Tag Archives: employment

Troublesome landing — They don’t grow land anymore

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

 
 
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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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Big and Small in Retail

(Published in the Telegraph, Calcutta, 11 September, 2012)

It appears that a survey conducted by a reputed research institute has concluded that a single Walmart store can substitute for more than a thousand average retail stores in India. On the face of it, the claim is simultaneously dramatic as well as disturbing, both from the point of view of employment generation as well as that of business interest of small and medium retailers.

The finding though, assuming that it is error free, raises a question of analytical interest as well. Will the arrival of Walmart in India wipe out a thousand or more small retail stores that already exist? Or, will it pose a threat for the potential entry of similar small businessmen into the retail sector? The direction of causality carries undeniable significance. Destroying the means of livelihood of existing traders has grievous implications. Charting out a map for the future on the other hand is in the nature of a planning exercise. It is not entirely clear which of these two questions is being answered by the research work quoted above.

And it is not merely Walmart that should be under the scanner in this connection. It has been several years now since India too came up with its indigenous variety of supermarket chains. It is puzzling, therefore, that the Indian stores are not being seriously questioned by the critics of FDI in retail trade.

In this connection, an obvious line of investigation should be directed towards the first of the causal links, viz. the extent to which small shop-owners have been displaced by large multi-brand Indian retailers. Whether serious researchers have addressed this issue or not, the lay public has rarely been treated to anything more than the verbal rhetoric that opponents and supporters of big investment in retail engage in. 

What, however, does casual observation suggest? The pavements of the city of Kolkata have long been suffering from hawker induced pedestrian jams. The hawkers’ stalls offer a wide variety of products, starting from fruits and vegetables, fast food, clothing, trinkets, stationery goods, books leading all the way to semi-sophisticated electronic equipment. If large scale retailers are a threat to the hawkers, then some of the major street junctions of the city today should have turned into pedestrians’ paradises. Quite clearly, this is yet to happen.

Indeed, if anything, one hears allegations that the hawkers’ temporary sheds have posed a threat to the conventional stationery shops located inside permanent structures. In fact, the more commonly heard story is that many a medium size shop owner uses hawkers’ stalls in the immediate vicinity of his store as extended showrooms. If this observation is true, then the price wise competition brought forth by the hawkers has led to implicit collusion and therefore peaceful coexistence of the big and the small. Also, such arrangements lead to what economists refer to as discriminating monopoly, with better off and possibly somewhat stuck up consumers paying a higher price for any given commodity inside the air-conditioned comfort of regular shops and hawkers satisfying the needs of the economically humble majority. And, as economics textbooks teach us, monopolistic behavior, discriminating or otherwise, leads to unfair allocation of resources as well as welfare.

It was not, however, the hawkers vs. stationers that we started off with. We were actually concerned with the burning question of massive investments in retail trade and their possible impact on the small traders. The Indian version of big investors in retail trade appears to be thriving. The convenience of shopping they offer is attracting many consumers. This is all too evident from the queues that form at the payment counters. Often customers are known to wait for at least half an hour to clear their bills before exiting the premises. And, as already noted, this has not brought about any significant change in the clientele size of the small street peddlers.

The multi-brand retail establishments probably attract both types of consumers we have identified, those who wish to enjoy a price advantage as well as those with an eye towards ambience. The price advantage is evidently available in the large multi-brand retail stores, partly because big capital has a buyers’ benefit in the wholesale markets as well as at prime producing locations. Some believe that their presence keeps on hold the extortionist practices middlemen engage in, though this hypothesis calls for serious field investigation. Quite apart from price competition, the multi-brand retail stores can be relied on for purchase quality. Packages bearing the seal of authenticity of product attributes including quantity, as well as the availability of diversity make shopping a simpler as well as happier experience, though the happiness of the experience attracts disapproving frowns from the “opposition” camp.

