📰 ‘Reverse migration to villages has set the economy back by 15 years’
India risks losing benefits of the demographic dividend by not creating enough jobs for new entrants, warns Professor Mehrotra
•Santosh K. Mehrotra , Professor of Economics at the Centre for Informal Sector & Labour Studies at Jawaharlal Nehru University and author of the recently launched book Reviving Jobs: An Agenda For Growth says the current reverse migration has set the country back by 15 years, and stresses that the economic stimulus package announced by the government is minuscule compared with the package rolled out by the Manmohan Singh government during the 2008 crisis.
How prolonged will be the economic impact of this extended lockdown? Do you see the workers who left the cities returning anytime soon?
•I see a long economic and migrant worker impact. I don’t see them streaming back in a hurry. The trauma has been far too great. There are many reasons why they left — poor living conditions here, overnight loss of livelihood, no social security and so on. They will not return in a hurry and relates to your larger question on the revival of the economy; for the first time in decades, India’s economy will contract in FY21, and revive in the latter half of FY22 (as RBI has admitted). Also, we were in an economic crisis even before the pandemic started.
•But before we get there, you need to appreciate the contrasting economic situation prevailing in the last quarter of 2019 before the pandemic, and the pre-2008 crisis situation. Before 2008, all engines of growth were firing.
•Our investment-to-GDP ratio was at an all time high. GDP growth was 8-9% per annum and because of that the job growth was very rapid. We had five million unskilled workers leaving agriculture for the first time in Indian history because non-agri jobs were growing.
Is the stimulus announced by Finance Minister Nirmala Sitharaman strong enough to bring the economy back on track?
•A straightforward answer is no. But before I answer this we need to see what happened between 2012 and 2018. Until 2012, nearly 7.5 million non-agriculture jobs were being created per year, but thereafter there was a slight economic slowdown, but still the average GDP growth over 2004-14 was 8% per annum.
•There were two years of droughts in 2014-2015. The slowdown also accelerated after 2014 because of misplaced economic policies. The rate of non-agricultural jobs was reduced to 2.9 million per annum.
•Now, this was happening at a time when young entrants into the labour force were increasing. Until 2012 the number of new entrants in the job market was only 2 million per annum (as youth were entering school in much larger numbers than before). Thereafter, the number looking for work increased to roughly 5 million per annum. These young people were getting better educated and no longer wanted to be tied down to agricultural jobs. The result was open unemployment. And that is how we came to our 45-year high in open unemployment rate in 2018.
•The state of the economy and joblessness continued to worsen through 2019 because the growth rate slowed. We entered 2020 with seven quarters of systematic decline in growth rate, investment rate and exports.
•So, every engine of growth had stopped firing; government revenue growth slowed, the real fiscal deficit in 2018-19 was 5.68% of GDP for the central government (as revealed by CAG) when the government was claiming it was 3.4%.
•By early 2019, the government did not have the fiscal space left any longer to actually jump start the economy if a shock was to happen. Given that COVID-19 is an unprecedented exogenous shock delivered to a slowing economy, we were hoping that the government would take a slightly different view than it has taken, and significantly increase public expenditure.
•Now going back to the 2008 crisis, the fiscal space existed then because the economy had been growing until then. In the post 2008 global economic crisis, the fiscal stimulus size by the government and mind you, fiscal stimulus alone, was 4% of the GDP (supplemented by monetary policy actions). And the fiscal package announced post-COVID-19 is less than 1% of the GDP, although the economic and jobs crisis is much deeper than in 2008.
Can this stimulus package provide jobs, say in the next six months or a year from now?
•No because this stimulus is heavily dependent on banks extending loans. Why do I, as an entrepreneur, borrow from the bank when I know demand is already extremely low in the economy, both domestically and internationally? This is a global economic crisis much worse than the 2008 one. So why am I going to borrow to invest? Some borrowing for working capital will take place. The government has taken supply side action without taking demand side action. If you don’t put money into the hands of people, then you are not going to see a revival of demand. The total unemployed went from about 30 million in 2018 to 122 million in April 2020. This is unprecedented in Indian history. Some jobs would come back post-lockdown. But how many of them will come back depends on the quality of the stimulus...
In your book, you have observed that the demographic dividend kicked in during the 1980s and it will end by 2040. We just have 20 years left to cash it. How does this pandemic and the economic fall out impact on this dividend?
•Yes, we are running a very, very serious risk of frittering away this dividend. Realising the demographic dividend requires job growth at a rate faster than the number of entrants into the labour force. If new entrants into the labour force, who are better educated, are entering at a rate of more than 5 million per annum, you have to create at least 5 million non-agricultural jobs.
