The passing of Manmohan Singh should be an occasion for evaluating the lasting legacy of the work initiated in the 1991 economic reforms, by him as the Finance Minister, and his team of high-calibre economists, Ministers and professionals (Montek Singh Ahluwalia, C. Rangarajan, P. Chidambaram, Shankar Acharya, and many others), and continued during his term as Prime Minister. Much has already been written on the animal spirits released by the 1991 economic reforms. But the period 2004-14, and the decade that followed, stand in such contrast that it is worth investigating them using verifiable government data — not views that reflect the observer’s ideological predilections.
Five outcomes stand out, affecting citizens’ lives, and which laid the foundations of a hastened pace of structural change that could have led India to become a high-income/high-human development index country by the 2040s.
Appropriate macroeconomic policies
First, the savings rate had begun to rise ever since the demographic dividend set in in the early 1980s. The rise in savings/GDP ratio — and corresponding growth in the investment to GDP rate — was the basis for the ensuing rise in the GDP growth rate. Thus, by 2003-04, the savings rate had risen to 23% of GDP and investment to 24% of GDP. However, appropriate macroeconomic policies enabled this to be translated into raising the investment to GDP from 24% to 38% over the next six years. This was the highest ever that India had achieved — nearing, though still below, Chinese investment rates. The resulting growth averaged 8.5% per annum over 2004-05 to 2008-09 (under the United Progressive Alliance I). Although helped by a booming international economy, export growth (15%-18% per annum) could not have been maintained without real effective exchange rates being maintained at stable levels.
Despite the global economic crisis of 2008-09, GDP growth dipped for a few quarters before recovering quickly, because of a well-designed fiscal/monetary policy stimulus so that the 2009-14 period also saw 7.5% p.a. Thus, the overall growth rate over 2004-14 averaged 7.8% p.a., which was unprecedented in India’s history.
Second, the growth encompassed all sectors — the unorganised and organised. Not surprisingly, aggregate demand was sustained, as all growth engines were firing (public and private investment, final consumption, exports, and government). Hence, non-farm jobs grew at a rate of 7.5 million p.a., which itself was unprecedented. Except agriculture (where workers fell, a good thing), all sectors generated jobs. Construction jobs grew from 26 million in 2004 to 51 million in 2012 (or nearly doubled); manufacturing jobs increased by 8 million, especially, but not only in the labour-intensive sectors (that account for half of all manufacturing employment) from 52 million to 60 million; as did jobs in modern services (telecom, sale/distribution of cars, financial intermediation/banking, insurance and pensions, airlines, railways, and health and education). Structural change in the economy, slow for half a century, really gathered momentum.
Third, until 2004-05, non-farm jobs had grown so slowly that although migration from farm to non-farm occurred, never did the absolute number of workers in agriculture fall. But, for the first time in India’s post-independence history, the absolute number of workers on farms actually fell after 2004, as non-farm job growth was high. This had the effect of tightening the labour market in rural areas over the entire period till 2014, helped by the government emerging as employer of last resort through the Mahatma Gandhi National Rural Employment Guarantee Act in 2005.
Fourth, the combined effect of new non-farm jobs and tightening rural labour market was to raise real wages, which rose all the way till 2015. This was true for casual wage work as well as regular/salaried work.
Finally, as real wages rose, private final consumption expenditure continued to rise, especially of simple consumer goods. For the first time in India’s history, the absolute number of poor fell — which had never occurred from 1950. The incidence of poverty fell from 1973-74, but the absolute number of poor remained very sticky (due to population growth) till 2004-05. Between 2004-05 and 2011-12, the number of people who rose above the poverty line was 138 million — an achievement of staggering, almost Chinese, proportions.
Policy-induced shocks
Not one of these life-changing transformations in the lives of ordinary people was sustained after 2015. First, the growth rate averaged 5.8% p.a. over the last 10 years. This is hardly surprising, given three policy-induced shocks. The demonetisation damaged the unorganised sector and agriculture leading to Micro, Small and Medium Enterprises (MSMEs) closing on a vast scale (as demonstrated by the delayed NSS Annual Survey of Unorganized Sector Enterprises 2023).
The poorly designed and badly implemented Goods and Services Tax was another shock that MSMEs and the unorganised sector were unprepared for. For the next nine quarters, GDP growth rates fell. Finally, the unnecessary national, very strict lockdown led to the Indian economy contracting by 5.8% in FY21 when the global economy only contracted during COVID-19 by 3.1%.
Second, overall unemployment jumped from 2.2% in 2011-12 to a 45-year high of 6.1% in 2017-18 (NSSO). The number of those jobless tripled from one crore in 2011-12 to three crore in 2017-18. It rose again by at least 70 lakh by 2022. Jobs had grown by 75 lakh per year in industry and services between 2004 and 2013, and only 29 lakh per year between 2013 and 2019. This is a 61% drop in jobs as the population of India grew by 10%. Youth unemployment is still double, from 6% in 2011-12 to 11% in 2022-23. The unemployment rate for graduates and postgraduates is about 33% — one in three looking unsuccessfully for a job. This is why engineers are becoming coolies and doctoral degree holders are applying for railway peon jobs.
Third, the process of structural change that had gathered momentum has been reversed, forcing India’s youth back into farming. For 15 years (2004-19), the number of agricultural workers declined by 6.7 crore between 2004-05 and 2017-18. This entire progress has been fully reversed between 2020 and 2024 – with eight crore workers added to agriculture. Never in world history, perhaps, has such a retrogressive reverse migration occurred.
This is happening because manufacturing (especially unorganised) took the brunt of job losses. ‘Make in India’ failed. The share of manufacturing in the economy fell since 2015, falling from a consistent 17% of GVA for the previous 25 years, and hitting an all-time low of 13% in 2022. Assembling expensive iPhones using imported parts from China hardly generates jobs. Reviving labour intensive industries such as garments, textiles, furniture, leather goods and processed food does. These are precisely the industries that lost jobs — and also exports. The number of workers in manufacturing was 600 lakh in 2012; it fell to 567 lakh by 2019, the last year before COVID-19. By 2022, it had barely gone up to 629 lakh, in 2022, despite all the talk about ‘Make in India’.
Distress and unpaid work
The Modi government has neglected exports. Merchandise exports grew four times, from $77 billion in 2004 to $323 billion in 2014. Between 2014 and 2022 they grew only one-and-a-half times to $454 billion. With less production for global markets, there were fewer jobs.
Fourth, wage growth has also suffered. The share of regular salaried workers in total employment, which was 23.8% in 2019 before COVID-19, fell to 20.9%. Unpaid family workers, whose numbers had fallen from 11.1 crore in 2004 to 8.5 crore in 2012, and then by 2017 to 6.2 crore, have risen sharply to 10.4 crore by 2023. This showed that distress has driven these family members (mostly children and women) into work to support the family. But they are unpaid. This makes the unemployment rate look better than before, clearly misleading. Gold-based loans, and defaults on them, are rising daily today.
These reversals have put the earlier achievements under grave threat, and now give legitimate rise to concerns whether India will realise its demographic dividend before 2040. The growing inequality and constrained aggregate demand now may be putting paid to the prospects of India becoming ‘Viksit Bharat’.
Santosh Mehrotra led divisions in the Planning Commission (2006-14), authored the 11th and 12th Plans, and was professor of economics at the Jawaharlal Nehru University, New Delhi
Published – January 03, 2025 12:16 am IST
