Context: Recently, Narayana Murthy, founder of leading Information Technology firm Infosys, 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, these two countries experienced sharp economic uptick after the World War II due to a dedicated workforce. Long working hours is expected to boost the productivity of Indian economy and the workforce, leading to economic growth.
However, there is a competing opinion among a section of economists that merely boosting working hours will not boost the Indian economy.
These group of competing economists argue that supply-side strategies such as more production, more working hours are not sufficient to life the Indian economy, as the main issue with the Indian economy is the lack of demand.
Thus, the key to lift the Indian economy is employing demand side strategies which will increase demand for goods and services and therefore demand for more production.
What is 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 low or fall in demand in Indian economy
- 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).
- 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). The situation is made worse by the fact that minimum wages are currently not applied on much of informal sector and the informal sector is characterized by low wages, which is even more pronounced for casual workers in the agricultural sector. All these factors reduce the buying power of vast majority of Indian population and hence low demand for goods and services.
- 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.
- 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.
- '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.
- 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.
- Marginalisation of women: India’s female labour force participation rate is way below to the comparable economies of India. Currently, this stands at about 17%. Thus, a vast majority of females lack regular incomes to procure goods and services leading to low demand as 50% of Indian population does not have the disposable incomes to buy goods and services.
What can be done about this?
Thus, economists have argued to employ following strategies to boost demand in the Indian economy, thus boosting India’s economic growth. Some strategies are:
- Tap the global markets or world demand: Indian economy should expand exports to meet the global demand which will mean investing in infrastructure and competitiveness of Indian exports.
- 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.
- 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 formalization 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.
- Greater participation of women and provision of transfers like pensions and universal basic incomes can be deployed to boost demand.
- 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. 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.
- 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.
Ideally, a mix of demand and supply side strategies need to be employed to for a sustainable growth of the Indian economy.
However, the preponderance of market-economics has forced countries like India to overtly focus on supply side strategies. However, there is a need to bring balance by employing supply side policies.