Forget micro-management

In the last several years that he’s been head of Hindustan Lever, and pilloried for the company’s poor performance, never once has M S Banga blamed Lever’s poor performance on the lack of jobs in the country.

Though, had he chosen to, he could have used any number he chose — the Montek Singh Ahluwalia Task Force says unemployment was 2.2 per cent in 1999-00 and likely to go up to 4.3 in 2006-07, the S P Gupta Special Group said the figure was 7.3 in 1999-00 and likely to touch nearly 10.

And most pundits, within and without the country’s main political parties, are of the view it was the rising unemployment that did the NDA in.

Perhaps the reason why the seasoned marketer didn’t use this excuse is that the evidence is not conclusive.

For one, the unemployment data comes from the same National Sample Survey which shows that wages for even casual labour in farms has grown at a faster pace in the post reforms period (1993-94 to 1999-00) than in the pre-reforms one (1983 to 1993-94) — these grew by 2.4 per cent in the first period and rose to 4.4 in the second. Apart from the moon perhaps, there are few places where wages go up in a situation where unemployment is also rising.

What’s important about the current debate about unemployment is that it looks certain that much of the new government’s preoccupation is going to be that of creating new employment opportunities, and the way most people are advocating this is through greater incentives for the unorganised sector.

While creation of jobs is clearly critical, it’s useful to keep a few things in mind. For one, while the employment growth slowed down, from 2 per cent per annum in the pre-reforms period to 1 per cent in the post-reforms one, this was accompanied by an equally dramatic fall in the growth of the labour force, with a very large number of youth preferring to go in for more education than looking for jobs.

And while no one disputes the net slowdown in job creation in the post-reforms period, what’s important is that a large part of this employment slowdown took place because of the industrial slowdown after 1997.

In fact, as my former professor at the Delhi School of Economics, K Sundaram, an acknowledged expert on poverty and employment in India, has argued, the real wage growth in the post-reforms period was actually high enough to offset the reduction in the number of days worked, so that on a net basis, there has been an overall improvement in the employment situation.

Indeed, another former professor, Suresh Tendulkar, has argued that the decline in employment in the factory sector between 1997 and 1999 was largely due to the sharp fall in industrial growth, but in the period prior to this (in the 1993-96 period) factory employment rose by 3 per cent each year.

So, while there will be a lot of temptation to increase concessions for the unorganised sector, since this sector generates more employment, it’s quite obvious that once industrial growth picks up, so will employment. Huge foreign investment in China, in the manufacturing sector, today contributes a fourth to China’s annual employment growth!

But it won’t generate adequate employment, argue the lot who believe big industry-led growth leads to less jobs as the production process is capital intensive and believes in mass production as opposed to production by the masses.

Though appealing, that’s not the whole picture. A study by Robin Burgess and Anthony Venables of the London School of Economics last year has some interesting insights to offer. The duo looked at labour laws in various states, and classified them as pro-labour if firing workers was difficult and anti-worker if it was easy.

Some of their results were pretty obvious — states which were pro-labour saw a decrease in total manufacturing output, and the decline was concentrated in the large factory sector. But what was interesting was that pro-labour states had a significant increase in urban poverty!

Why? After all there was a commensurate increase in output and employment in the informal sector, wasn’t there? Sure, but anyone who has studied the organised manufacturing sector knows that wages in it are around two to three times that in the informal sector.

So, for a family with one earning member working in a small unit, the wage is generally insufficient to take the family above the poverty line.

The huge productivity hikes in the organised manufacturing sector, economist Prem Shankar Jha adds, have caused employment growth to slow down in that sector, but the higher earnings of workers have in turn resulted in, in the post-reforms period, a 7.1 per cent hike in construction employment, a 6 per cent hike in transport/storage, and a 5 per cent growth in trade.

While it is true that the unorganised manufacturing sector would create more jobs than the large factory sector in the first round, with the low surpluses in the unorganised sector, this second and far more vital round of employment growth just can’t be expected.

So, while it is important for the Congress-led United Progressive Alliance to try and fashion policies to increase employment in rural areas, it would do well to keep this in mind — hit large industry, and it will end up killing jobs growth in the services sector.

In any case, what the small scale sector needs more than concessions is better infrastructure — poor electricity infrastructure, for instance, means that small firms need to buy gensets and this adds a sixth to their capital needs. Forget the micro-management, concentrate on growth.