Structural imbalances

Published : Oct 05, 2012 00:00 IST

A rickshaw puller, with a billboard advertising an upcoming retail e-mall in the backdrop, in Kolkata.-ARUNANGSU ROY CHOWDHURY

A rickshaw puller, with a billboard advertising an upcoming retail e-mall in the backdrop, in Kolkata.-ARUNANGSU ROY CHOWDHURY

The expectation that growth would cause the movement of workers out of low-productivity primary activities to formal employment in regular jobs has been completely misplaced in India so far.

One of the surprising, and disconcerting, features of the Indian development storynot just in the past two decades but over a longer post-Independence trajectoryhas been the relative absence of structural change. This is not just a technical matter: it has a direct impact on peoples lives and material conditions. It is a crucial reason why the dominant part of the Indian population is still dependent upon low-productivity agriculture and other insecure activities and even helps to explain partly the abysmal human development indicators that are sought to be brushed off in the recent narratives of dynamic India.

The notion that economic growth is associated with the structural transformation of the roles of different sectors in the economy was first propounded by Simon Kuznets more than half a century ago, and it has since become a staple feature of how economists view the growth process. The idea is that per capita income growth over time is accompanied by structural transformation in the economy at two different levels: a shift first from agriculture to industry and then from industry to services; and a shift from self-employment to wage employment in impersonal organisations like large firms. Subsequently, economists like Nicholas Kaldor emphasised the critical role of the manufacturing sector in this processbecause it generates faster productivity increases, and because the demand for manufactured goods rises with per capita incomes. So developed countries are often simply referred to as industrialised societies.

Many currently developed countries have exhibited this historical pattern, from northern European countries to the United States to Japan. More recently, South Korea, which in the middle of the 20th century had an economic structure that was not so different from that of India, went through a very similar process. As Chart 1 shows, the manufacturing sector increased as the proportion of both output and employment in the early phase of fairly rapid and sustained growth in the Republic of Korea, from the mid 1960s to the late 1980s.

By then, South Korea reached the level of a middle-income country. The share of manufacturing in employment began to fall from the early 1990s, even though the share of manufacturing in total output continued to increase, because labour productivity gains in manufacturing were greater than in other sectors. After 2005, manufacturing fell even as a share of the gross domestic product (GDP)but by then the per capita income of the country had put it into the league of rich nations, as a member of the Organisation for Economic Cooperation and Development (OECD) club. Recent growth in output and employment has been dominated by services, which by 2010 accounted for as much as 64 per cent of the GDP and 75 per cent of the workforce.

But this classic pattern of structural change does not always occur, even in countries that experience relatively rapid income growthand India is a particularly disturbing example of this. Chart 2 provides some illustration, particularly in terms of the very high proportion of workers still based in primary activities (such as agriculture, fishing and mining).

Per capita incomes go up, but with desired structural changes

It was often argued in the past that the absence of structural change in India was due to the relatively low rate of growth of per capita income related to the Hindu rate of growth. But Chart 2 tells a different story. As output growth accelerated, per capita incomes increased quite sharply from the mid-1990s onwards. Despite this, the desired changes in manufacturing output and employment did not take place.

The share of the primary sector in the GDP declined from 55 per cent in 1960 to only 18 per cent in 2010. In fact, the share of agriculture declined even more, to only around 15 per cent. But employment in the primary activities continued to dominate total employment. In the three decades after 1965, the share of the primary sector workers fell only marginally, from 71 to 64 per cent. But even in the period of dynamic growth from 1995 onwards, such employment remained very high, and in 2010 it still accounted for around 54 per cent of total employment.

This inability to move people out of low-productivity primary activities must be counted among the chief failuresperhaps the primary failureof the Indian economic growth process. In addition, the continued policy neglect of agriculture allowed the agrarian constraint to growth to reappear after a period when it was believed to have been removed by processes of globalisation. Agrarian crises, the inadequate and insecure livelihood of small cultivators, and food inflation have emerged as critical public concerns once again.

This persistence of low-productivity employment helps to explain why the benefits of recent growth have been so unequally distributed. Simply put, the expectation that growth would generate the movement of workers out of informal activities to formal employment in regular jobs has been completely misplaced in India thus far. But the more pressing question is why the period of rapid growth has so far made so little difference in this regard.

Part of this is clearly because manufacturing simply did not expand as expected. The share of manufacturing in total GDP peaked in 2000 at below 15 per cent. As a share of total employment, it has remained well below 20 per cent. The recent increases in manufacturing employment share indicated in Chart 2 should be treated with caution since much of this reflects increases in informal (often self-employed) manufacturing activity rather than the formal employment that was expected in the classic model.

So the burden of generating economic dynamism has fallen on services. Even Indian policymakers have tended to treat this as the sector on which to pin their hopes for future growth, as if the difficult stage of industrialisation could simply be bypassed. Services now account for nearly two-thirds of the GDP with less than one-third of the workforce.

Unfortunately, the dynamic services (like information and technology-related services, telecom and finance) may be the ones causing the higher GDP growth, but they account for minuscule shares of employment. As a result, most people who work in service activities are actually in low-paid and low-productivity informal work that is usually a reflection of economic desperation in the face of few other options and anyway is outside the purview of minimum wages or any other form of labour protection. Contrary to Kuznets expectation, the share of formal employment in the total has not gone up but rather declined slightly in the past two decades.

What explains this trajectory? After all, 50 years ago India had one of the largest industrial sectors among developing countries. The strategy of import-substituting industrialisation may have had other problems but it actually strengthened this for a while, adding the diversification towards higher value-added activities and increased industrial activity. But the recent period of rapid growth has not brought with it the kind of expanding industrial activity that is necessary if the Indian productive structure is truly to be transformed.

