India has a complex, diverse economy, and this often seems to paralyze policymaking. However, two sets of data published in September make it clear that India must create more non-farming jobs of high enough quality to pull people away from agriculture. Compared to this goal, everything else is a sideshow.
The Covid pandemic has hurt India worst among large economies. This is not due to macroeconomics, but demographics. Because it has a rapidly growing labor force that must be well utilized for the country to soar up the income ladder, the Indian economy as a whole can and must rapidly grow now. Covid has been painful for many rich countries’ economies, but because of the number of people entering the workforce in India during these two years, they needed to be prime years for growth. The economic hit India suffered is therefore much worse than other countries have experienced.
Two potential boom years have already been lost. First came the fiscal year 2021 crash, and the fiscal year 2022 bounce-back has simply returned the Indian economy to where it was before the pandemic. It is all too possible that more of this period of demographic expansion period will be lost to another Covid variant.
India’s demographic expansion was supposed to make it the “new China,” whose own boom is giving way to bust. Covid has dimmed that prospect. By the end of 2020, outstanding Indian credit as a share of GDP was comparable to China’s level in 2012. Per capita GDP is an artificial, flawed measure of personal income. But China’s 2012 per capita GDP of $6,300 is so much larger than India’s 2020 figure of $1,900 that the measure’s flaws hardly matter.
China is not known for efficient credit allocation. Yet at the same level of economy-wide leveraging, India is still roughly 15 years behind in income. Among other things, this implies India’s aggregate credit allocation to date has been exceptionally poor. Those insisting on, for example, more central government borrowing must show how the next round will be effective in the way previously leveraging was not.
If India borrows more, it is clear what the objective of any further debt must be: to durably raise the incomes of present-day farmers. India’s National Statistical Office recently published a 2019 (pre-Covid) assessment of 93 million farm households. Compared to the same survey six years earlier, farm income adjusted for inflation increased only 2.5% annually on a compound basis.
For hundreds of millions of poor people in an economy which should have grown quickly, this is tortuously slow. To illustrate, the closest Chinese equivalent is roughly twice as fast. The solution is not handouts — India doesn’t have that much money. While price supports for farm goods should play a transition role, they can’t be permanent — that would also make them unaffordable.
Lying behind the unaffordability is that more than two-thirds of surveyed households have landholdings of less than a hectare (2.5 acres). To get a sense of how far India is from plot sizes that enable farmers can thrive, the average American landholding is 180 times larger. Further, the average landholding in India has been shrinking, tightly limiting productivity and income. This must change in order for farmers, and therefore India, to see fast growth in what must be a boom time.
There obviously isn’t going to be more land. This means the only solution is for there to be fewer farmers. The best way to accomplish that is to draw farmers to better job opportunities. Enter the second set of new and discouraging data. The Labor Ministry released a quarterly employment survey for manufacturing, construction, transport, IT, health, hospitality, trade, education, and financial services. It indicates a total of 7.1 million jobs created in these sectors since fiscal year 2014.
If you forget India’s size and demography, this seems fine. But it’s far from fine. While there are gigantic numbers tossed around for new entrants to the labor force, more recent data put the figure near 5 million new laborers annually. What should have been nine leading sectors in hiring only accounted for 20% of what was needed to accommodate all the jobseekers. Even that failure is dwarfed by the failure to find better work for tens of millions of farmers who didn’t join the labor force at all, and are now stuck with tiny plots and very slow income gains.
The credit figures show India has already wasted a good deal of money and has little to show for it in employment and farm income. Covid is costing crucial time. How to achieve the paramount goal will of course be fought over, but the first step is agreeing on what’s most important: creating enough good jobs to pull large numbers of people off farms. Otherwise a generation of enormous economic potential will be lost.
Derek Scissors is a senior fellow at the American Enterprise Institute focusing on the Chinese and Indian economies. The views expressed are the author's own.
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