What’s the news?

• A recent report, SWI 2023, has brought to light the disconcerting disparity between India’s relentless pursuit of GDP growth and the stark reality of inadequate job creation.

Central idea

• In the realm of policy decisions, a fundamental question often arises: Should the focus be on accelerating economic growth or ensuring widespread employment opportunities? A recent report, India is Broken and the State of Working India 2023, draws insights on how India’s growth trajectory impacts employment, emphasizing the need to consider various social factors in this equation.

The State of Working India 2023 (SWI) Report

• SWI 2023, focusing on a long-term perspective, analyzes data from 1983 to 2023, emphasizing social identities like caste, gender, and religion.
• It highlights how GDP growth benefits are distributed unevenly among various segments of society.
• The quality of jobs created is a crucial aspect of distinguishing between regular-wage jobs and self-employment.

The relationship between economic growth and employment in India

• Job Creation Challenge: The report emphasizes that job creation remains one of India’s most significant macroeconomic challenges. Despite the pursuit of high GDP growth, the report suggests that the correlation between economic growth and employment generation has weakened over time.
• Weakening Employment Elasticity: Employment elasticity, which measures the extent to which employment grows when GDP grows by one unit, has consistently declined since the 1980s. This decline indicates that a 1% increase in GDP now results in less than a 1% increase in employment.
• Recent Trends: The period from 2017 to 2021 showed a notable improvement in employment. However, this improvement came with nuances. While employment numbers increased, it’s essential to distinguish between jobs created due to economic growth and those created out of necessity (self-employment).
• Quality of Jobs: The SWI 2023 report underscores the importance of considering the quality of jobs created. Not all employment opportunities are equal, and the report highlights the prevalence of self-employment, which often lacks regular wages and job security.
• Impact on Women: The changing employment landscape disproportionately affects women. Although women accounted for half of the lost employment during the specified period, they received only a third of the increase in formal employment. This shift also saw more individuals turning to self-employment due to economic distress.
• Uncorrelated Growth: The report’s broader takeaway is that over the long run, GDP growth and employment growth have been uncorrelated in India. This suggests that policies solely oriented towards achieving higher GDP growth rates may not necessarily lead to accelerated job creation.

The dominance of GDP growth

• For years, India’s national discourse has been dominated by the pursuit of high GDP growth rates as the primary indicator of economic progress.
• The belief has been that rapid economic growth will naturally lead to increased employment opportunities.
• However, recent developments challenge this conventional wisdom, prompting us to reconsider our priorities.

The US perspective

• In contrast to India’s GDP-centric approach, the United States, the world’s largest economy, places a strong emphasis on employment levels.
• The Chairman of the US Federal Reserve, Jay Powell, consistently highlights the importance of achieving full employment while maintaining price stability.

Why does India not prioritize employment to the same degree?

• Historical Perspective: India’s approach to economic development has been influenced by its post-independence history. When India gained independence in 1947, it faced widespread poverty, and economic growth was seen as a means to uplift the masses.
• Development Paradigm: India adopted a development paradigm that prioritized industrialization and capital-intensive sectors. The belief was that as industries expanded, they would naturally absorb labor.
• Policy Framework: India’s economic policies, especially since the 1991 economic reforms, have largely centered on liberalization, privatization, and globalization. These policies aimed to attract foreign investment and promote private sector growth, often with an emphasis on manufacturing and services. While these policies aimed at increasing overall economic output, they did not always address the issue of employment directly.
• Data Focus: Economic policymakers often rely on GDP growth as a quantifiable and easily measurable metric to gauge economic performance. Employment data can be more complex to collect and interpret, and the focus on GDP growth has made it the primary indicator of success.
• Political Considerations: Political leaders and parties have, at times, used the promise of high GDP growth as a way to gain popular support and demonstrate economic progress to the electorate. This political narrative has reinforced the emphasis on GDP growth.
• Globalization Trends: The global trend toward globalization and competitiveness has also influenced India’s priorities. The country has sought to position itself as a global economic player, and this often involves pursuing policies that align with international economic norms, including a focus on GDP growth.
• Lack of Comprehensive Social Safety Nets: India’s social safety nets and social security systems have historically been limited in coverage and effectiveness. As a result, there may be a perception that focusing on GDP growth is essential to lifting people out of poverty, as job opportunities are seen as the primary means of economic betterment.

