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Budget 2010: An Analysis
The budget document considers the high growth rates India has achieved as a ‘gain’, which needs to be consolidated so that there can be ‘inclusive’ growth. Economics, during its course has divorced rate of growth of output (of commodities and services) from the question of employment. Hence, we need to use terms like ‘jobless growth’, ‘inclusive growth’ and so on. Unfortunately, a weak form of trickle down theory is assumed in most cases. Therefore, having a high growth rate becomes a necessary pre-requisite.
It is comforting to see that the need for good institutions have been emphasised in the document. As one of the challenges is “to address the weaknesses in government systems, structures and institutions at different levels of governance. ”
Unorganised sector has been highlighted in the document. A National Social Security Fund has been established for workers in this sector. And the National Skill Development Corporation has approved three projects worth about Rs 45 crore to create 10 lakh skilled manpower at the rate of one lakh per annum targeting the unorganised sector. I guess the question is: do we impart skill to the workers or do we provide jobs according to their skill?
On the agricultural front, 5 more mega food parks are going to be set up as an impetus to the food processing sector. Under the Debt Waiver and Debt Relief Scheme for Farmers, the period of repayment has been extended owing to the drought. In order to step up agricultural production, around 60,000 “pulse and oil seeds villages” are going to be set up. And the benefits of ‘green revolution’ are going to be increased by carrying out similar activities in the eastern region of India. The ‘benefits’ indeed!
Owing to the financial crisis, an apex level Financial Stability and Development Council will be set up with a view to strengthen and institutionalise the mechanism for maintaining financial stability. Alongside this, FDI flows will be liberalised more. It is interesting how new challenges/problems are brought about. Regulation is removed in a particular sector and regulation is increased in some sector. Overall, it seems to appear that ‘less regulation’ is considered efficient- right prices, no wastage of output and so on. Thanks to Neoclassical Economics.
Several projects are being set up to meet our energy demands and also to conserve our environment. Strengthening transparency and public accountability seems to be given adequate importance (in paper at least). In this context, an Independent Evaluation Office (IEO) chaired by the Deputy Chairman, Planning Commission to be set up to evaluate the impact of flagship programmes. More and more committees and commissions coming up!
On the whole, I think it is a more government’s budget than people’s or the corporates! However, their highlighting of the unorganised sector and the crucial role of institutions need to be congratulated.
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What are the Contents of India’s Economic Growth?
The above question was discussed by Bhabatosh Datta in 1977 in his book The Contents of Economic Growth and Other Essays. This blog post briefly revisits Datta’s article to see whether the current growth of India is on the right track. A few details about Datta is in order. For most of his life, he taught at Presidency College, Calcutta. He is an economist who has written on diverse aspects of the Indian economy – industrialisation, planning, regional rural banks, economic growth, monetary reforms, commercial banks, financial system and on Indian economic thought. And for this reason, his work is of utmost relevance to us- who want to understand the Indian economy.
On 29th December 2009, the Deputy Governor of RBI spoke about the ‘Current Macroeconomic Developments in India’. I reproduce some of her observations below:
India had a strong recovery in the second quarter of 2009-10 at 7.9 per cent. “The sequential recovery over the first quarter of 2009-10 was driven by notable turnaround in industrial output (9.0 per cent), and services sector (9.0 per cent), while agriculture sector also came to record a positive growth (0.9 per cent), despite drought like conditions and floods in some parts of the country.”
Which India had a strong recovery, when more than 60% of Indian population work in the agricultural sector? As Datta writes, for India, economic growth takes place when there is “growth in employment and growth in incomes of large numbers.”
“On the whole, agricultural production during 2009-10 hinges critically on the performance of the North East monsoon and rabi production.”
“The recovery in industrial growth has been broad-based with acceleration in growth of all the three sectors, viz., mining, electricity and manufacturing .”
The consumer durables sector shows an impressive growth with 22.2 per cent in the second quarter of 2009-10.
Consumer durable showing strong growth, a recovery of industrial growth alongside a critical agricultural sector seems to suggest that Indian policy makers and economists seem pre-occupied with non-problems. As Datta lucidly points out: “it is possible that over a particular year there has been only a very small increase in agricultural and essential industrial production, while there has been a substantial rise in the output of luxury goods, high-income varieties of consumer goods and outdated capital goods.”
It is easy to forget that 8% or 9% rate of growth does not have a unique meaning. For, it might express many alternative states of affairs. I often wonder, what our objective should be as an economist in India! As I had argued elsewhere, it is time that we looked at the structure or the contents of economic growth carefully.
