6. Economics Notes 27

Elaborate Notes

National Income: Concepts and Calculation

National Income accounting is a framework for measuring the economic activity of a nation over a period. The summary provides a practical example and several conceptual clarifications.

• Calculation of Personal Income and Personal Disposable Income:

  • Personal Income (PI) refers to the total income received by individuals and households from all sources before the payment of direct taxes. It is a measure of the actual income received by the household sector.
  • The formula used is derived from National Income (represented here by NDP at FC + NFIA, which equals NNP at FC or National Income):
    • PI = National Income - Undistributed Profits - Corporate Tax - Net Interest Paid by Households + Transfer Payments
    • NDP at Factor Cost (FC): Net Domestic Product at Factor Cost is the total value of net output produced within the domestic territory, valued at the cost of factors of production (wages, rent, interest, profit). It is also known as Domestic Income.
    • NFIA (Net Factor Income from Abroad): This is the difference between the factor income earned from the rest of the world by residents of a country and the factor income paid to the non-residents. (National Income = Domestic Income + NFIA).
    • Undistributed Profits: This is the portion of corporate profits that is not distributed as dividends to shareholders but is retained by the company for future investment. It is part of national income but not received by households, hence it is subtracted.
    • Corporate Tax: This is a direct tax levied on the profits of corporations. It is part of national income but not available to households, hence it is subtracted.
    • Net Interest Paid by Households: The summary uses -(Interest received by households - Interest paid by households). This simplifies to Interest paid by households - Interest received by households. Households pay interest on consumption loans, which is treated as a transfer payment from households to firms, not as a factor payment. Interest received by households on loans given for productive purposes is a factor payment. The net amount is adjusted. In the given example, Net interest paid by households = 1200 - 1500 = -300. The formula subtracts this value.
    • Transfer Payments: These are payments received by households without any corresponding productive activity, such as pensions, subsidies, and scholarships. They are added to national income to arrive at personal income.
  • Personal Disposable Income (PDI): This is the income available to households for consumption or saving after the payment of personal direct taxes (like income tax).
    • PDI = Personal Income - Personal Direct Taxes.

• Inclusions and Exclusions in National Income: The following points clarify the boundary of production as defined in the System of National Accounts (SNA).

  • Transfer Payments (e.g., Free meals to beggars): These are not included as they are unilateral payments for which no goods or services are rendered in return. They do not reflect current production.
  • Wages from Foreign Embassies (e.g., British Embassy in India): Wages received by Indian residents working in a foreign embassy located within India are part of India’s National Income (specifically, under Net Factor Income from Abroad). It is factor income earned by Indian residents.
  • Intermediate Consumption (e.g., Vegetables bought by a restaurant): These are goods and services consumed as inputs in a production process. Including them would lead to double-counting, as their value is already incorporated in the final product (the meal sold by the restaurant).
  • Compensation of Employees (CE) in Kind (e.g., Medical facilities for Govt. Employees, Free medical facilities by Employer, Leave travel allowance): These are non-monetary benefits provided to employees and are considered part of their total compensation. As Compensation of Employees is a component of National Income (under the income method), these are included.
  • Government Final Consumption Expenditure (G) (e.g., Expenditure on Streetlights): This is part of the expenditure method of calculating GDP (GDP = C + G + I + (X-M)). It represents expenditure by the government on goods and services for collective consumption.
  • Production for Consumption vs. Productive Purpose (e.g., Interest on personal loan): Interest paid by an individual on a loan taken for personal consumption is not included because the loan does not contribute to the production of new goods and services. However, interest paid on a loan taken for business/production is a factor payment and is included.
  • Repair of Fixed Capital vs. Investment: Expenditure on routine repair and maintenance of a fixed asset is considered intermediate consumption, necessary to keep the asset in working order. It does not create a new asset. Gross investment or Gross Capital Formation, which is part of GDP, includes only expenditure on new assets or significant upgrades that increase the productive capacity or lifespan of an asset.
  • Private Final Consumption Expenditure (C) (e.g., Purchase of books by a student): This is expenditure by households on final goods and services and is a primary component of GDP by the expenditure method.
  • Transactions in Second-Hand Goods: The sale or purchase of second-hand goods is not included as their value was already counted in the year they were first produced. However, any commission or brokerage earned by facilitating the transaction is a service rendered in the current year and is included.
  • Interest on National Debt: Interest received on loans taken by the government is generally not included in National Income. The dominant view, as adopted in India’s national accounts, is that government borrowing is primarily for administrative and non-productive purposes (defence, administration), rather than for creating productive assets. Hence, the interest paid is treated as a transfer payment.
  • Interest on Debentures/Bonds: This is included. When a company issues a bond, it is assumed the funds are used for productive investment. Therefore, the interest paid to the bondholder is a factor payment (for capital) and is part of national income.
  • Factor Income from Abroad (e.g., Profits of Reliance in Australia): This is a classic example of factor income earned by an Indian resident (Reliance Industries) from abroad. It is included in India’s Gross National Product (GNP) / National Income, as part of NFIA.
  • Payment for Professional Services by a Firm (e.g., Fees to a lawyer): When a firm pays a lawyer for services, it is treated as an intermediate expense for the firm, just like raw materials. The lawyer’s fee is part of the value of the firm’s final output. The lawyer’s income (as a self-employed professional) is counted in national income under ‘Mixed Income’, but the firm’s payment itself is an intermediate cost to avoid double counting.