A Framework for Change: Rethinking India’s Growth Strategy

• Promote labor-intensive manufacturing:
  • Encourage industries that have the potential for labor-intensive manufacturing, such as textiles, electronics assembly, and agro-processing.
  • Implement policies and incentives to attract investments in these sectors, as they can create a significant number of jobs.
• Invest in skill development and training.
  • Establish comprehensive skill development programs to enhance the employability of the workforce.
  • Collaborate with industries to design training programs that align with their specific needs, ensuring that workers are adequately prepared for available job opportunities.
• Support Micro, Small, and Medium Enterprises (MSMEs):
  • Provide targeted support to MSMEs, which often generate substantial employment.
  • Simplify regulations and reduce bureaucratic hurdles for MSMEs to encourage their growth.
• Green Manufacturing and Sustainable Industries:
  • Explore opportunities in green manufacturing and sustainable industries, aligning with global trends toward environmentally friendly practices.
  • Invest in renewable energy, eco-friendly technologies, and sustainable agriculture, which can create employment while contributing to environmental goals.
• Infrastructure Development in Rural Areas:
  • Develop infrastructure in rural areas to facilitate economic activities and job creation outside of urban centers.
  • Improve connectivity, transportation, and access to markets to boost rural employment opportunities.
• Focus on the formalization of jobs:
  • Implement policies that encourage the formalization of employment, including ensuring written contracts and providing benefits to workers.
  • Address labor market informality to improve job quality and security.
• Gender-Inclusive Policies:
  • Develop and enforce policies that promote gender equality in the workforce.
  • Encourage women’s participation in the labor market through initiatives such as affordable childcare facilities and measures to reduce workplace harassment.
• Social Safety Nets:
  • Strengthen social safety nets to provide a cushion for workers during periods of economic volatility.
  • Ensure that unemployment benefits, healthcare, and retirement provisions are accessible and effective.
• National Employment Policy:
  • Develop and implement a comprehensive national employment policy that outlines a long-term vision and strategy for job creation.
  • Address both the supply and demand sides of the labor market and promote the quantity and quality of employment.
• Global Trade and Export Promotion:
  • Actively engage in global trade and export promotion, which can stimulate economic growth and create jobs.
  • Identify and target export-oriented industries with growth potential.
• Decentralized Economic Development:
  • Promote economic decentralization by encouraging the development of regional and local economies.
  • Invest in infrastructure, skills, and entrepreneurship in underdeveloped regions to reduce regional disparities.

Conclusion

• The time has come for India to reconsider its economic priorities. While GDP growth remains important, a greater emphasis on job creation, especially quality employment, is crucial for sustainable and inclusive development. The findings of the SWI 2023 report offer a compelling case for Indian policymakers to shift their focus towards strategies that prioritize employment generation, ensuring that the benefits of growth are shared by all segments of society.

What’s the news?

• The growing chasm between wages or salaries and the cost of living has given rise to a distressing scenario: the affordability of vital food commodities is under threat.

Central idea

• In Mumbai, the cost of a vegetarian thali surged 65% in five years, while income for laborers and salaried workers in urban Maharashtra increased only 37% and 28%, respectively. This discrepancy is making essential food items unaffordable, leading to compromised meals.

What is Thalinomics?

