View: Prosperity and economic transformation in India require a complete change of mindset

By Arvind Panagariya

The report on Periodic Labour Force Survey 2017-18 has now been released. Critics of Prime Minister Narendra Modi had made much of the leaked estimate of unemployment rate of 6.1%. Hoping to turn voters against him, they repeated ad nauseam that unemployment rate had turned the highest in 45 years. But with their blinkered vision, they failed to see that the flip side of unemployment rate is employment rate, which stood at a hefty 94%. For most voters, unemployment was not an issue.

But the survey does point to a difficult road ahead for India. It reveals that the transition of workers out of agriculture into industry and services has continued to move at a snail’s pace. Agriculture’s share of employment, which had fallen rather slowly from 58.5% in 2004-05 to 48.9% in 2011-12, fell yet more slowly in the following six years to 44.1% in 2017-18.


The fact that 44.1% of workers employed in agriculture produce only 15% of GDP means that output per worker in this sector is less than one-fourth of that in industry and services combined. With output per worker in industry and services itself low, per-worker output in agriculture is truly tiny.

Even within industry and services, the vast majority of workers are employed in tiny enterprises characterised by low value added per worker and low wages. A 2015-16 survey of unincorporated enterprises in all industries and services except construction found that these enterprises employed 111 million workers. These workers constituted a gigantic 84.7% of the total of 131 million workers in all industry and service enterprises identified by the Economic Census 2013-14. Own-account enterprises (OAEs), which employ no hired workers on a regular basis, accounted for 62% of the 111 million workers and establishment enterprises, which employed less than three hired workers per enterprise on average, accounted for the rest.

Predictably, average labour productivity in these enterprises is low. Gross value added per worker in OAEs was a meagre Rs 73,951 per year. The corresponding figure for establishment enterprises was Rs 1,52,723. Hired workers in these latter enterprises received total emoluments averaging only Rs 87,544 per worker per year.

These features of the economy have produced a political equilibrium that perpetuates employment in activities exhibiting low value added per worker. The vast majority of voters are dependent on either agriculture or OAEs and tiny establishment enterprises in industry and services. Therefore, politicians champion the cause of these very activities. The result has been that the vast majority of workers keep pedalling in the same place generation after generation.

The harsh reality is that without moving vast proportions of workers currently employed in agriculture, OAEs and tiny establishment enterprises into larger enterprises, prosperity and economic transformation will remain distant dreams.

Consider workers in agriculture. No doubt, some increase in their income is feasible through marketing reforms that increase their share in the price paid by the final consumer. But given the low output per worker in the first place, the scope for such increase is extremely limited. Even transferring the entire value of agricultural output to workers would not make them prosperous.

Nor can increases in agricultural output through better technology, improved irrigation and increased investment go very far. With limited scope for the expansion of demand, output increases would translate into correspondingly lower prices and no increases in incomes. Farmers could export some of the output but this too has limits, as importing nations would resist price reductions in their markets. Given our agricultural subsidies, these nations would have a good case for countervailing duties on imports from us under World Trade Organization rules. Diversification into horticulture and fisheries can help on the margin but their capacity to absorb workers is extremely limited.

Even addressing farmer distress meaningfully requires a reduction in agricultural workforce. When drought, frost or floods happen, stories of farmer distress become ubiquitous on front pages of newspapers in the United States as well. But with only 2% of the workforce in agriculture, the remaining 98% workers are in a good position to substantively address this distress. Magnitude of the problem is much larger and revenue resources much smaller in India.

All roads to increasing incomes in agriculture significantly and addressing farmer distress substantively go through the movement of a substantial part of agricultural workforce into industry and services. Such movement will immediately increase land and hence output per worker in agriculture. Marketing reforms would then go a lot farther in increasing per farmer income.

Where are farmers to find job opportunities? To be sure, creating yet more OAEs and tiny establishment enterprises is not the answer. Instead, we need enterprises to grow larger with many micro enterprises graduating to small, small to medium, and medium to large enterprises. But this requires a complete change of mindset. It calls for shedding our obsession with keeping farmers where they are and supporting OAEs and tiny enterprises to remain as they are. We must accept that migration of farmers to non-farm activities and exit of low-productivity enterprises to give way to larger, more productive enterprises, even if painful in the short term, are essential aspects of dynamic, fast-growing economies.

(The writer is Professor of Economics at Columbia University)