Surveys for Unemployment

Systematic measurement of employment and unemployment is crucial for policymaking.

• Periodic Labour Force Survey (PLFS):
  • Introduction: Launched in 2017 by the National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI). It replaced the earlier quinquennial (once in five years) Employment and Unemployment Survey (EUS) conducted by the National Sample Survey Organisation (NSSO).
  • Rationale: The EUS provided data with a significant lag. A high-frequency, more dynamic survey was needed to capture the rapidly changing labour market scenario. The committee chaired by Dr. Amitabh Kundu recommended this shift towards a more frequent survey.
  • Methodology:
    • It uses Computer-Assisted Personal Interviewing (CAPI) technology, a solution supported by the World Bank, to improve data quality and reduce processing time.
    • For stratification (dividing the population into subgroups for sampling), education levels are used as a key criterion.
  • Data Outputs:
    1. Quarterly Bulletin: Provides estimates for urban areas only, focusing on key indicators like Labour Force Participation Rate (LFPR), Worker Population Ratio (WPR), and Unemployment Rate (UR). It uses the Current Weekly Status (CWS) approach, where a person’s activity status is determined based on a reference period of the last 7 days.
    2. Annual Report: Provides comprehensive data for both rural and urban areas. It uses both the Usual Status (US) and Current Weekly Status (CWS) approaches.
       • Usual Status (US): Determines a person’s principal activity status over a long reference period of the last 365 days. It is further divided into Principal Status (activity for a major part of the year) and Subsidiary Status (activity for a shorter period, i.e., at least 30 days). US (ps+ss) provides a broad measure of the workforce.

Labour Force Participation Rate (LFPR) and Key Findings

• Definition: LFPR is the percentage of the working-age population (conventionally 15 years and above) that is economically active, i.e., either employed or unemployed but actively seeking work.
  • Formula: LFPR = [(Number of Employed + Number of Unemployed) / Total Working-Age Population] * 100
  • Significance: It represents the supply of labour available to the economy and indicates the willingness of people to engage in economic production. A falling LFPR can indicate that people are discouraged from seeking work or are opting for education/caregiving.
• Key Findings of PLFS Report 2019-20:
  • The report indicated an improvement in labour market indicators compared to the previous year.
  • Unemployment Rate (UR): Fell to 4.8% in 2019-20 from 5.8% in 2018-19. (Note: The 2017-18 survey had shown a 45-year high unemployment rate of 6.1%).
  • LFPR: Increased to 40.1% in 2019-20 from 37.5% in 2018-19. This increase was driven significantly by a rise in female participation.
  • Female LFPR: Improved to 22.8% in 2019-20 from 18.6% in 2018-19, reversing a long-term declining trend. However, this level remains low by global standards.

