A slowdown in the Indian economy and jobless growth have made the future seem bleak for many young Indians. Pronab Sen, country director of the International Growth Centre’s central team for India, speaks to Governance Now about what led to this pass and gives his prognosis. Sen has served as the first chief statistician of India, served as the functional and technical head of the national statistical system, and also been secretary, ministry of statistics and programme implementation from 2007 to 2010. Excerpts from the interview:

How do you see the dip in GDP growth for six quarters in a row?

It goes back to the global economic crisis 2009. The Indian economy recovered quickly. There were two reasons: first, our banking sector was insulated in certain ways; second, the small and medium enterprises (SME) sector continued to maintain strong growth. This was till 2012-13, when the economy started dipping a bit. My sense is that one of the dominant drivers of growth was what was happening in the agricultural sector: prices of agricultural commodities were growing faster than that of non-agricultural commodities, and farmers’ real incomes grew rapidly between 2004 and 2013. The Indian economy was growing at nine percent and farmers’ real income was growing at 7.5 percent. Also, farmers’ demand for all kinds of goods and services went up, and that was what the SME sector took advantage of. There was this huge base of 900 million people who were consuming strongly now. This process ended in 2013: price movement was reversed; non-agri prices rose fast.

What was the reason for the price movement?

The initial high growth we had from 2004, that itself led to increase in food prices, because people’s incomes were going up and also the demand for food products, which were in short supply. The second factor was that global agricultural prices were going up. The third factor was that, because of income from MNREGS, the benefit from higher agricultural prices actually got passed on to labourers as well. There was a time agricultural wages were going up 15 percent and agricultural prices were going up nine percent. The SME sector was growing strongly on this rural demand and because it was labour intensive, it was generating a lot of jobs. When it turned, all the factors I mentioned got reversed. Global prices started coming down. The rise in minimum support prices (MSPs) – in the beginning, MSPs were rising 16-18 percent – became three percent. The third reason is – and this comes after 2014 – that the new government simply gave up on MNREGA. Since this government came to power, MNREGA has become a resource driven rather than demand driven programme. The government allocates ‘x’ amount of money and whosoever wants to use it, uses it. There came a situation where states were providing work, but the centre wasn’t reimbursing them. Now that’s quite a political damage at the local level. So the states started de-emphasising MNREGA as well. All of this came together. The world economy was not doing well either. So the corporate sector, which could have picked up, was in trouble. That’s one set of actors.

The second set of issues pertains to banks and banking capitalisation. See, again people don’t realise that the Indian banking sector is not designed for giving loans for fixed capital formation (finance for plant, machinery). It is designed to give loans for working capital (finances for raw materials and wages). Banking laws were framed like that. Since 2004, P Chidambaram (former finance minister) pretty much destroyed what we call development financing institutions like IDBI and ICICI, who were in the business of making loans for fixed capital. The banks, on the other hand, were providing loans for working capital. Development finance institutions (DFIs) shut down and IDBI and ICICI converted themselves into banks. Someone had to finance fixed capital, and banks were forced to do it. Now, the banks did not have the expertise – because fixed capital financing requires skillful assessment of investments. Their skills were in evaluating raw materials – easy to do, as they are all against invoices. You forced fixed capital lending on the banks. The net result was that a lot of lending was done without proper appraisal. And this is not the fault of the banks. It is fault of the government. Banks needed time to develop such systems. You needed to change banking laws, which you haven’t even now. When you are doing fixed capital lending, you do it for seven to 10 years – long-term lending. In case there is any problem of flow, banks get screwed up – which is what you are seeing today. Banks got themselves into a position which they are incapable of handling. NPAs are just an outcome. The problem is that you forced public banks into lending for infrastructure projects. These are land-intensive projects. To develop roads, I need to buy land first and then develop roads and then collect toll fees, which happens over 30 years. The banks didn’t know of the long-term gestation period. The problem was not that they had bad assets, but that their assets are not liquid. They can’t sell it off and pay the bank. This was a banking disaster that was in the making and it has been in the making since 2004, and accounts for 25 percent of banks’ lending. A very large chunk of it was residential lending. So fixed capital lending was actually very small.

The bulk of it was residential lending, which is reasonably safe. That proportion today is 54 percent. It has more than doubled. The mismatch between assets and liability really became bad. This is completely predictable, we really saw it coming but we didn’t do anything about it. That’s how you start seeing the subsequent fall. In a sense these things happen in a market economy.

But then demonetisation happened. In a situation where the economy was trending down, you added another jolt. Because it hit the ones who were already hit the most – agriculture and informal sector – as their transactions are done in cash.

And then came GST?

Well, in between we had something else as well. The ban on cattle trade. Anyone who understands rural India knows that for farmers, their real insurance is the animal. When there is a drought, they survive by selling their animals. Now if you say you can’t do that, what do you do in times of emergency? Since this government took charge, it is its sheer good fortune that there were two good monsoons. For heaven’s sake, if there is drought in the coming year, it will become a really major issue. That was the second blow and it sharpened before GST came in. With GST, the burden of compliance is only one part of it. The other factor is fear. The word going around is that with everything you buy, the taxmen will come to know.

Why are we experiencing jobless growth?

It is a concern. The question we should ask is: where are the employment opportunities getting generated? At corporates or at small and medium enterprises? If you look at the corporate sector, there is job growth but the growth is low. It is growing at 2.5-3 percent. That accounts for only seven percent of the workforce. Even if it is increasing three percent a year, you are talking about 0.2 percent increase in terms overall employment as against a labour force increasing by 1.5 to 2 percent.