There is a cultural constraint it would seem in approaching the issue from the point of view of consumer satisfaction. Consumers’ interests, many feel, should be the least important amongst the concerns of policy makers. Paradoxically enough, we do not hesitate to celebrate the fact that for the first time in contemporary Indian history, consumer expenditure in rural areas of India has exceeded that of the urban population. Urban consumers, in other words, are to be treated with suspicion and rural consumers eulogized. One is not quite sure why this ought to be the case, but a probable reason lies in the perception that rural areas are poverty ridden while urban dwellers are exploiters. This may well be the case to some extent, but the latest figures reveal that the latter, even as they are reveling in the sinful luxury of shopping malls, have actually consumed less than the exploited masses.

Going back to the causality question once again, it was noted that the shopping plazas have not quite usurped the existing small or medium traders, at least not visually so. From the logical point of view as well, how many shopping plazas would be required to completely satisfy the demands of a populace exceeding 120 crore? The arguments presented so far suggest that large scale retail trade, however large it may be, cannot possibly weed out the small traders, simply because there are too many consumers to cater to. Will the arrival of FDI in multi-brand retail trade make a major difference to the argument? As far as small traders are concerned, it is not so obvious how Walmart and others will pose a threat to their business. However, the Walmarts might pose competition for their Indian counterparts. What is more likely to emerge is competition between big capitalists, unless the large Indian retail marts invest more and adopt modern technologies. Whether they intend to do so is unclear, especially in the context of the infrastructure debate.

It is widely believed that FDI in retail trade will benefit farmers through the creation of spacious cold storage. There will be less wastage of produce as a result and farmers will not be forced to sell their products at throwaway prices to unscrupulous intermediaries. Whether this will actually happen is a matter of conjecture, especially since Indian investment in multi-brand retail trade is still to initiate investment in supply chain infrastructure.

What seems certain, however, is that multi-brand retail trade, both big and small, will survive. The giants will capture a chunk of the formidable Indian middle class market. However, even if its size is significant in the eyes of the retail Goliaths, it is a small fraction of the aggregate retail market in India. Consequently, as with the hawkers and the stationers, the small may not be swallowed up. Moreover, since the supermarkets will generate employment for otherwise unemployable young people who have completed high school education at best, the employment scenario is likely to improve. These employees will add to those already employed in existing small stores, without creating a barrier for similar shops in future.

Misson Impossible

[This is a slightly revised version of an article originally published in The Telegraph, Calcutta on November 23, 2010.]

Barack Obama’s desperate bid to rescue the recession-plagued American economy stands in sharp contrast to events that occurred in the early 1970s when Richard Nixon was in charge of the country. His bête noire at the time was the then president of France, Charles De Gaulle, who demanded that the United States of America pay for its mounting trade deficits by gold shipments from Fort Knox valued, according to the Bretton Woods agreement, at $35 an ounce. The US refused to honour the agreement and forced upon the world the tour de force of an oil-backed dollar. Oil imports, in other words, had to be paid for by US dollars and this made it imperative for everyone to hold eagerly on to the dollars printed by the US government to support its trade deficits. The US trade deficit turned, therefore, into an advantage for its creditors, especially the ones, such as Japan, who were in dire need of oil imports to keep their economies running.

When Obama came to power, the trade deficit was still very large, but the US economy was in the doldrums. And things had not improved significantly by the time the midterm polls were due. This is clearly borne out by his press conference of September 10, 2010, published by the Wall Street Journal. As he admitted, “We lost 8 million jobs total during the course of this recession. That is a huge hole to dig ourselves out of.” The US economy has been sucked into a maelstrom of recession for over three years now and this makes Obama’s job far more difficult than that of Nixon. In contrast to the latter, who decided that Americans should continue to spend beyond their means, Obama needs to assure his people that they can spend at all.

With US industries thirstily awaiting a resurgence of growth in the demand for their produce and domestic demand continuing to be weak, Obama does not enjoy Nixon’s luxury to allow American trade deficit to keep inflating. Indeed, he needs to travel in a direction exactly opposite to the one that Nixon was headed for. He has no choice, in other words, but to reduce the deficit and, if feasible, convert it into a surplus. His recent whirlwind tour of the world has little purpose other than convincing foreigners to purchase American goods, for that can at least open up the closed factory gates in his country separating a sitting work force from the elusive work they seek.