Reasons for India’s Low LFPR, especially Female LFPR

• India’s female LFPR is one of the lowest in the world, lagging behind countries like Bangladesh and Sri Lanka.
• Socio-cultural Factors: Patriarchal norms often restrict women’s mobility and their participation in paid work. There is a strong social stigma associated with women working outside the home in many communities. The responsibility for unpaid domestic work and caregiving falls disproportionately on women.
• Economic Factors: The ‘income effect’ suggests that as household income rises (due to the male member’s earnings), women may withdraw from the labour force. This was a view proposed by economists like Claudia Goldin in her U-shaped female labour participation hypothesis, where participation first falls and then rises with economic development.
• Safety and Infrastructure: Lack of safe and reliable public transport, poor law and order, and a high incidence of violence against women act as major deterrents.
• Nature of Work: A significant portion of the jobs created are not considered suitable or safe for women. The decline in agricultural jobs, a traditional employer of women, has not been compensated by adequate job creation in other sectors.
• Data from CMIE (Centre for Monitoring Indian Economy), which provides high-frequency data, often presents a more pessimistic picture than official NSO data, highlighting the precariousness of the situation. The CMIE data for Dec 2021 showing female LFPR at 9.4% underscores this deep-rooted challenge.

Occupational Structure and its Transformation

• Definition: Occupational structure refers to the distribution of the workforce across different sectors of the economy: Primary (agriculture and allied), Secondary (manufacturing, construction), and Tertiary (services).
• Structure (2018-19 Data):
  • Primary Sector: Still the largest employer at 42.4%, indicating the continued agrarian nature of the Indian workforce.
  • Tertiary Sector: The second-largest employer at 32.6%.
  • Secondary Sector: Employs about 24.9% of the workforce.
• Long-Term Structural Change (1950-51 to 2019):
  • The share of the primary sector in employment has drastically fallen from 72.7% to 42.4%.
  • The shares of the secondary (10% to 24.9%) and tertiary (17.3% to 32.6%) sectors have increased significantly.
  • This shift is a hallmark of economic development. However, India’s trajectory is unique as the workforce moved from agriculture predominantly to services, with the manufacturing sector’s share in employment remaining relatively stagnant. This is often described as a “premature de-industrialization” or a leapfrogging from an agrarian to a service economy.

Employment Trends: Jobless Growth and Structural Shifts

• Employment Elasticity: This measures the percentage change in employment for every one percentage point change in economic growth (GDP).
  • A value of 0.5 means a 1% GDP growth leads to a 0.5% increase in employment.
  • The steady decline in India’s overall employment elasticity from 0.52 (1972-83) to a near-zero 0.04 (2004-12) is the statistical basis for the term “jobless growth”. This signifies that high GDP growth was not translating into commensurate job creation.
• Structural Transformation in Employment:
  • Decline in Agricultural Workforce: For the first time in post-independence history, the absolute number of workers in agriculture declined after 2004-05. This marks a significant turning point, indicating workers are moving out of agriculture in search of better opportunities.
  • Rise of the Construction Sector: This sector has been the fastest-growing employer, absorbing a large number of low-skilled workers leaving agriculture. While it provides employment, the jobs are largely casual, informal, and lack social security.
  • Stagnation in Manufacturing: The manufacturing sector, considered the engine of quality job creation, has failed to absorb the surplus labour from agriculture. Its share in employment remained stagnant at around 12-13%. This failure is a key challenge for the Indian economy and is attributed to factors like restrictive labour laws (historically), infrastructure deficits, and competition.

Casualization and Informalization of the Workforce

These two trends characterize the quality of employment in India.

