by the Planning Commission Macro-Modelling for the Eleventh Five Year Plan of India edited by Kirit S Parikh.

It is incorrect to argue that planning in India has become redundant after the 1991 reforms. These reforms provided freedom to the firms with respect to what to produce and how to produce them. As the recent global financial crisis has shown, unregulated finance can lead to unfavourable outcomes for the financial as well as the real sectors of the economy. Also, significant divergences in income and wealth are being reported. This is the case, especially in India which is home to some of the richest and poorest people in the world. As Parikh writes, ‘As long as disparities in income, endowments and wealth persist, access to public goods and services is uneven and infrastructure paucity is there, we need active government policy. We need planning.’ [Planning Commission 2009, 16]

The 11th Five Year Plan’s goal is to have ‘Faster and More Inclusive Growth’. The basis of this goal is that the growth of GDP is treated as a necessary and almost sufficient condition for improving livelihoods. We know that markets exclude those without adequate purchasing power. And growth in GDP mainly results in an increase in the extent/size of the market. Unless appropriate systems are in place, ‘trickle down’ does not take place. Hence, an outline of how ‘inclusive growth’ can take place needs much greater attention. And it is disappointing to see that employment generation is not considered as a central objective. For the first time, the inputs of the 11th Five Year Plan have been provided by a ‘modelling forum’. The forum consists of researchers from NCAER, IGIDR, IEG and ISI Bangalore apart from the in-house team of the Planning Commission.

A formal model is constructed for the purposes of planning because it makes the assumptions transparent, ensures consistency and provides insights into the inter-relationship between various actors and sectors in the economy. These models in turn borrow concepts, categories, functional relationships and links from the paradigms in economics. The paradigms that have influenced modellers, according to Parikh are Input-Output, Walrasian, Neoclassical, Keynesian, Structuralist, Vector Auto Regression/Error Correction, New Neoclassical and Dynamic Stochastic General Equilibrium. The most obvious drawback of this classification is the mix-up of paradigms with tools of economics. For instance, IO framework, VAR models and DSGE models are only tools. For our later exposition, it would be helpful to point out the important characteristics of each of these paradigms/tools.

Input-Output: Usage of inputs in fixed proportion

Walrasian: Optimising behaviour of economic agents

Neoclassical: Pricing through supply and demand mechanism and full employment at prevailing wage rate

Keynesian: Underemployment equilibrium

Structuralist: Imperfect markets and incomplete monetization of the economy

Vector Auto Regression: All variables depend on lagged values of all variables and data speak for themselves

New Neoclassical: Microeconomic foundation of macroeconomics- importance of information, expectations and contracts

DSGE: Forward looking and optimising economic agents

In the modelling for the 11th Five Year Plan, six different models with different analytical approaches have been used. The models are a) Perspective Planning Division’s In-house Model, b) A VAR/VEC Model from ISI, Bangalore, c) A General Equilibrium Model from IGIDR, d) An Econometric Model from IEG and e) Macro-Econometric Model of NCAER. The various model scenarios show that the direction of policy shocks are similar ‘though the structure and philosophy of the models are different’. However, this is not such a shocking or an interesting revelation. For everybody knows that oil price shocks have a negative impact on the GDP growth rate and that the global slowdown affects the GDP adversely. The only result of interest is that of an increase in NREGs by 1% of GDP. This will result in an increase of around 0.35 to 0.5 GDP percentage points. However, it must be noted that this is based on ‘a general equilibrium model in which it is assumed that the adjustments to the new equilibrium are completed in one year. Thus, the impacts may be overstated as in reality this may not be the case’.

Overall, it seems that the assumptions of the various models are far from our Indian reality. There is no attempt at including the unorganised sector. And it is very clear, from the recent evidences from neuroeconomics, experimental economics and game theory that individuals are not rational optimizing machines. Instead, we are more moved by social concerns and we exhibit a pro-social behaviour which is norm-based. There is no explicit move to analyse employment generation. Nor is there the necessary focus on agriculture. It is stated that agriculture needs to grow by 2.4 % to 4 % so as to achieve 9% GDP growth rate. One cannot help but wonder whether the objective of economic planning in India is only about the GDP growth rate! And as to the use of VAR models, the generators of the model argue that since there is ‘no real basis to say which variable is endogenous and which is exogenous’, they adopt a ‘general equilibrium approach, where everything (except rainfall, of course) depends on everything else.’ [Planning Commission 2009, 88] An easy route indeed!

This publication by the Planning Commission is a must read for all those who are interested in understanding the Indian policy making. Also, it provides the crucial link between policy and theory. Hence, making the study of economic theory very significant, especially for policy makers. It will also be of interest to students and practitioners of time series methods using the VAR framework.

Reference

Planning Commission (2009), Macro-Modelling for the Eleventh Five Year Plan of India, edited by Kirit S Parikh, Academic Foundation: New Delhi.

Budget 2010: An Analysis

The budget document considers the high growth rates India has achieved as a ‘gain’, which needs to be consolidated so that there can be ‘inclusive’ growth. Economics, during its course has divorced rate of growth of output (of commodities and services) from the question of employment. Hence, we need to use terms like ‘jobless growth’, ‘inclusive growth’ and so on. Unfortunately, a weak form of trickle down theory is assumed in most cases. Therefore, having a high growth rate becomes a necessary pre-requisite.

