Troublesome landing — They don’t grow land anymore

(Published in The Telegraph, Calcutta, April 9, 2015)


Singur, the potato bowl of Bengal, appears to have landed in trouble again. Not on account of unwilling farmers grieving over their lost assets, but on account of overproduction by the ones who didn’t lose their land. Excess supply of the crop has pulled down prices, leading indebted farmers to slither down the precipice. According to media reports, matters have come to a dismal pass, with a section of the farmers demanding that the Tatas be recalled to help rectify the situation. Industrialization, presumably rapid, will bring along with it employment for the farmers, thereby leading them out of misery.

Simultaneously, the Central government is leaving no stone unturned to ensure the passage of the land bill. What with its minority status in the Rajya Sabha, it is relying now on repeat promulgations of ordinances, till presumably, a joint session of Parliament will beget the act itself, the promised blueprint for industrial bliss. Unleashing the forces of industrialization is believed to be the sine qua non for economic growth, an adored goal for governments across our planet. Growth increases output and growth creates employment, as the recent Singur message appears to suggest. In his radio broadcast, the prime minister, too, has assured a job for each land-losing family, over and above the compensation offered for acquired land.

Availability of land, of course, is an essential precondition for building factories. It is a basic factor of production along with labour and capital utilized by industry. Of these three, though, land enjoys a unique position in that while the other factors can grow, land cannot. Widespread industrialization makes land increasingly scarce vis-à-vis other factors of production, leading to a rise in its market price in the vicinity of industry.

Let us concentrate, however, on the nature of technology associated with growth. As every budding undergraduate student of economics is aware, extra doses of capital and labour, applied to a fixed plot of land, cause aggregate output from an enterprise to rise, but the incremental output brought about by the extra labour and capital begins to fall eventually. Elementary text-books refer to this as the law of diminishing returns. Put somewhat dramatically, a banyan tree cannot be grown in a flower pot, unless it is cultivated as a bonsai.

A sustained rate of growth of per capita aggregate output will call, then, for forces that can negate the tendency for diminishing returns to capital and labour as they are applied to non-augmentable land. Quite obviously, the forces in question will assume the form of technological upgrades that will improve the productivity of capital as well as labour. However, a rapid rise in labour productivity may not necessarily be a phenomenon that acts in the interest of the labouring class as a whole, for it implies that any given volume of output will require a smaller workforce to produce it. The labour required by the industrial sector could nonetheless rise over time, provided, of course, that the size of the manufactured produce itself grows at a high enough rate to engage not only more productive labourers, but also a larger number of them.

Indeed, this is the way employment in China’s industrial sector behaved from 2003 till 2012, during which period the number of workers engaged in industry expanded from 159.27 million to 232.41 million. These figures translate to 21.6 per cent and 30.3 per cent of the total workforce for China. As opposed to this, India employed 24.7 per cent of its workers in industry in 2012, while in agriculture it had engaged 47.2 per cent of the workforce. The land ordinance or act is aimed at reducing the size of the agricultural workforce through allocation of land to industry. Even if the land reallocation goal is achievable, what is not clear is how the displaced agricultural workers will be rehabilitated as industrial workers.

There are at least two issues that need to be borne in mind in this context. First, India’s land area is approximately 2.97 million square kilometres as opposed to China’s much higher 9.33 million sq km. Further, India’s population density is around 421 persons per sq km as opposed to China’s approximate density of 145. In other words, not only does China have more land available in absolute terms to be distributed in favour of industry, it is also likely to displace fewer people in the process relative to India. In comparison with China, the law of diminishing returns is likely to work with a vengeance in India therefore, to counter which India needs massive access to productivity improving technology. And this, as already pointed out, does not send a cheerful message to the agricultural land owners. More productive industrial workers will probably give rise to greater, not less, unemployment in the workforce, especially for those displaced from agriculture.

A second issue that needs to be emphasized is that employment generation in the industrial sector is not merely a technological phenomenon. Industry does not produce output unless it can be sold. And the market for Indian goods is no longer restricted to its geographical boundaries. The country’s open economy policies are gathering pace and this means that it is rapidly transforming into one amongst the many producers catering to world demand. Its producers have to compete with foreigners for a rising chunk of the world market, and this too when the world market itself has been in doldrums for the last few years. Even China is showing signs of a slowdown, in spite of a political structure that allows workers to be woken up in the middle of the night to attend to lucrative export orders.

Whether India can harness the forces of technological advancement in industrial production and compete in world markets is yet to be seen. But even if it is successful in its endeavour, we are likely to be caught in a Scylla and Charybdis paradox, namely, needing to compete in a weak world market on the one hand and preventing unemployment from rearing its head at home on the other.

The implication of technical progress for employment may easily be gauged from the performance of India’s service sector, which produced 56.27 per cent of the gross domestic product in 2012 by employing 28.1 per cent of the workforce. China’s share of services by contrast was 44.6 per cent and its employment share of the workforce was 36.1 per cent. It is no secret that India has a giant lead over China in services and the secret of our success lies in labour saving technological innovations. Exactly the reverse situation prevailed in Indian industry in 2012, where 24.7 per cent of the workforce produced 26.21 per cent of the GDP. China on the other hand utilized 30.3 per cent of the workers to turn out its 45.3 per cent of the industrial share.

It is not entirely clear, therefore, that the magic of competitive growth in industry can be achieved through a simultaneous increase in employment of land and labour, even though the media reported the government to have made precisely this claim following the re-promulgation of the ordinance. If the assertion turns true, what is almost certain to happen is a growth in the ranks of the unorganized labour force working in the fringes of industry in townships surrounding industries.

Since land acquired for industrial use cannot keep pace with the growth in industrial capital and output, a steep rise in the price of land in the neighbourhood of industry can hardly come as a surprise. This had happened in Singur before the Tatas took the curtain call. As Mark Twain had famously observed, the best way to get rich was to buy land, since people didn’t produce it anymore. Some people out there are awaiting a bumper harvest therefore. Not of potatoes anymore, needless to say.

(The author is former professor of economics, Indian Statistical Institute, Calcutta)


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