But still that leaves a huge number of people who don’t have jobs. And their only fallback was SMEs. Corporate manufacturing is steadily moving towards automation. The growth in manufacturing employment is coming from SMEs that are still in the pre-automation stage. If the firms feel that the market is expanding and it needs to increase its production it prefers to put more machines than get more people. This is something which is happening globally. But the difference is that in the advanced economies the labour force is not growing. Here our workforce is growing. We can’t follow that path.

How many people are we adding every year?

The most conservative estimate is about six million a year and the most liberal would be about 12 million. The assumption is that women are not entering the workforce in large numbers. Otherwise, the number can go higher. So far we are talking about a male-driven workforce.

Do we know what has been the impact of these policies and the economic slowdown on the informal sector?

We don’t have any measure for it. Getting data on the informal sector is very difficult. It is done through surveys and these surveys are extremely expensive and extremely time consuming. It was done every five years by the ministry of statistics and programme implementation. Then the labour bureau took this up in 2011 and did it on an annual basis. Again, the ministry of statistics and programme implementation has taken charge and would be doing an annual survey from this July. We are looking forward to that. It will improve our understanding a lot more on the informal sector. But the essential issue is that if you think of what has happened post-demonetisation and what will happen post-GST, it doesn’t look good at all. Let me give you a measure.
What we do know from banking data is that the amount of currency available with the public is about Rs 3 lakh crore short of what it should have been – cash with people and not in the banking system. It should have been Rs 19 lakh crore but it is Rs 16 lakh crore. Now if I assume that a part of this money was actually financing the working capital of the informal sector [estimated at Rs 12 lakh crore] – which I think is a fairly good assumption – then what it means is that the informal sector is today working with about 25 percent less working capital, roughly. That has to have an effect. You can’t have a business without working capital.

Have they?

They have actually shrunk. Today bank credit 2.5 percent below what was last year. Mainly because the bankers are not lending. They are scared because of the NPA problem. So they are not expanding.

Can’t microfinance institutions like Bandhan fill in this gap?

They are again mainly taking deposit at this stage. Bandhan, because of its roots, because it is from the microfinance sector, is likely to have a feel and understanding of SMEs and may actually enter that space. I hope they do. Because other banks are not going to do it. Or they will but in a limited way.

You have pointed at the non-reliability of data on employment. Any comment?

The gap essentially relates to the informal sector. It is about 45 percent of the Indian economy that we capture reasonably well. Agriculture today is 17 percent. That leaves 28 percent of the economy on which we have no data at all. This data we are getting in a five-year cycle. We don’t know what’s happening between five years. Before, we didn’t have the right attitude towards collecting employment data. But now has become extremely important to track the employment scene. Which is why this new survey has been launched. This survey – I started working when I was there in 2009 – it has taken eight years to hit the field. It required hiring additional people, having additional resources. It’s called periodic labour force survey (PLFS). It’s a household survey. We go to all working members of the household, ask them where they are working.

What is the future of jobs?

It depends on the nature of growth in the country. If it is corporate-driven growth, then I think we have a serious jobs issue. I think we are headed towards corporate-driven growth, because both demonetisation and GST have hit the competition – which is micro, small and medium enterprises. It is quite likely that the corporate will be able to take away market share from MSMEs. Which means you are headed towards a more corporate-led growth pattern.

What does that mean as far as jobs are concerned?

Not very good. Let me put this way. Let’s assume that the corporates take away this entire 28 percent space that the informal sector is occupying today. Well, what you will have is an unemployment level which is close to 30 percent. At present it is 4.5-5 percent.

The World Bank has said that extreme poverty will soon be history in India?

Well, we don’t know that yet. But remember, when you are talking about GDP numbers, you are not asking who has that money. Is it the top 20 percent or is it a wider set of people who hold the GDP? You can very well be a developed economy but still have several people living in poverty.

Three things the government must do?

I think there is lot to be said about formalisation of the economy. You can certainly create a formal economy by killing the informal economy. The other way of doing it is to create a formal economy by enabling the informal to become formal. That, I think, needs a whole bunch of reforms. For instance, access to bank credit is always going to be a problem unless there is a certain minimum level of documentation.

I think we need to sit down with people – with bankers on the one hand and with beneficiaries on the other – to find out what is the minimum level of documentation needed, and whether that can be created. I think it’s not a bad idea to ask people having Jan-Dhan accounts if they need assistance in documentation so that they can use the documentation for taking credit. Aadhaar addressed the problem of proving identity. But the main question is that Aadhaar by itself is not going to create opportunities. In terms of opportunities, you need to think in terms of small and micro enterprises and how you can encourage them to come into existence. The other thing is that, having created the conditions for the existence of these enterprises, have you created conditions for them to  grow? They face a whole bunch of constraints. For example, the moment you employ the 10th employee, EPF contributions have to be made. When you hire the 20th employee, some other compliance comes in picture. You have these barriers. It creates a disincentive for people to expand.

Third, we need to make sure that farmers’ incomes are not driven simply by the amount they are producing. That there should be a price movement in their favour.

Your comments on the relevance of employment exchanges, several of them having a record of zero placements.

Originally, they were essentially built for local population. In India, the situation is that you have labour force getting created at one place and your employment exchange is at a different place altogether. The labour force is growing in rural areas.

Employment exchange is a very urban phenomenon. So the registration in employment exchange is low. A major problem was that typically, in employment exchanges the world over, when you get a job, you and your employer both need to get back to the exchange and report the employment. The exchange then removes the job and your name from the list. In India neither of them report back. Hence the name continues in the list and the list keeps growing. My view is that data is telling you nothing about the employment. With technology, I don’t see any reason why you can’t have a national jobs portal.

pratap@governancenow.com

(The interview appears in the November 30, 2017 issue)