Piero Sraffa: An Introduction
In the first half of 20th century, Marshallian economics dominated economic theory and policy. Keynes in his 1936 book (The General Theory) tries to break away from the orthodoxy by challenging its concepts such as full employment and equality of savings and investment. In 1960, Sraffa mounted a strong critique through his book Production of Commodities by Means of Commodities.
Concepts such as utility, capital, prices, marginal product, marginal cost, etc were questioned by Sraffa. In fact, not only were they challenged, but they were also shown to be problematic. The following paragraphs will show how Sraffa pointed out the inadequacies with the above mentioned neoclassical conceptions of the economy.
Traditional theory lists land, labour and capital as ‘factors of production’. This means that production is carried out using some combination of the above factors. However, the process of production is seen as a one-way avenue from factors of production to production of final goods for consumption. Sraffa, in the tradition of classical economists argued that production is a circular process, or to use Myrdal’s phrase- production is a circular and cumulative process. This was in the tradition of the Classical economists who visualised the economy as an interdependent entity- Francois Quesnay was the first to provide a systematic account of interdependence in his Tableau Economique.
As we know, neoclassical theory of equilibrium prices (value) is built on the twin pillars of production and consumption. It is the production side that provides the supply function; and the consumption side provides the demand function. Through the interaction of demand and supply, equilibrium prices or value is created. This seems plausible and true, at the very outset. Why? When we think of the production of, say, a car, we presume that both the buyer and the seller has some role in price fixing. Yes, this would be the case if we viewed production (of cars) as an independent activity. Whereas, in reality, production is a social activity and so is consumption. Marshall’s partial equilibrium analysis sought to understand equilibrium price and quantity formation in isolated firms/industries. Sraffa’s 1960 book provides a framework for understanding values (or in neoclassical terms, equilibrium prices) in an economy where production is a social activity and where the nature of production is circular. Hence the title of his book: production of commodities by means of commodities. This highlights the interdependent production structure, which is the case in today’s economies.
In the preface of his 1960 book, Sraffa points out the obvious problems of the ‘marginal method’. To have marginal cost, one needs to pay attention on change. To illustrate, suppose Hero Cycles produce 100 cycles a day using 10 machines and 10 labourers. And production is carried out in this way. How does one calculate marginal cost? Do we add a machine and see how much extra output is produced? Or do we ask one worker to work in Hero Cycles for a day?
The above paragraphs are only meant to introduce a reader to Sraffa. To me, Sraffa’s work has brought about a change in how I visualise the economy. Earlier, the linkages between various macroeconomic variables and their micro counterparts were vague. In the following posts, the above mentioned concepts will be explained in more detail. And, concepts such as increasing/diminishing returns, scarcity and prices, joint production, surplus approach, capital theoretic problems, etc will be tackled in the following posts.
Division of Labour: some comments
Division of labour is generally associated with Adam Smith (1776). The concept of division of labour attains significance because it helps in formulating an endogenous growth model, along with the extent of the market. The idea is that specialization has a positive effect on the extent of the market, which in turn leads to more division of labour.
Apart, from this, in everyday life, we come across division of labour in various shapes and sizes. A very strong example of this is that of outsourcing. Earlier, physicians attended to a patient and they were quite knowledgeable in many aspects of medicine. Now, we have ENT specialists, paediatricians, cardiologists, nephrologists, neurologists, orthopaedicians, etc. This is visible in the IT industry as well. And specialization has not left academic untouched either. Within economics, one finds econometricians, economic historians, experimental economists, macroeconomists and so on.
In the Wealth of Nations, Smith [1776] talks of pin-making to illustrate division of labour:
“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.” [p. 15]
Today, while going through Sir William Petty’s ‘Another Essay in Political Arithmetick Concerning the Growth of the City of London‘ which was published in 1682, I found division of labour mentioned. Petty illustrates it using the example of watch-making:
“In the making of a Watch, If one Man shall make the Wheels, another the Spring, another shall Engrave the Dial-plate, and another shall make the Cases, then the Watch will be better and cheaper, than if the whole Work be put upon any one Man.” [p. 473]
Then, while going through the Campbell and Skinner edited Volume of Wealth of Nations, I noticed that in the first foot note, they refer to Petty as probably being the first modern author to talk about division of labour.
Interesting to know that William Petty, hailed by Marx has the first political economist, had developed notions of division of labour!
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