• Thalinomics is a term coined by an Indian economist and former Chief Economic Adviser to the Government of India, Arvind Subramanian.
• It refers to a concept that involves analyzing changes in the cost of a vegetarian thali (a meal consisting of a variety of dishes served on a single plate) to gain insights into the trends and dynamics of food inflation and affordability.
• It involves tracking the prices of key ingredients that constitute a thali, such as cereals, pulses, vegetables, and other essential items.
• This concept is particularly relevant in countries like India, where food affordability and inflation are significant concerns for a large population.

Key insights: A case study of Mumbai and urban Maharashtra

• Rising Cost of Thali: The cost of preparing a home-cooked vegetarian thali in Mumbai has increased significantly by 65% over the past five years. This increase is attributed to rising prices of essential ingredients like rice, dal, vegetables, and other items that constitute a thali.
• Income Growth: Over the same five-year period, the average wage earned by casual laborers in urban Maharashtra increased by 37%, while the average salary of regular salaried workers increased by 28%. These income growth rates reflect the changes in earnings for these two categories of workers.
• Disparity Between Costs and Income: While the cost of a thali increased by 65%, income growth for casual laborers and salaried workers was significantly lower, at 37% and 28%, respectively.
• Affordability Challenge: The disparity between rising costs and income growth has resulted in essential food items becoming increasingly unaffordable for households. This affordability challenge can lead to reduced portion sizes or a compromise in the variety and nutritional quality of meals.
• Impact on Budget Share: The study also analyzes the portion of monthly wages or salaries required to afford two thalis every day for a month. This share increased from 22.5% of a casual laborer’s monthly earnings in 2018 to 27.2% in 2023. For salaried employees, it increased from 9.9% to 12.8% over the same period.

• Incomplete Data: Data limitations, particularly regarding the absence of certain ingredients like spices and ghee in the analysis, This suggests that the actual cost of making a thali could be even higher than the calculated figures.

Key aspects of the relationship between thali prices and inflation

• Inflation and Ingredient Prices: The prices of ingredients like rice, dal, vegetables, and oil can be affected by inflation. If the prices of these essential ingredients rise due to inflationary pressures, the overall cost of preparing a thali would increase.
• Food Inflation: The cost of a thali, which is composed of various food items, is directly influenced by food inflation. If there’s high food inflation, it can significantly impact the affordability of thalis and other meals.
• Supply and Demand Dynamics: Inflation can be driven by supply and demand imbalances. If there’s a shortage of certain ingredients due to supply disruptions (e.g., poor harvests or transportation issues), prices can rise. Similarly, changes in consumer demand patterns can affect the prices of specific ingredients, further impacting thali costs.
• Monetary Policy: Central banks often use monetary policy tools to control inflation. Interest rate adjustments, money supply regulation, and other measures can impact inflation rates. High inflation rates can lead to increased production costs for farmers and manufacturers, which may trickle down to the prices of thali ingredients.
• Income Effects: Inflation can impact consumers’ purchasing power. When inflation outpaces income growth, households might need to allocate a larger portion of their income to cover basic expenses like food. This can particularly affect lower-income households, leading to affordability challenges for items like thalis.
• Regional Variation: Inflation rates can vary regionally and even locally. Different regions might experience different rates of inflation due to factors like supply chain disruptions, local economic conditions, and government policies.
• Government Policies: Government policies such as subsidies, import/export regulations, and agricultural policies can influence ingredient prices and, consequently, the cost of preparing a thali. These policies can impact the supply and availability of key ingredients.

Implications of the higher cost of a thali

• Nutritional Impact: The rising cost of thali ingredients can lead to compromised nutritional intake as households might cut back on certain items to manage expenses. This can result in inadequate diets and potential health implications.
• Affordability Strain: As thali prices escalate, households may face financial strain by allocating a larger portion of their income to food expenses. This can limit their ability to save, invest, and engage in non-essential expenditures.
• Dietary Diversity: Increased thali costs can potentially lead to reduced dietary diversity as households might opt for cheaper, less nutritious alternatives, affecting overall dietary quality.
• Balanced Meals: Higher thali costs might lead to smaller portions or fewer items in the thali, disrupting the balance of a typical meal and potentially impacting satiety and nutritional completeness.
• Quality of Life: Reduced dietary quality due to affordability challenges can have broader implications for individuals’ quality of life, health, and overall well-being.
• Economic Struggles: For households with limited disposable income, the burden of increased thali costs can exacerbate economic struggles and hinder progress.

