Boost wages to stimulate India’s growth

By, Jayan Jose Thomas teaches Economics at the Indian Institute of Technology Delhi. Views are personal

Introduction

Impoverishment among English workers during the early years of the Industrial Revolution had prompted Leicester framework knitters to frame this resolution in 1817: “… if liberal Wages were given to the Mechanics in general throughout the Country, the Home Consumption of our Manufactures would be immediately more than doubled, and consequently every hand would soon find full employment” (cited in E. P. Thompson’s The Making of the English Working Class, 1963).

We need to plan for an economic growth driven by rising — and not stagnant — wages, and a development model that is dispersed far and wide across the country, and not centred in a few big cities.

Data

Out of India’s total workforce of 471.5 million, only 12.3% are regular workers receiving some form of social security. (figures for 2018).

A vast majority of migrant workers belong to the category of informal casual workers. According to the 2011 Census, there were 54.3 million persons (workers as well as non-workers) in the country who migrated from one State to the other.

The ‘heartland’ States of Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh accounted for 48.9% of these inter-State migrants, much higher than their combined share in India’s population (of 36.8%).-->Workers migrate from villages to urban centres as the growth of rural incomes has not kept pace with the rising numbers and aspirations of the young in the countryside.

Those engaged in agriculture and allied activities as a share of the combined workforce in U.P., Bihar, Rajasthan and Madhya Pradesh fell to 49.1% in 2018 from 64.1% in 2005. This meant that, between 2005 and 2018, 19.3 million persons left agricultural work in these four States alone and sought job opportunities elsewhere.

A majority of the workers who leave villages find themselves in the bottom rung of the urban economy, earning a precarious living as drivers, factory workers, security guards and domestic helpers.

Their livelihoods are directly or indirectly linked to economic activities that cater to the demand from the relatively affluent in India and abroad

Widening the demand base

According to the official consumption-expenditure surveys (for 2011-12), the richest 5% accounted for as much as 64.4% of the value of overall consumption of durable goods (such as of furniture or refrigerators) in urban India. The share of the poorest 50% was only 13.4%.

The COVID-19 pandemic is set to cause long-term disruptions to the existing structure of demand dominated by the consumption of a privileged few.

Businesses in India and elsewhere are concerned that even after the lifting of the lockdown, they will have to operate at a fraction of their installed capacities due to the sagging demand conditions.

Lockdown displaces lakhs of migrants

The crisis in the economy can be overcome only by widening the sources of demand, by raising the consumption of and investment for the poor.

Setting up of industries linked to food processing or affordable housing in rural areas. The multiplier effects of such investment will be huge. Food processing can help boost farmer incomes, reduce food spoilage, create rural employment and, above all, improve the availability of nutritious food to the needy.

Broadening the demand base requires policies that differ fundamentally from conventional economic ideas. The mainstream argument has been that firms should try to reduce costs by squeezing wages.

But cutting wages will shrink markets further and deepen the crisis during a depression. Instead, firms should assist in raising workers’ wages and incomes, thereby, enlarging the size of the markets. Even with higher wages, profit rates will not dip because the larger demand allows firms to utilise their capacities better.

Increase government spending (Pump Priming)

It is critical that governments increase spending on the economy, in areas such as infrastructure and innovation.

Government spending can boost the “animal spirits” of the private investors, as had been suggested by John Maynard Keynes amidst the great depression of the 1930s.

The ideas of Keynes and his followers helped to fuel an unprecedented economic boom in the U.S. and European countries for almost three decades after the end of the Second World War in 1945.

A striking feature of this ‘golden age of capitalism was that the real wages kept rising.

What is needed is a massive expansion in government spending, which will uplift workers’ skills as well as their incomes and purchasing power.

This will include investments in healthcare, education, roads, rural infrastructure, agricultural research, and public transport.