His tragedy lies unfortunately in the magnitude of the problem he inherited. Worse, he has now less than two years to address the issue. “The huge hole” of eight million job losses that he needs to “dig” the US economy out of translates into providing a net addition of 330 thousand jobs a month on the average during the rest of his term, a task that might appear to be far more daunting than the cleaning of the Augean stables.

How has he set about to achieve this miracle? Despite all the hype surrounding his India trip, policymakers in this country ought to be aware that the $15 billion in deals promising 72 thousand jobs for the US economy is no more than a whiff of a consolation in an ocean of despair. The US Census Bureau quotes the figure of $7 billion as the US’s trade deficit with India for the current year till August end. If the $15 billion Indian expenditure is undertaken by year end, then there is a possibility of turning the deficit to a surplus.

Once the US turns India’s creditor in the trade account, it will be in a somewhat comfortable position to acquire assets in this country and it is no wonder, therefore, that Obama has left behind him material promises of investment in infrastructure and agriculture, cooperation in civil nuclear energy and, much to the chagrin of his Indian detractors, the suggestion of retail trade. He has made non-material promises too, such as a permanent seat in the United Nations security council, which has been viewed by the American media as “largely meaningless”. He did not forget to chide Pakistan. He has removed Bharat Dynamics, the Defence Research and Development Organization and the Indian Space Research Organization from the entities list. However, G. Balachandran, a non-proliferation expert has pointed out that the list itself consists of 24 countries. He has been quoted to have observed that “all that will happen now is, when Indian knocks at the gate, the US will ask the gatekeepers who it is and listen to what India wants. But a licensing regime will continue to be in place”.

Of course, all is not over yet. The Federal Reserve Bank has already flooded the market with dollars, thereby cheapening US money against most other currencies in the world and especially the Chinese yuan. It has been a long standing contention of the US that China has kept the yuan artificially low to hold the rest of the world captive to its manufacturing sector. This hurts the US deeply, needless to say, especially on account of its unwavering affair with a recession economy. The jobs that Obama is inviting for Americans will create incomes and these incomes will be spent. If they are spent on American products, then more jobs will spring forth and more incomes generated in a sequence that will make the final employment figure much larger than the initial dose of, say, 72,000 jobs created through Indian expenditure. Lord Keynes, the author of the General Theory of Employment, Interest and Money, had famously called this the “multiplier” effect of any expenditure.

However, if the incomes generated are spent on Chinese goods, then the multiplier impact will fall on Chinese products. This makes it vital for Obama to insist on an appreciation of the Chinese currency. Even if he succeeds in this mission though, it is doubtful if the US will gain a competitive edge over China, given that Chinese wages and other production costs are low compared to those in the US. Consequently, the US, the most important force behind the jostle surrounding globalization, will have little alternative but to raise tariff and non-tariff barriers to protect its own economy.

This in turn could unleash a tariff war, which is the last thing Obama desires. Nor will such actions find favour with the US’s own business community, for which foreign markets are a vital part of its life support system. Hence, Obama has little option but to support the Federal Reserve Bank’s recent decision to come out with a massive rise in dollar supply. The price of the dollar needs to be kept low, quite independent of what is happening to the yuan.

In the meantime though, the world will be watching crude prices. The Organization of the Petroleum Exporting Countries will not be elated to see itself caught in a depreciated dollar trap, the currency in which it earns its income. Either it will be forced to raise the dollar price of oil at breakneck speed, or the oil economy is poised for fundamental structural changes. And there is always the possibility that the dollars earned by oil importers will be spent in the US to purchase Chinese goods!

Every cloud has a silver lining. Despite India’s abysmal performance in terms of the human development index, we have succeeded in applying a veneer of sugar as it were to sweeten the US’s bitter pills. This has earned us a modicum of economic prestige in our role as a country that brought succour to the mighty United States economy. Similarly, although Obama is unlikely to get a second term, he has at least pocketed the Nobel Peace Prize, even if serendipitously. And finally, if history remembers him for failing to rid his economy of recession, he will at least stand delisted from the group of people responsible for its arrival in the first place.