Way forward

• Policy Interventions: Implement policies to address the widening gap between thali costs and income growth, ensuring that essential food remains affordable.
• Income Enhancement: Focus on raising wages for casual laborers and salaried workers to match the rising cost of thalis.
• Affordability Measures: Establish measures to mitigate the impact of expensive thalis on households, considering subsidies or targeted assistance.
• Nutrition Awareness: Launch campaigns to educate households about maintaining nutritious diets even when faced with affordability challenges.
• Gender-Inclusive Approach: Address gender disparities by formulating policies that empower women economically.
• Data-Driven Approach: Base policies on accurate and up-to-date data on food prices, wages, and consumption patterns.
• Food Security Initiatives: Strengthen food security programs to ensure access to nutritious food despite thali cost increases.
• Policy Evaluation: Continuously assess the effectiveness of policies in addressing thali affordability and overall well-being.

Conclusion

• The shifting dynamics between escalating costs and relatively stagnant income pose a serious challenge to maintaining a nutritionally balanced diet. As prices continue to rise, a more comprehensive approach is crucial to ensuring that affordable nutrition remains within reach for all strata of society.

Central idea

• In recent weeks, a notable surge in vegetable prices has acted as a harbinger of a potential increase in overall inflation, as gauged by the consumer price index. This inflationary trend, if sustained, could breach the upper threshold of the Reserve Bank of India’s (RBI) targeted inflation framework.

Inflation Trend Analysis

• Initial Indications of Upward Movement: The recent surge in vegetable prices over the past few weeks served as an early signal of an impending inflationary trend. These signs prompted expectations of an escalation in overall inflation, as gauged by the consumer price index, during the months of July and August.
• Confirmed by Official Data Release: The National Statistical Office’s data release on Monday solidified these apprehensions. Headline retail inflation surged to a 15-month high of 7.44 per cent in July, marking a substantial increase from the 4.87 per cent recorded in June.
• Food Prices as the Main Catalyst: Dissecting the data, it becomes evident that the major driving force behind this surge has been the elevated food prices. The consumer food price index soared to 11.51 per cent in July, significantly up from the 4.55 per cent reported the previous month.

• Core Inflation and Goods/Services Inflation Trends:
  • Core Inflation: Excluding the volatile food and fuel components, core inflation has shown a moderation trend, as noted by ICRA.
  • Goods and Services Inflation: Both goods (excluding food) and services inflation have demonstrated a softening trend, indicating a certain degree of stability.

Food Categories and Their Impact

• Vegetables: This category experienced a staggering price rise of 37.3 per cent, serving as a primary contributor to the overall increase.
• Spices: Prices of spices surged by 21.6 per cent, further accentuating the inflationary pressure within the food segment.
• Pulses and Products: With an inflation rate of 13.2 per cent, pulses and related products added to the upward trend in food prices.
• Cereals and Products: A rise of 13 per cent in this category also contributed to the overall surge in food inflation.

Central Bank’s Perspective

• Early Warnings Heeded: Recognizing the potential implications for overall inflation, the Reserve Bank of India (RBI) took swift action during its recent monetary policy committee meeting.
• Proactive Forecast Revision: In a preemptive move, the RBI adjusted its inflation projection for the second quarter upwards. The initial estimate of 5.2 per cent was revised to 6.2 per cent, reflecting the central bank’s readiness to address the imminent inflationary pressure.
• Confirmation through Data: The RBI’s perspective received validation with the release of official data by the National Statistical Office. The subsequent surge in headline retail inflation to a 15-month high of 7.44 per cent in July, from the previous month’s 4.87 per cent, bolstered the central bank’s concerns.
• Food as a Key Driver: The central bank’s analysis correctly identified that the main driver behind this inflationary surge was the escalating food prices. The consumer food price index’s significant rise to 11.51 per cent in July, compared to 4.55 per cent in the previous month, reinforced the central bank’s focus on this critical aspect.

