Demand side strategies to boost Employment

Context: Recently, Narayana Murthy has argued for Indian workers to work for 70 hours a week for boosting India’s economic growth. He based this on the experience of Germany and Japan during the 1950s.

However, the author of this article says, that merely asking workers to put in extra hours will not lead to economic growth. Economic growth is a result of increased demand in the economy, which results in greater demand for goods and services.

About Demand Side Economics

  • According to Keynesian economics, total output is determined by aggregate demand, which is demand for the total volume of goods and services produced in the economy. The demand for labour is a function for this demand.
  • Firms are guided by profit motive and will employ more labour only if there is increased demand for their products and services. Firms that employ more labour while aggregate demand has not increased will find themselves with unsold goods. Thus, there is a need for demand side interventions to boost employment in India. 

Reasons for fall in global demand

  1. Structural issues: Agriculture which employs around 45% of India’s workforce, only accounts for 16% of India’s GDP. While the services sector which accounts for around 65% of India’s output only employs a smaller labour force. This means that vast majority of India’s labour force employed in the agricultural sector is left with small disposable incomes to buy goods and services. (Note: According to Situation Assessment Survey of Agricultural Households in rural areas conducted by NSO conducted in 2018-2019, average monthly income of an agricultural household stands at Rs 10,218).
  2. Informalisation of workforce: Majority of Indian workers are employed in the informal sector with low wages and low social security. (Note: According to PLFS survey, close to 90% of workers are employed in the informal sector).
  • Minimum wages are currently not applied on much of informal sector.   
  • Low wages provided to casual workers, particularly in the agricultural sector.
  1. Widespread income inequality: According World Inequality Database, the share of top 1% income earners in India’s pre-tax national income increased from 10% in 1983 to more than 21% in 2013. However, the share of bottom 50% declined drastically from around 22% to 15% in the same period. 
  2. Rising global inflation and food inflation: Rising inflation has led to reduced disposable incomes with vast majority of the low- and middle-income households. The inflation has been particularly high in food commodities. Since, expenditure on food is necessary, it has meant that less is left with households to expend on further goods and services leading to reduced aggregate demand. 
  3. ‘Just in time’ supply chain strategy which allows manufacturing firms to hold low or minimal levels of inventory of materials. This has been employed by companies to maximize efficiency and cost savings. This has allowed companies to produce less and in the face of rising global inflation and slowing global demand further reduce output. 
  4. Low labour productivity in India: In today’s globalized economy, all inputs into the production of goods and services are available to all countries via trade. Thus, the competitiveness of an economy is ultimately determined by productivity of its workforce and the physical infrastructure that complements the labour force. Productivity of labour force is determined by the health and skill base of the labour force. Indian workers are at a disadvantage when compared to most successful Asian economies in both the above categories. 

Way forward

  1. Tap the global markets or world demand to grow the domestic economy. For this India’s goods and services will have to be globally competitive. 
  2. Focusing on the expansion and skills sets of India workers to boost their productivity. 
  3. Investment in domestic infrastructure to boost the competitiveness of goods and services produced in India.
  4. Controlling food inflation: For boosting domestic demand, it is essential that food inflation is controlled by reducing food wastage and raising productivity of labour and other inputs in agricultural sector by infusion of capital and technology. This will allow households to spend on non-agricultural goods and services. Thus, generating demand needed to boost production and create employment.
  5. Increasing incomes of those at the bottom of pyramid: People at the bottom of the pyramid have a high marginal propensity of consume. Hence, increasing their incomes will lead to multiplier gains in the demand situation. This can be done by:
    • Increasing and widening the ambit of minimum wages for those at the lowest levels of employment for a decent living. Minimum wages can index to the consumption expenditure of a relatively better-off group of workers. 
    • Greater formalisation of the economy. 
    • Linking MGNREGA wages to minimum wages will enhance the floor for casual workers in rural and urban areas, thus expanding their incomes and thus ultimately demand. 
  1. Stepping up public investment and government expenditure: If other actors of economy i.e., firms and households are not willing to consume, enhanced government spending can generate demand for goods and services. Government expenditure can crowd-in and put more money in the pockets of middle and lower classes r This along with lowering the overall levels of taxation can put more money in the hands of people to spend. These strategies will boost demand for goods and services in an economy and lead to employment creation.
  2. In the monetary policy: For increasing demand in the economy, an expansionary monetary policy should be followed by Central Banks. This means reducing interest rates which will increase the demand for goods and services in the economy and create employment opportunities. 

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