Today (01/02/2017) the Indian budget for FY 2017 was announced. The total size of the budget is 21.47 Lakh Crore (Trillion) Rupees. At an exchange of rate of Rs.68 to a Dollar, it is $315 billion US Dollars. The economy is expected to grow at 7.5%. This means that this budget will return approximately $ 24 billion (1.6 Lakh Crore approximately). The question to discuss is how efficient our economy is in creating real wealth and jobs. The answer is a dismal. We may get the 7.5% growth but let us not assume that this will be a high quality return what then is the issue? This is a discussion between a Student and his Professor.
Student: Professor, What exactly is productivity?
Professor: We can broadly classify the factors of economic growth as namely physical and labour. According to Paul Krugman the noble laurate in his book titled, “The age of diminishing expectations” states that productivity is not everything but in the long run it is almost everything. For a country like India it is almost everything. In essence productivity implies getting the best out of factors of production namely land, labour and capital.
Student: How is the labour productivity in India?
Professor: In all honestly it is abysmal. Just look at the data. For a population of 130 Crore people only 1.9 Crore people pay income tax. The total earned by the entire labour force is 19 Lakh Crore Rupee approximately of which we paid 1.9 Lakh Crore as income tax in FY 2016. Only 30% of 130 Crore people are employed in India ie., 39 Crore people, 40% of it is in agriculture which is 15.2 Crore and the rest 23.8 Crore people work in the organized sector. Youth unemployment is very high. According to OECD 73% of British people aged 15-64 were at work in Britain in 2015; 73% in Germany; 73% in Japan; 69% in the US; 64% in France and 57% in Italy. In the case of India it is lesser than 30%. What a shame, so much labour is wasted. Most of the people are sitting bumming away their valuable productive time. If only our labour participation is much higher, our government will receive significant amounts of tax revenue.
Student: How come we have such low labour participation in the economy?
Professor: I will guess the answer. Most of our labour is basically unskilled (the skill they don’t have to get relevant jobs). Besides most of the unemployed are illiterates. The resign to fate and give up trying. Most of the jobs available are menial and with very low wages. Our labour is in comparison is less motivated. In other countries unemployment is an election issue. In India it is never an issue at all. Besides our investment in infrastructure is pathetic; we now turn our attention to infrastructure development. The physical productivity from this sector is very slow. Our savings rate of 30% along with the FDI is the major source of capital. People would rather put their money in Gold than put any money in projects. The government talks big about supporting MSME with lowered taxes. They also don’t have any plan. All our good quality labour is seeking fortune elsewhere in the world. We have several million workers of Indian origin all over the world. In summary our productive labours have gone abroad and is a big loss to our country. For example many of our 117 graduates become entrepreneurs and crate thousands of jobs.
Student: How do we seek higher productivity?
Professor: I remember a Dutch economist visiting Singapore 1985. At that time the wages were very low in Singapore. He said that unless the wages are increased drastically Singapore will get money only for labour intensive industries. The government believed him. Now the GDP per capita is US $ 60000 surpassing the US. Indian politician should see the importance of high value added products and services which are the outcome of high quality research and R and D. It is time they woke up.
Student: Thanks, Professor.
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