Impact of the inflation trends

• Consumer Affordability: The surge in vegetable prices contributes to overall inflation, impacting consumers’ ability to afford essential goods. As prices rise, individuals might need to allocate more of their budget to food, potentially reducing spending on other items.
• Budgetary Strain: Higher food prices, particularly vegetables, strain household budgets, affecting families’ purchasing power. This burden is often more pronounced for lower-income households, potentially leading to trade-offs in spending and impacting overall consumption patterns.
• Cost-Push Inflation: The rise in food prices, driven by vegetables and other factors, can lead to cost-push inflation. This occurs when higher production costs are passed on to consumers, causing a general increase in the price level across various sectors.
• Wage Pressure: Elevated inflation can lead to demands for higher wages by workers to maintain their real income levels. Businesses might face challenges managing increased labor costs, potentially affecting profitability.
• Monetary Policy Adjustment: The Reserve Bank of India (RBI) might need to consider adjusting its monetary policy to address the rising inflation. This could involve raising interest rates to control demand and curb price increases, potentially impacting borrowing costs and investments.

Conclusion

• Despite optimism about a forthcoming correction in vegetable prices, the economy remains vulnerable to external shocks such as crude oil price fluctuations. The committee’s continued vigilance and strategic policy responses will be pivotal in managing inflationary pressures and maintaining economic stability.

What’s the news?

• The Indian economy grapples with a soaring fiscal deficit and public debt, posing a critical challenge to its financial stability. With impending state and general elections in 2023 and 2024, the electoral budget cycle could worsen the debt situation, raising questions about its sustainability.

Central idea

• The escalating levels of fiscal deficit and public debt in India have been a persistent concern, even before the COVID-19 pandemic hit. Although there has been some recovery in the post-pandemic period, projections indicate that returning to pre-pandemic debt levels in the medium term seems unlikely.

What is meant by fiscal deficit?

• A fiscal deficit refers to the difference between a government’s total expenditures and its total revenues (excluding borrowings) during a specific period, usually a fiscal year.
• It is a crucial component of a country’s fiscal policy and represents the amount of money the government needs to borrow to meet its expenditure commitments when its total expenses exceed its total revenue.

What is meant by public debt?

• Public debt represents the total amount of money that a country’s central government owes to various creditors, whether individuals, financial institutions, or foreign governments, at a specific point in time.
• It is the cumulative result of past fiscal deficits and surpluses. Public debt includes all outstanding government borrowings, including both short-term and long-term debt.

What is meant by financial repression?

• Financial repression is an economic term used to describe government policies and regulations that manipulate interest rates, capital flows, and other financial instruments to channel funds towards the government’s debt obligations and other strategic priorities.
• It typically involves measures aimed at reducing the cost of government borrowing and raising funds for public spending, often at the expense of savers and investors.

India’s fiscal deficit and public debt

• One of the Highest Debt Levels: Even before the COVID-19 pandemic, debt levels were among the highest in the developing world and emerging market economies.
• Fiscal Deficit: The fiscal deficit in 2020–21 increased to 13.3% of GDP and has receded to 8.9% in the post-pandemic period.
• Public Debt: The aggregate public debt relative to GDP was 89.6% in 2020–21 and decreased to 85.7% after the economy started recovering from the pandemic.
• Debt-to-GSDP Ratios in Specific States: The debt-to-GSDP ratios in specific states: Punjab (48.9%), West Bengal (37.6%), Rajasthan (35.4%), and Kerala (close to 33%)