•Secondly, you need to create enough jobs to employ the currently unemployed, which has risen sharply. Thirdly, in 2018 we had 205 million people working in agriculture. From 2004-05 until 2018, the absolute number of workers in agriculture was falling because non-agricultural jobs were growing fast. This means the process of structural transformation of redirecting the workforce from agriculture to construction/industry/services was underway.
•But after 2012, we have been witnessing a decline in jobs in manufacturing for the first time in India’s history. If we are to realise the demographic dividend, we need a shift of jobs from the agriculture sector to manufacturing. Reverse migration, that we are seeing today, has increased workers in agriculture by 5.2 million in a few weeks. It means that we have gone back by 15 years.
It responds to unions’ plea for action
•The International Labour Organisation (ILO) has informed trade unions of India that its Director-General has expressed concern and urged Prime Minister Narendra Modi to “send a clear message” to the Central and State governments to uphold international labour laws after the recent dilution of laws by some States.
•A group of 10 Central trade unions wrote to the ILO in Geneva on May 14, seeking its intervention to protect workers’ rights and international labour standards.
‘Expressed concern’
•In a response to the unions on May 22, the chief of the Freedom Of Association Branch of the ILO’s International Labour Standards Department, Karen Curtis, wrote: “Please allow me to assure you that the ILO Director-General has immediately intervened, expressing his deep concern at these recent events and appealing to the Prime Minister to send a clear message to Central and State governments to uphold the country’s international commitments and encourage engagement in effective social dialogue”.
Wide representation
•The unions that sent the representation to the ILO were the Indian National Trade Union Congress, the All-India Trade Union Congress, the Hind Mazdoor Sabha, the Centre of Indian Trade Unions, the All-India United Trade Union Centre, the Trade Union Coordination Committee, the Self Employed Women’s Association, the All-India Central Council of Trade Unions, the Labour Progressive Federation and the United Trade Union Congress.
•They sent the representation to the ILO after Uttar Pradesh, Madhya Pradesh, Gujarat and some other States either suspended a large number of labour laws for two-three years or diluted them in an attempt to woo industry in the midst of the COVID-19 pandemic.
📰 Batting for free speech
Reckless filing of criminal defamationcases against the press must end
•A feature of public life in Tamil Nadu in the last three decades has been the indiscriminate institution of criminal defamation proceedings against Opposition leaders and the media. It is no surprise, then, that the most comprehensive judgment on the limits of the State’s power to prosecute members of the press for defamation should come from the Madras High Court. The verdict of Justice Abdul Quddhose, quashing a series of defamation complaints filed since 2011-12, is remarkable for applying a set of principles that would firmly deter the hasty and ill-advised resort to State-funded prosecution on behalf of public servants. The first principle is that the State should not impulsively invoke provisions in the CrPC to get its public prosecutor to file defamation complaints in response to every report that contains criticism. The court deems such impulsive actions as amounting to throttling democracy. It advises the government to have a higher threshold for invoking defamation provisions. It notes that each time a public servant feels defamed by a press report, it does not automatically give rise to a cause for asking the public prosecutor to initiate proceedings on her behalf. The statutory distinction between defaming a public servant as a person and as the State itself being defamed has to be maintained.
•Justice Quddhose goes on to fault the government for according sanction to the initiation of cases through the prosecutors without explaining how the State has been defamed. He cautions prosecutors against acting like a post office, noting that their role is to scrutinise the material independently to see if the offence has been made out, and if so, whether it relates to a public servant’s conduct in the course of discharging official functions or not before filing a complaint. So, the court finds that many were cases in which public servants ought to have filed individual cases. An earlier Madras High Court ruling noted that an essential ingredient of criminal defamation must be that an imputation was actuated by malice, or with reckless disregard for the truth. A recent judgment by Justice G.R. Swaminathan enunciated what is known in the United States as the ‘Sullivan’ rule of ‘actual malice’. While quashing a private complaint against a journalist and a newspaper, the judge said two of the exceptions to defamation given in Section 499 pertained to ‘public conduct of public servants’ and ‘conduct of any person on any public question’. This implied that the legislature itself believed that unless it is demonstrated that reporting on a public servant’s conduct or on a public question was vitiated by malice, the question of defamation does not arise and that even inaccuracies in reporting need not occasion a prosecution for defamation. Within a matter of days, the HC has struck two blows for free speech and press freedom.