Is this just because the process is ongoing and as yet unfinished or does it indicate a different kind of process altogether? The second answer is more likely to be true, because the income growth has not been associated with the generation of good quality jobs. Nor is it likely to be because the combination of market forces with existing political and social equations will continue to deliver more of the same unless there are proactive policies that are focussed particularly on employment creation.

In fact, this overall growth trajectory cannot be seen in isolation from the social and political contexts. In India, the way in which social institutions and structures interact with economic processes has been absolutely crucial and has affected and been affected by changing political equations that determine not just the broad relationship between capital and labour, but also the interaction between different forms of capital.

Just as India contains a vast multitude of everything, whether it be agro-ecological regions, varying physical terrains, languages, cultures, social mores, and so on, the Indian economy contains a proliferation of different forms of capital. In the period of globalisation these complexities have not been eliminated or ironed out: rather, they have interacted in specific ways to create very particular and even unique paths of capitalist development, which do not necessarily follow the standard script. As a result Indian capitalism is a unique hybrid which is obviously interlinked with and dependent upon not only the state (as everywhere else) but also past and evolving social formations.

Take the large bourgeoisie, for example, which is dominated by diversified joint family enterprises extending across different economic sectors. Harish Damodaran ( Indias New Capitalists: Caste, Business and Industry in a Modern Nation) has shown how even in the phase of globalisation, caste, region and linguistic community have been crucial in shaping these groups, determining their behaviour and influencing their interaction with each other as well as with global capital. The very emergence of such capital has often reflected social forces: for example, there are no major business groups in the north and east that are not from traditional business communities, and, nationally, there is no Dalit business group of significance.

Existing practices reinforced by corporate behaviour

Existing practices, such as gender discrimination in property ownership and control, were in turn often reinforced by corporate behaviour, such as the ability to utilise the existence of legal forms (such as the Hindu Undivided Family form of ownership) that deny any role to women, as work done by Chirashree Dasgupta shows. These obviously added to the weight of socially discriminatory practices; they also affected how business houses at large and medium levels dealt with more purely economic forces, and their attitudes to investment, employment and output.

Barbara Harriss-White ( India Working: Essays on Society and Economy, Cambridge University Press, 2003) has argued that the greater part of the modern Indian is regulated or determined by social institutions derived from primordial identity such as gender, caste and community. These interact with political forces, generating forms of patronage, control and clientelism that vary across regions. She argues that this makes the outcomes of government strategies, including those connected with liberalisation, privatisation and deregulation, different from those expected.

Yet it could also be argued that these features of the Indian economic landscape are precisely what have been crucial in generating the recent phase of rapid growth, even as they have allowed the persistence of backwardness and accentuated inequalities in the course of that expansion. The ability of employers in India to utilise social characteristics to ensure lower wages to certain categories of workers (say because of caste, gender and other forms of social discrimination) has certainly benefited capitalist accumulation. The complex nexus between politics and different levels of local, regional and national businesses has allowed for the appropriation of land and other natural resources that has been an integral part of the accumulation story and fed into the way that Central and State governments have aided the process of private surplus extraction. More overt economic policies such as patterns of public spending and taxation are only one part of thisa substantial part relates to laws, regulations and their implementation (or lack of it) that provide the contours for the expansion of private capital.

The focus of the Indian state (and of most state forces at the regional level) has been on generating growth through various incentives designed to encourage the expansion of private capital. It is now obvious that this can very quickly become prey to corruption, crony capitalism and the like. But it is possibly less obvious that this strategy in itself generates incentives for such private players that effectively militate against a more broad-based and egalitarian economic expansion.

So new forms of capital certainly do emerge and proliferate as a result of this strategy, but they do so in a wider context in which capitalist accumulation is based essentially on extraction: of land and other natural resources, of the labour of workers, and of the products of peasant cultivators and small producers of goods and services. This has reduced the incentives to focus on productivity growth and innovation as routes to more rapid growth, since state-aided primitive accumulation and socially determined extra-economic relationships provide easier and more reliable means of generating private surpluses. All this has actually been reinforced under globalisation, rather than being diminished by external competition.

The point is that these transactions in land, labour and product markets are not simply voluntary exchanges between equivalent parties. Instead, the game is played with dice that are heavily loaded in favour of capital, especially large capital, through various means: social institutions that allow for discriminatory labour market practices; legal and regulatory institutions that can be mobilised to enhance the bargaining power of capital; and political forces that actively engage in supporting all of these. These are in turn associated with various other more economic patterns that pile on the imbalances: financial institutions, input and product markets that do not provide reasonable credit access, and so on. So it may not be surprising that private agents find little value in accumulation strategies that are designed to enable structural transformation.

Indeed, such transformation may even be to the detriment of their short-term interests, if it reduces their bargaining power. The low tolerance levels of capitalists in India to anything that can even slightly improve the bargaining power of workers is evident in the growing impossibility of even forming workers unions in most activities controlled by the private sector. It is clearly indicated by the ferocious and orchestrated backlash against something as limited as the National Rural Employment Guarantee Act (NREGA), only because it provided some relief to rural workers, who could at last begin to demand wages closer to the legal minimum from employers.

In such a context, only dramatic changes in the nature of state intervention in the economy can actually ensure a process of sustainable economic diversification that is the essence of development. The political traction for such a change in state strategy is currently low, but that is not immutable. The Indian economy and polity are both currently poised for change but if that change is to be progressive, it requires much more social and political mobilisation.

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