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Growth in unemployment and its effect on India’s fiscal growth

Author: Sheela Mamidenna/Sunday, April 29, 2018/Categories: Economy

Growth in unemployment and its effect on India’s fiscal growth

Last week, most of India's unemployed youth would have found some diversion from their worries of not having a job. Thanks to well-funded games like cricket, the jobless will be lured into the miasma of cheer girls, bright lights, runs and wickets. But this momentary relaxation can never blanket the looming black and white picture painted by the Labour Bureau Statistics and by the Nobel laureate Paul Krugman. The Labour Bureau Statistics’ gloomy picture says, 'India is now one of the most unemployed countries in the world', while the Nobel laureate economist Krugman says, 'India's growth story will be driven by the world's fastest-growing economy's young population'!

On April 5, 2018, the United Nations International Labour Organisation (ILO) released its 2017 World Employment and Social Outlook Report which stated that economic growth trends are lagging behind employment needs and has predicted both rising unemployment and worsening social equality in 2017-18. And India seems to be faring the worst.

As per the ILO Report, unemployment in India is steadily increasing from 18.3 million unemployed in 2017, to 18.6 million in 2018 and is expected to touch 18.9 million in 2019, with the actual figures being much higher than the estimated ones. In 2017, the number of unemployed people in India saw an increase of 0.5 million than what ILO had initially projected. Nonetheless in percentile terms unemployment rate will remain at 3.4% in 2017-18 as job creation in India has not picked up in 2017 and is likely not to do so in 2018.

All these dismal numbers can be attributed to the economic slowdown that India faced in 2014, due to corruption, poor governance followed by demonetisation and the poor implementation of the Goods and Services Tax which has sent the Indian economy spiralling down.

Among all these dismal numbers, there is another picture emerging, that of the country being 'one of the fastest growing peak economies in the world'. Sometime between the non-job creation and trying to revive our growth, we have managed to scale up 30 places in the Business Accessibility Index.

Inequality and increasing unemployment is the challenge that this government and all the future governments will face for years to come. While the rich become richer, the poor poorer, the situation could reach catastrophic levels. Unless there is increased public spending by the government there will not be a growth in the GDP.

Ideally the most accepted economic theory of Keynes says, “Governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation, increases employment and maintains a healthy value of money. Fiscal policy plays a very important role in managing a country's economy.”

Last week the RBI in its bi-monthly monetary policy projected that Consumer Price Index based inflation is likely to see a downward trend and remain in the 4.7%-5.1% range, though in February the Monetary Policy Committee of RBI had pegged the range at 5.1%-5.6% for the first half of FY 2018-19. Having lowered the inflation expectations, the RBI has increased the GDP projections to 7.4% from 6.6%, or rather by 80 basis points.

However, the growth-inflation trade off is a well accepted paradigm and according to the economic theory propagated by A.W.Philips, “inflation and unemployment have a stable and inverse relationship.” In other words according to Philips, with economic growth comes inflation, which should lead to more jobs and less unemployment!

What should the government do in such a scenario?

In such a situation, direct government spending can provide a direct boost to the GDP growth and the benefits of increased spending by the government on the GDP growth could come with a ‘multiplier effect’ wherein India’s pressing unemployment problems could easily be solved.

But then there are limitations to these ‘multiplier estimate effects’ which in reality is a boon and a bane as well.

(The author is a senior business journalist with over 15 years experience)

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