📰 Moving beyond geopolitics
In the post-COVID world, countries and tech giants should be obligated to share data in the larger interest of mankind
•Deeper issues arising due to the pandemic are slowly emerging as the world relaxes lockdown measures. These issues, especially those relating to the convergence of technologies such as biotechnology, genetic engineering and information technology, will have a long-term impact on geopolitics. Underlying most geopolitical issues are technology and data, which are interdependent. National governments, policymakers, and healthcare researchers are using technology and data to plan and improve economic activities, social development, and treat deadly diseases more effectively than ever before.
Changing idea of privacy
•Technology and data are now inherently geopolitical. Proper data related to the COVID-19 outbreak were not shared in time, and that is why there is so much anger towards the World Health Organization and China. The nature of technology and data has placed tech giants such as Google, Facebook and Amazon in a commanding position. At one time, these tech giants needed the support of governments everywhere. But now, with their global reach, it is governments that are dependent on them. Access to data on a majority of the population makes these giants stronger when they enter the negotiating room with governments. The current pandemic is a great example of how people across the globe have accepted the idea of their live locations being traced and shared with governments. In India, without much concern for the right to privacy, more than 90 million people have downloaded Aarogya Setu. The pandemic has brought a change in perception on issues like privacy.
•Tech giants are taking a leading role in geopolitics, at times playing on their own and sometimes as proxies of nation states to influence policymaking and national regulations. The U.S.-China trade war, the position of governments on Huawei 5G technology, and Facebook’s attempt to implement internet.org are a few examples.
•An unprecedented amount of data are being collected by tech giants. The data need to be used towards the welfare of society, but the sharing of data presents many challenges to human rights. COVID-19 is a good example of this. Are we not doing injustice to people by not sharing data in a timely fashion merely due to geopolitical reasons? It is the right of every human being to benefit from the collective data to which he or she contributes.
•The current data system is one where the incentives align with the creation and spread of technological innovations but not their governance (think of Cambridge Analytica). Restrictions on the flow of data have increased significantly in the last 7-8 years. Across the world, data protection laws, requirements of data localisation, laws related to weakening of encryption keys and data retention requirements are by and large patchwork. These frameworks are not interoperable. They focus on protection of personal data and privacy and give little thought to the broader impact of data on mobility and social aspects. Data protection frameworks such as the the General Data Protection Regulation of the EU and the CLOUD Act of the U.S. are aimed at putting users in control of their data. But they have issues relating to data localisation and cross-border flow of information. These frameworks have not solved the issues of data sharing. Even the UN has not succeeded in bringing consensus in the preparation of a framework on the norms of behaviour in cyberspace. With data flow set to become more important over time, we need government regulations and standard and inter-operable frameworks to govern issues and address risks emerging from these technological innovations.
Data in the post-COVID world
•The post-COVID-19 world is expected to be different. Digital equity will require frameworks relating to governance of technology and data that look beyond geopolitical considerations. We need to distinguish individual data from large global data sets. We cannot extrapolate the current human rights framework to human rights in the digital and biological domain. The current concept of privacy and cross-border flow of information may require significant change. There is a dire need to impose obligations for data flow on countries and tech giants in the larger interest of mankind. We need to establish a baseline of global norms of data governance that go beyond privacy and geopolitical considerations. These norms must focus on mechanisms to leverage data to solve problems and ensure consistency, interoperability, privacy and security. It is the right time for a Parliament select committee to look at the data protection framework. At the same time we need to identify an international body to evolve global norms on data governance.
📰 The problem with the liquidity push
Even if partially successful, it will culminate in eventual default; the crisis is only likely to intensify
•The present government’s much-hyped, post-COVID-19 relief and recovery package has disappointed many. It provides little by way of additional budgetary resources to halt and reverse the economic and social collapse that the pandemic and the response to it has triggered. Most estimates place the additional fiscal allocation implicit in the proposals at about a tenth of the size of the package, which the government claims amounts to around 10% of GDP.
•In its effort to tote up a 10% of GDP relief-cum-stimulus figure, the government has relied heavily on measures aimed at pushing credit to banks, non-banking financial companies (NBFCs) and businesses big and small, which are expected to use borrowed funds to lend to others, make payments falling due, compensate employees even while under lockdown, and otherwise spend even while not earning. The thrust is to get the Reserve Bank of India (RBI) and other public financial institutions to infuse liquidity and increase lending by the financial system, by offering the latter capital for longer periods at a repo or policy interest rate that has been cut by more than a percentage point to 4%.