It is comforting to see that the need for good institutions have been emphasised in the document. As one of the challenges is ‘to address the weaknesses in government systems, structures and institutions at different levels of governance. ‘

Unorganised sector has been highlighted in the document. A National Social Security Fund has been established for workers in this sector. And the National Skill Development Corporation has approved three projects worth about Rs 45 crore to create 10 lakh skilled manpower at the rate of one lakh per annum targeting the unorganised sector. I guess the question is: do we impart skill to the workers or do we provide jobs according to their skill’

On the agricultural front, 5 more mega food parks are going to be set up as an impetus to the food processing sector. Under the Debt Waiver and Debt Relief Scheme for Farmers, the period of repayment has been extended owing to the drought. In order to step up agricultural production, around 60,000 ‘pulse and oil seeds villages’ are going to be set up. And the benefits of ‘green revolution’ are going to be increased by carrying out similar activities in the eastern region of India. The ‘benefits’ indeed!

Owing to the financial crisis, an apex level Financial Stability and Development Council will be set up with a view to strengthen and institutionalise the mechanism for maintaining financial stability. Alongside this, FDI flows will be liberalised more. It is interesting how new challenges/problems are brought about. Regulation is removed in a particular sector and regulation is increased in some sector. Overall, it seems to appear that ‘less regulation’ is considered efficient- right prices, no wastage of output and so on. Thanks to Neoclassical Economics.

Several projects are being set up to meet our energy demands and also to conserve our environment. Strengthening transparency and public accountability seems to be given adequate importance (in paper at least). In this context, an Independent Evaluation Office (IEO) chaired by the Deputy Chairman, Planning Commission to be set up to evaluate the impact of flagship programmes. More and more committees and commissions coming up!

On the whole, I think it is a more government’s budget than people’s or the corporates! However, their highlighting of the unorganised sector and the crucial role of institutions need to be congratulated.

On Disguised Unemployment: Some Issues

This post discusses some of the broad theoretical issues underlying the category of ‘disguised unemployment’. The discussion is made clear by closely examining the hypothesis that Indian agriculture is plagued by the presence of high disguised unemployment.

Let us take a glimpse at the Economics textbook for class XI published by the NCERT. (NCERT 2006, p 131, Indian Economic Development)

‘Economists call unemployment prevailing in Indian farms as disguised unemployment. What is disguised unemployment’ Suppose a farmer has four acres of land and he actually needs only two workers and himself to carry out various operations on his farm in a year, but if he employs five workers and his family members such as his wife and children, this situation is known as disguised unemployment. One study conducted in the late 1950s showed about one-third of agricultural workers in India as disguisedly unemployed.’ (italics mine)

Is disguised unemployment unemployment’

A thought experiment. Suppose A and B are two similar countries ‘ both are equally populated. Now, a study has estimated disguised unemployment in country A to be 30% and in country B to be 10%. This implies that employment in country A is more than that of country B. Should this be of concern’ Must we try and reduce disguised unemployment in country A’

If so, what is the basis of ‘disguised unemployment” Do we see the principle of allocative efficiency present in disguise’ Disguised unemployment means that ‘labour’ is ‘inefficiently’ utilised. Attestation of this claim is done by showing the high share of workers employed in agriculture alongside the low contribution of agriculture to GDP.

The first draft of National Employment Policy (2008) reads thus: ‘Over half the workforce continues to depend on the agriculture even though it accounts for less than a fifth of the total GDP. This implies a vast gap in incomes and productivity between agriculture and non-agriculture sectors. This is mainly due to inadequate growth of productive employment opportunities outside agriculture.’ Is employment the need of the hour or is it contribution to GDP’ Which variable (employment or GDP) should be the criterion’ Why not improve the quality of employment in agriculture’ To attain quality, provision of infrastructural support is absolutely essential- credit facilities, good roads and increased railroad connectivity, storage houses, institutions so as to enable the farmers get a ‘decent’ price for their produce, etc.

In 1960-61, the share of agriculture, forestry and fishing in total GDP was 53% (at 1993-94 prices). This came down by around 30 percentage points to 22% in 2002-03. On the other hand, the share of agriculture, forestry and fishing in total employment was 75.9% in 1961; by 1999-2000, it had come down to 59.9%. [The Oxford Companion to Economics in India, ed Kaushik Basu, OUP: New Delhi, 2007, p. 11]

The above discussion attains significance when we view agricultural workers as those who are trying to make a livelihood out of various jobs ‘ farm and non-farm employment and self-employed and casual labour. ‘Employment’ mainly refers to wage employment. In India, out of total employment, the share of self-employment is the highest. As Amit Bhaduri writes, the economic activities predominant in the agricultural sector (or rural or informal) can be called as ‘survival strategies’. [Bhaduri 2006, Employment and Livelihood, in Employment and Development: Essays from an Orthodox Perspective] He cautions the policy makers on the use of dual-sector models in framing development policies for India owing to the heterogeneity prevalent in rural India and also because of the specificities present in the unorganised agricultural sector. Hence, the notion of ‘surplus labour’ loses much of its weight. In turn, we need to carefully look at ‘disguised unemployment’ for it disguises a lot of specificities of rural India.