Impact of financial repression

• High Debt and Interest Payments:
• Financial repression may lead to higher government debt levels as it facilitates borrowing at low-interest rates. As a result, interest payments on the accumulated debt can become a significant burden on the government’s finances.
• On average, interest payments constitute over 5% of GDP and 25% of revenue receipts in India. This surpasses government expenditures on critical sectors like education and healthcare, hindering investments in essential infrastructure and human development.
• State-Specific Concerns: Certain states in India, such as Punjab, Kerala, Rajasthan, and West Bengal, are particularly affected by high Debt-to-GSDP ratios. The debt burden in these states poses challenges for managing finances and implementing developmental initiatives.
• Constraints on Fiscal Policy: Elevated debt levels resulting from financial repression can limit the government’s ability to implement counter-cyclical fiscal policies during economic downturns. This constraint can hinder the government’s capacity to respond effectively to shocks and economic challenges.
• Distorted Financial Market: Government interventions, such as the SLR requirement, can create imbalances in the allocation of funds, affecting the availability of credit for productive sectors like manufacturing.
• Impact on Sovereign Rating and External Borrowing: Persistently high deficits and debt levels can lead to lower sovereign ratings by rating agencies. A low sovereign rating can increase the cost of external commercial borrowing, making it more expensive for the government to raise funds from international markets.
• Burden on Future Generations: Excessive debt accumulation can lead to intergenerational equity issues, with future citizens having to repay the debt and interest accrued during the period of financial repression.

Way forward: Financial Consolidation

• Fiscal Responsibility and Budget Management (FRBM) Rules: Enforce and strengthen the existing FRBM rules to ensure prudent fiscal management. Adhering to these rules can help control deficits and prevent excessive debt accumulation.
• Targeted Interventions: Implement targeted interventions to reduce the debt burden while addressing critical needs such as education, healthcare, and infrastructure development. For instance, the government can allocate funds specifically to boost primary education and healthcare access in states with high debt burdens, such as Punjab, Kerala, Rajasthan, and West Bengal.
• Infrastructure Investments: Prioritize investments in physical infrastructure, human capital, and green initiatives to enhance economic productivity and foster sustainable development. For example, investing in renewable energy projects can support the green transition while creating employment opportunities.
• Enhance Tax Collection and Compliance: Improve tax administration and compliance to increase government revenue. Utilizing technology for cross-matching of GST and income-tax returns can enhance tax collection efficiency and curb tax evasion.
• Fiscal Reforms at the State Level: Encourage states to adopt responsible fiscal policies and avoid excessive borrowing. For example, the central government can provide incentives to states that adhere to fiscal discipline and implement reforms to improve fiscal health.
• Disinvestment and Efficient Asset Management: Pursue disinvestment and strategic asset management to optimize government resources and reduce the need for excessive borrowing. For instance, the government can consider divesting non-essential government assets and utilizing funds from asset sales efficiently. Instead of pouring money into BSNL, which may be better served by private sector expertise, the government can explore disinvestment options.
• Market-Based Interest Rates: Gradually transition towards market-driven interest rates on government borrowing to ensure a more efficient allocation of capital in the financial market. This can help improve credit availability for the private sector.
• Encourage Private Sector Participation: Promote private sector participation in critical sectors, allowing the government to focus on its core functions. For instance, the government can encourage private investment in infrastructure projects through public-private partnerships (PPPs).
• Focus on Cash Transfers: Consider providing targeted cash transfers instead of subsidies for specific commodities and services. Cash transfers can be more efficient at redistributing resources without causing unintended distortions in relative prices.
• Medium-Term Fiscal Consolidation: Develop and implement a medium-term fiscal consolidation plan to gradually reduce the fiscal deficit and public debt levels sustainably. This plan can include specific targets for debt reduction and deficit control.

Conclusion

• Financial repression’s adverse effects, along with the heavy costs of high deficits and debt, necessitate responsible policy interventions and fiscal consolidation. Emphasizing technological advancements and prudent economic policies will be vital in tackling the debt burden and ensuring long-term fiscal sustainability.