"In the present economic crisis involving the rupee’s depreciation and rising onion prices, one thing which is not being talked about is the employment situation. In an economy which is slowing down and which is confronted with a major problem of declining industrial growth, there is a much larger problem of job creation.
India’s labour force participation rate has slipped to 38.6 per cent in 2011-12 from 39.2 per cent in 2009-10, according to a special NSSO survey on unemployment. The number of the unemployed rose to 10.8 million in January 2012 from 9.8 million in January 2010. An important facet of the survey is that self-employment and casual employment account for 80 per cent of the employment. Most self-employment is distress-driven and not voluntary. Jobs can be created only when the economy is on an upswing and there is resurgence in demand for industrial goods. Industrial growth, specially manufacturing growth, can lead to an increase in the number of jobs.
But is the demand for manufactured goods increasing? Apart from fast-moving consumer goods (FMCG) like toothpastes, soaps, detergents and clothing items, few people are able to afford new white goods (washing machines, TV sets, refrigerators), as their incomes are getting squeezed by food inflation. The successive petrol and diesel price hikes in the recent past and the expectation of future hikes are likely to slow the demand for cars. The common person is busy trying to make two ends meet, especially in times of high food inflation because while the Wholesale Price Index has come down, food inflation has not.
If demand for manufactured goods is slack, there is bound to be a cut-back on new investment. This has already happened and has resulted in a fall in productivity and a decline in capital goods production. Manufacturing growth, which has been stagnant, is the only sector that can employ millions of young job-seekers. There will be 400 million job-seekers over the next 10 years. The service sector also employs young people but only the educated and skilled. If there is a decline in manufacturing, there will be a rise in unemployment as is happening in China.
With a scale back on new investment, the demand for bank credit has also fallen in India. Credit growth, according to Mr. Chidambaram, has been very slow. Also many of the borrowers are not able to pay back the loans and this has resulted in more bad loans or NPAs (Non Performing Assets) with banks. Even though the RBI’s monetary policy of hiking interest rates to control inflation has not helped in easing inflation, it has led to a rise in bond yields over the last two years and this has squeezed banks’ margins further. Some big PSU banks have seen their profits fall rapidly as a result.
The State Bank of India shares fell 3.4 per cent in Mumbai on August 12, 2013 after it declared a 14 per cent loss in its quarterly net income. This has been mainly due to the accumulation of bad loans. Also, gross NPAs at India’s top 10 government-owned banks have doubled in the past two years to Rs 1.4 trillion or 4.4 per cent of the total advances. The banks’ provision to cover bad loans has not been adequate and in many cases these can only take care of half the bad loans.
The RBI’s recent monetary tightening efforts to stem the rupee’s slide have further raised the yields of three month Treasury Bills to 10.9 per cent as compared with 8.3 per cent on 10-year government bonds. The longer the banks face high short-term funding costs without an increase in long-term lending rates, the more their earnings will shrink.
The banks cannot hope to expand business in the near future in a slowing economy. The only hope is if the Finance Ministry helps in the recapitalisation of state-controlled banks to tide over the difficult period. But it is constrained because it has to reduce the Budget deficit and has no money left for such cleanup operations. Another hope would be if the public bought more PSU bank shares but this is not happening in a stock market which has been down since May. The BSE Banking Index has slumped 27 per cent.
Many analysts have proposed that the government should switch policies from one of inflation control and fighting the rupee’s slide to that of promoting growth and employment. The RBI should bring down the repo rates because high interest rates are throttling the economy and are also resulting in a rise in NPAs with banks.
If the rupee is allowed to fall further, it may revive export growth and this could be good for the manufacturing sector. A looser monetary policy will also help banking business. Banks would be able to expand credit to industry whose investments would rise and industrial and manufacturing growth could be revived. More jobs could be created, especially for women. More FDI would also flow in with high industrial growth and GDP growth could be restored to 6 per cent level. Right now growth projections are growing gloomier by the day. FIIs and FDI will not come back if growth prospects are not bright.
It is important that manufacturing growth picks up otherwise India’s demographic dividend in terms of having a youthful population could become a demographic liability. Around half of India’s population is under 25 years old. Unless they have jobs or job prospects, they will become dissatisfied and disgruntled. Only if youth of the country are channeled into productive activities, they can help in building the nation.
If Indian exports become more competitive, there would be more dollar inflows which would help to shrink the Current Account Deficit and the Indian economy’s dependence on foreign institutional investors’ (FII) funds could be reduced. The FII dollars have been used for funding the Current Account Deficit and around $85 billion are needed this year. In fact the rupee’s decline in the last two months has been due to the sudden withdrawal of FIIs from India and returning to the US because of an improved economic outlook.
To fight food inflation, vegetables and edible oil could be sold by the government’s fair price shops which would increase their supply. Also the surplus foodgrains (instead of rotting under bad storage) could be released from the godowns of the FCI to meet the rise in demand. Onions prices may come down by the end of the monsoon in any case. The long-term RBI policy should focus on reviving manufacturing growth and jobs.
(The writer is a Senior Fellow at Observer Research Foundation, Delhi)
Courtesy: The Tribune, August 31, 2013
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