The fourth ‘l’
•There was a hint that this would be the thrust when the Prime Minister in his speech calling for a “self-reliant India” identified, besides land, labour and laws, “liquidity” as among the areas of focus of the package. In economic and business parlance, liquidity refers to ease of access to cash — a liquid asset is one that can be easily sold for or replaced with cash, and a liquid firm or agent is a holder of cash, a line providing access to cash, or assets that can be easily and quickly converted to cash without significant loss of value. In periods of crisis, individuals, small businesses, firms, financial institutions and even governments tend to experience a liquidity crunch. Relaxing that crunch is a focus of the government’s crisis-response package. In keeping with that perspective, it gives a much larger role to enhancing liquidity than it does either to direct transfers to the poor and precariously employed workers devastated by the crisis, or to spending to ensure that micro- and small businesses would remain viable and along with medium and big businesses, would ride a demand revival when the lockdown ends.
Focus on NBFCs
•The main intermediaries being enlisted for the task of transmitting liquidity are the banks, with NBFCs constituting a second tier. Among the first steps taken by the RBI was the launch of special and ‘targeted’ long term repo operations (TLTROs), which allowed banks to access liquidity at the repo rate to lend to specified clients. One round of such operations, which was relatively more successful, called for investment of the cheaper capital in higher quality investment grade corporate bonds, commercial paper, and non-convertible debentures. That funding allowed big business, varying from Reliance and L&T to financial major HDFC, to access cheap capital to substitute for past high-cost debt or finance ongoing projects. There is little evidence that this is triggering new investment decisions.
•The second round was geared to saving NBFCs, whose balance sheets were under severe stress even before the COVID-19 strike, because they were finding it difficult to roll over the short-term debt they had incurred to finance longer term projects, including lending to small and medium businesses, housing and real estate. Banks were wary about lending to these NBFCs, because of fears that their clients could default in amounts that would bring the viability of these institutions into question. Those fears were confirmed when Franklin Templeton announced that it was shutting down six of its funds, setting off redemption requests across the NBFC sector, as investors rushed to take back their money, at a time when the ability of these institutions to mobilise funds to meet these demands had been impaired. Not surprisingly, banks were unwilling to respond when liquidity was infused to target lending to the NBFCs.
•Building on these initial liquidity infusion efforts, the COVID-19 package identified more intermediaries (such as the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank) that could refinance lending by the banks to different sections, with targeted lending amounts providing figures to fatten the “stimulus”. To persuade the banks and other intermediaries to take up these offers when the clients they must lend to (micro, small and medium enterprises, street vendors, marginal farmers, etc.) are themselves stressed, in some instances the government offered them partial or full credit guarantees in case their clients defaulted. The government also sought to persuade the RBI to lend directly to NBFCs against their paper.
•These measures, which are only marginally effective even in the best of times, will not work during this crisis. Consider a bank or NBFC lending to small business. With economic activity either at a complete stop or at a fraction of the normal, those who can access credit would either not borrow or only do so to protect themselves and not use the funds either to pay their workers or buy and stock inputs. Even after the lockdown is lifted, the compression of demand resulting from the loss of employment and incomes would be considerable. It would be aggravated by the fact that spending by a fiscally conservative government would fall sharply because of a collapse in revenue collections. Faced with sluggish demand, firms are unlikely to meet past and current payments commitments and help the revival effort, just because they have access to credit. This would mean that credit flow would actually not revive. This danger is even greater because the government has been measly with its guarantees, not wanting to accumulate even contingent liabilities that do not immediately affect the fiscal deficit.
On disposable income
•Another component of the “liquidity” push is the measures that temporarily increase the disposable income of different sections. Advance access to savings like provident fund contributions, lower tax deduction at source, reduced provident fund contributions and moratoriums on debt service payments for a few months, are expected to provide access to cash inflows and reduce cash outflows, to induce agents to meet overdue payments or just spend to enhance the incomes of others. These are marginal in scope, if relevant at all. They have been combined with non-measures like adding on pending payments such as income tax refunds to spike “liquidity provision”.
•Overall, the “transmission” of the supply side push from these monetary policy initiatives for relief and revival is bound to be weak. Given the circumstances, the liquidity push, even if partially successful, would only culminate in eventual default, as borrowers use the debt to just stay afloat in the absence of new revenues. The measures are only likely to intensify the crisis, rather than resolve it.
Think new transfers
•What is needed now is government support in the form of new and additional transfers to people in cash and kind, and measures such as wage subsidies, equity support and spending on employment programmes. That, as many have acknowledged, would require debt financed spending by the government, with borrowing at low interest rates from the central bank or a “monetisation” of the deficit. Unfortunately, obsessed as it is with fiscal conservatism and tax forbearance, the Narendra Modi government is unwilling to take that route. Abjuring that option, the government’s “self-reliance package” calls on citizens to rely only on themselves, aided by an uncertain offer of temporary access to credit. That path can only have devastating consequences for lives and livelihoods.
