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Making sense of growth
By Sudhirendar Sharma

There is too much focus on meeting requirements of organized sector but does it have the capacity to employ vast numbers labelled as 'unskilled' and dependent on vocations in the unorganised sector?

Much to the surprise of avid economists, pulling people out of poverty remains a frustratingly slow process whereas it takes correspondingly less time for the rich to get richer. Else, the lowly maid servant would have uplifted herself out of subsistence ahead of local businessman or the politician. Contrary to official claims that poverty has seen a drop during recent past, the fact remains that despite two decades of fast growth of per capita GDP, the country has experienced a very slow decline in poverty.

'The assumption that growth in itself can have an impact on poverty has been found erroneous,' argue economists Ashok Kotwal and A K Chaudhuri of the University of British Columbia in their latest research. Their contention is that though the population living below the poverty line has come down from 45 per cent to 30 per cent during last two decades, as reflected by increase in per capita expenditure by all income groups, in the context of the fast growth the country has achieved in the recent past its poverty performance leaves a great deal to be desired.

Using the World Bank's $1.25 poverty line, a decline in poverty by 17 per cent was observed during past eight years. This does indicate a 2 per cent decline in poverty each year and may seem impressive, but other least developed countries reported a decline of 4.73 per cent for the same period. Use $2 poverty line and the poverty decline slips further. To explain this anomaly, the economist duo suggests that disconnect between growth and poverty decline could be attributed to the positive feedback emanating from a skill biased growth sector.

'The assumption that growth in itself can have an impact on poverty has been found erroneous,' argue economists Ashok Kotwal and A K Chaudhuri of the University of British Columbia in their latest research.

The core of the argument is that it is the formal or organized sector that is always in the news at the cost of the informal or unorganized sector which though engages a large chunk of the population and contributes significantly to national domestic product but without being its ultimate beneficiary. Need it to say that the fastest growing sectors in India were skill intensive sectors that created very little employment in general, especially for the unskilled poor who have continued to languish in poverty.

Insights from 2004-2005 statistics reveal that the informal sector had produced 58 per cent of national domestic product then by employing 93 per cent of the country’s labour force. In contrast, the formal sector was highly efficient, producing 42 per cent of the output by employing only 7 per cent of the work force. Even if a quarter of the work force from the informal sector could have been employed in the formal sector (of course after skill improvement) the gross domestic product could have taken a quantum leap!

But that was neither to be nor it is now! Given the fact that the potential to raise productivity faster through technology transfer rests with the formal sector, the policies favour easy access to credit and infrastructure to this sector only. Instead of investing in the informal sector, provision of employment guarantee has not only weaned away unskilled force from the farm sector but has forced it to join the army of unskilled workforce. This movement of workforce doesn’t convert the unskilled into skilled.

Only by facilitating access to easy credit, affordable technology and suitable infrastructure to high-value farm-based services can a growing economy make sense of growth for its unskilled workforce!
If the peak growth period between 1993 and 2004 is any indication, high-end services like communications, hotels and banking as well as low-end services like trade, transportation and construction went for a growth upswing but without making any contribution to increase in the employment of unskilled workers. However, the low-end services sucked in farm labour by declining farm workforce by 7 per cent. While real wages did increase somewhat, reduced agricultural productivity rendered farm-dependent population poor. According to Kotwal and Chaudhuri the pattern of growth during the subsequent five year period saw sub-sectors like electric machinery; transport equipment and metal products join the list of fast-growing high-end services. Far from absorbing the unskilled workforce many of these sectors instead shed unskilled labour. Interestingly, however, it is the construction sector that has continued to absorb much of the unskilled workforce. The consequent increase in labour to land ratio helped real wages to increase, contributing somewhat to growth elasticity of poverty.

It is clear that for the vast unskilled workforce to get out of the poverty trap there cannot be anything more urgent than either enhancing productivity of their existing activities or help them acquire desired skills to be part of the formal sector. The million dollar question, however, is whether the unsustainable pattern of economic growth can be sustained for long! Imparting skills to unskilled workforce in an agrarian economy will come with a heavy price - household food security would be the unintended challenge emerging from such a shift.

In this scenario where wealth accumulation is concentrating at the top, what is tricking down are consumption patterns favouring farm-based products. Growing health awareness amongst the affluent implies that sectors such as dairy, fruits, vegetables, meat and poultry have a high growth potential with an added promise of providing employment to relatively unskilled people. Only by facilitating access to easy credit, affordable technology and suitable infrastructure to high-value farm-based services can a growing economy make sense of growth for its unskilled workforce!

The views expressed above are personal and do not necessarily reflect the views of d-sector editorial team.

Sudhirendar Sharma  |  sudhirendarsharma@gmail.com

Dr Sudhirendar Sharma is an environmentalist and development analyst based in New Delhi. Formerly with the World Bank, Dr Sharma is an expert on water, a keen observer on climate change dynamics, and a critic of the contemporary development processes.

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