The key to Indian economy is in better wages for the masses

Economic Times, October 11, 2019

By Pradeep S Mehta and Abhishek Kumar

As per the latest World Economic Forum’s Inclusive Development Index, India ranked at a low 62nd out of 74 emerging economies. While the incidence of poverty has declined over the last five years, sixty per cent of Indians still live on less than Rs 230 per day. This, alas, is accompanied by inequality both in terms of income and wealth. To put this in perspective, India’s top 1% of the population now holds 73% of the wealth, a whopping 15% increase from last year. We witnessed this phenomenon first hand in an empirical research project which is looking at the compensation levels and working conditions of workers in the textile sector in India, the second largest employer in the country. This is a part of the humongous jigsaw puzzle of our economy, which includes low consumption affecting our growth.

While the world is going through a slow down due to several factors, the International Monetary Fund supremo, Kristalina Georgieva, says that it is worse in India. The economy seems to be slipping into deeper crisis. Both consumption and investments, the two indicators that signal the health of the economy are progressively spiralling downwards.

Whether it is the job numbers or latest surveys released by the Reserve Bank of India on consumer and industrial outlook or even quarterly figures on Gross Value Added and Gross Domestic Product, all tell the same grim story.

At the heart of it all is the fact that majority of Indian workers earn very low incomes. This has led to the consumption crisis which ultimately has led to a slowdown in the production process. In the words of former Prime Minister’s economic adviser, Rathin Roy, this is because the demand is fast plateauing amongst the top 100 million who can afford to buy goods and services which most Indians with low incomes can’t afford, but which the Indian economy is good at producing.

In other words, this means that this time around the magnitude of the problem is much bigger and calls for serious structural reforms rather than mere palliatives through rate cuts and tax incentives.

To get to these structural reforms, we need to break down the trajectory in the reverse order.

The first question to ask is what should be the goal of the structural reforms?

The answer is to get as close as possible to the ideal scenario where wages for all workers are sufficient to ensure necessary consumption, some discretionary consumption and some savings. This is an ideal equilibrium which can ensure an organic redistribution of wealth generated in the economy through decent wages directly paid by the enterprises.

The problem today is that while the economy has the money, it is not with the masses who want to consume. For an economy which is dependent on domestic consumption for nearly 60% of its GDP, it is worrisome. It is no wonder therefore that the production process has started to stall as private investment is not sure of the demand scenario. To begin with, businesses at all levels are oblivious of the fact that a part of their profits should have ideally been spread over the economy in the form of better wages. If this had been the case, the economic slowdown would not have happened in the first place.

The second question to ask is what to do to get there?

To answer this, we need to fully appreciate three things. We need to see how best we can create more satisfactory conditions for our workers to impact the production process positively, while enhancing competitiveness. Secondly, to decide what to produce and how to produce so that most Indians with current incomes can buy steadily. Furthermore, how to ensure that workers have opportunities to learn more and earn more. Consequently, their incomes can increase over a period of time thereby creating more wealth in the economy and also reducing inequality.

In the new economy facilitated by the Industry 4.0 phenomenon, this will be a challenging task but not impossible to address. With deep sectoral analysis one can get closer to finding solutions. For example, in our own project on Textile and Apparel sector, supported by Ford Foundation, we have found that it is indeed possible to increase compensation along with improved competitiveness. But because labour is the only factor of production directly under the control of the firm, it is the first one to bear the brunt.

The third question to ask is how to get there?

One of the biggest ironies of our times is that while businesses are valued contributors to the economy, most of them are far from being enlightened about their long term sustainability. The good news however is that with economic slowdown biting most global economies due to similar factors everywhere, a greater awareness is seeping into the consciousness of businesses as well. For instance, earlier in July this year, several firms and labour unions from the G-7 countries signed a declaration to address similar challenges as India.

Such things have happened in the past but this time it is being done with greater sense of urgency. India needs a similar initiative too but with the government as a partner also. This is because the existing problem has emanated in a certain policy environment and it is the government that can amend it too.

So to put it simply, what we need is a new compact between the State, business and people based on evidence from the ground. Think of it this way, if 50 crore Indian workers, and counting, earn decent wages, there is no force in the world that can stop India’s rapid climb both at the domestic as well as international level. To further drive home the arguments presented here, the next two articles will focus on enterprises and workers, citing evidence and findings from our empirical research.

The authors work for CUTS International, a global public policy research and advocacy group. Sarthak Shukla, Prashant Tak and Muvafaq Sheeshaikh of CUTS contributed to this article.

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