📰 A well-balanced stimulus package
It will minimise the human cost of the COVID-19 crisis and also pave the path for structural reforms
•Cut your coat according to your cloth is a useful dictum to set policy priorities. Not all economies are bestowed with the unlimited resources of the U.S. whose currency, the dollar, still enjoys the enviable status of being the global reserve currency. This affords the U.S. the ultimate luxury to issue debt without any thought of its consequences on its macroeconomic balances. India does not have these many degrees of freedom. Cognisant of its constraints and compulsions, the government adopted a twin mantra for shaping its stimulus package, rolled out in five phases plus one earlier phase.
•The first strand has been to first ensure that the human cost of the COVID-19 crisis is minimised, especially for those at the bottom of the pyramid. The second has been to convert this crisis into an opportunity by implementing bold structural reforms, which have been pending for a while. Shaped by these two priorities, the stimulus is a carefully crafted, well-balanced, yet bold package that will, in the coming days, achieve both objectives.
Lifting demand and supply
•It is widely recognised that the present crisis has seriously impacted both the supply and demand side of the economy. The stimulus package effectively addresses both these aspects. Several measures have been announced to lift the sagging demand in the economy. It is important to point out that total effective demand is made up of demand for consumption, investment and intermediate goods. This has to be taken note of by those who consider only the cash in hand of consumers as the sole means for reversing the declining demand in the economy. Therefore, additional credit lines provided to micro, small and medium enterprises (MSMEs) or to street vendors or to farmers (additional credit of Rs. 2 trillion) will also surely contribute to the strengthening of aggregate demand in the economy.
•Measures announced for ramping up consumption demand directly included: Rs. 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts (announced in the first package); Rs. 50,000 crore additional incomes in the hands of those whose TDS and TCS were reduced by 25%; Rs. 40,000 crore additional allocation for MNREGA which will provide jobs and succour to those returning to their villages from metros and cities; Rs. 30,000 crore for construction workers; Rs. 17,800 crore transferred to 12 crore farmers; and Rs. 13,000 crore transferred to States to finance the costs of running quarantine homes and shelters for migrant workers. These measures will trigger demand, which is of course the necessary condition for triggering recovery in economic activity.
•On the supply side, the government’s response has been four-fold. The first was to ensure that the nation’s food security as also farmers’ incomes were not impaired. The government declared agriculture and all related activities as essential services immediately upon announcing the lockdown. This permitted the successful harvesting and efficient procurement of the critical Rabi crop. Procurement operations pumped in Rs. 78,000 crore as new purchasing power in the hands of the farmers.
•The second was to prevent the pressing cash/liquidity crunch from converting to insolvencies and bankruptcies. A moratorium was announced for all businesses for their debt servicing obligations to commercial banks. MSMEs were given an additional credit line of Rs. 3 trillion without any fresh collateral to further reinforce their access to credit. MSMEs could also avail of new equity from the Rs. 50,000 crore fund of funds. These measures provided some succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment, retail etc. which have suffered a near complete loss of revenues during the lockdown. A whopping Rs. 90,000 crore credit package has been extended to state electricity utilities to enable them to clear their dues to private sector power producers.
Higher self-reliance
•The third set of measures were directed to significantly improve the ecosystem for private producers and investors, both in agriculture and manufacturing. Farmers now have the much-needed freedom to choose their clients. Freed from the age-old tyranny of the Essential Commodities Act, 1955, traders and exporters of agro-products can maintain necessary stocks to meet export obligations. With further liberalisation in the defence production sector, India will achieve higher self-reliance in this strategic sector and also emerge as an exporter. Private businesses can now operate in sectors hitherto monopolised or dominated by the public sector enterprises. Finally, in a measure that touches the lives and livelihoods of more than 50 lakh families, street vendors all over the country have been given a credit of Rs. 10,000 each for re-stocking. Thus, ‘the package’ has guaranteed the survival of existing production capacities and laid strong grounds for attracting fresh investment to bolster growth.
•The size of the stimulus at Rs. 20.97 trillion is larger than the promise made by the Prime Minister in his address on May 12. At more than 10% of the GDP, it compares favourably with packages announced by other emerging economies. Indian farmers will get the much-needed freedoms, flexibility and financial strength to propel India’s economic recovery in the post-COVID-19 period. And buoyed by the stimulus, Indian firms will operate in an ecosystem that will help them become ‘Glocal’, thereby helping Indian brands command a larger share in to global markets and participate successfully in global value chains.