• Definitions:
  • Casual vs. Regular Workers: Hired workers are classified based on the nature of their contract. Regular salaried workers have a stable job with a permanent payroll and social security benefits. Casual workers are engaged on a daily or short-term basis without job security or benefits.
  • Formal vs. Informal Workers: This classification is based on the nature of the enterprise and social security coverage.
    • According to the National Commission for Enterprises in the Unorganised Sector (NCEUS), chaired by Arjun Sengupta (2007), informal workers are those who do not have access to any social security benefits (like provident fund, gratuity, healthcare) regardless of whether they work in the organized or unorganized sector.
    • The summary provides a simpler definition: workers in the organized sector (establishments with 10+ workers) are formal, and those in the unorganized sector (less than 10 workers) are informal. This is an enterprise-based definition.
• Reasons for Increased Informalization/Casualization:
  • Migration: Workers moving from rural agriculture (often with disguised unemployment) to urban areas often find work only in the informal/casual sector due to a lack of skills.
  • Stringent Labour Laws: Historically, rigid labour regulations in the formal sector (e.g., Industrial Disputes Act, 1947) made it difficult for firms to hire and fire workers, encouraging them to hire informally or through contractors. The recent labour codes aim to address this.
  • Globalization & Outsourcing: Increased competition led firms to reduce costs by outsourcing non-core activities to smaller, informal enterprises.
  • Rise of Gig Economy: The growth of platform-based work (e.g., Uber, Zomato) has created a new category of workers who are not traditional employees, often lacking social security.
  • Dwarf MSMEs: Many Micro, Small, and Medium Enterprises remain small (“dwarfs”) to avoid regulatory compliance, thus perpetuating informal employment. The Economic Survey 2018-19 highlighted this issue.
• Angel Tax: This is an unrelated tax concept mentioned in the summary. It is a tax levied on the excess premium received by an unlisted startup for its shares, over and above its “fair market value,” from an angel investor. This was introduced under Section 56(2)(viib) of the Income Tax Act, 1961 to prevent money laundering. However, it became a contentious issue for genuine startups and has been significantly reformed since.

Employment Strategy in Five-Year Plans

• 8th Plan (1992-97): Post-economic reforms, this plan recognized that high growth alone was insufficient. It aimed for a 2.6-2.8% annual growth in employment by focusing on sectors with high employment elasticity, such as the rural non-farm sector and small-scale industries.
• 9th Plan (1997-2002): Emphasized “productive work” as a source of dignity and recognized the need for public intervention to create and enable access to work opportunities.
• 11th Plan (2007-12): Acknowledged that the post-reform period had witnessed “jobless growth”. It highlighted the ineffectiveness of poverty reduction programs and the growth of an unprotected informal sector absorbing rural migrants.
• 12th Plan (2012-17): The last five-year plan, it explicitly aimed to make the manufacturing sector an engine of growth, with a target of creating 100 million jobs by 2022. It focused on skill development and sectors like food processing and textiles.

Recent Initiatives

The government has launched several schemes to promote employment and skilling.

• Aatmanirbhar Bharat Rozgar Yojana (ABRY): Launched as part of the COVID-19 relief package, it incentivized employers to create new formal jobs by subsidizing the provident fund contributions for new employees.
• Pradhan Mantri Kaushal Vikas Yojana (PMKVY): The flagship scheme of the Ministry of Skill Development & Entrepreneurship for skill training of youth to make them employable.
• PM-DAKSH (Pradhan Mantri Dakshta Aur Kushalta Sampann Hitgrahi): A portal and app to make skill development schemes more accessible, particularly for marginalized groups like SCs, OBCs, and sanitation workers.
• SMILE (Support for Marginalized Individuals for Livelihood and Enterprise): A scheme focusing on the welfare and rehabilitation of transgender persons and those engaged in begging.
• Other Schemes: MUDRA Yojana (for non-corporate, non-farm small/micro-enterprises), Stand-Up India (for entrepreneurs among SC, ST, and women), MGNREGA (guaranteed wage employment in rural areas).

Inflation: An Introduction

• Context: The summary points to the post-COVID-19 economic scenario.
  • Policy Response: Governments and central banks (like RBI) adopted expansionary fiscal and monetary policies to support the economy during the lockdown.
  • Demand Dynamics: Initially, demand was low due to uncertainty. As lockdowns eased, pent-up demand was released, leading to demand-pull inflation.
  • Supply Shocks: Simultaneously, global supply chains were disrupted (e.g., China’s Zero-COVID policy), and geopolitical events (Russia-Ukraine war) caused commodity prices to spike, leading to cost-push inflation.
  • Imported Inflation: As global inflation rose, India, being an importer of key commodities like crude oil, experienced imported inflation.

---

Prelims Pointers

• Personal Income Formula: PI = National Income - Undistributed Profits - Corporate Tax - Net Interest Paid by Households + Transfer Payments.
• Personal Disposable Income Formula: PDI = PI - Personal Direct Taxes.
• National Income Exclusions: Transfer payments, intermediate consumption, sale of second-hand goods, interest on national debt.
• National Income Inclusions: Compensation in kind (medical facilities, LTA), government final consumption, factor income from abroad, commissions on second-hand goods.
• Periodic Labour Force Survey (PLFS) is conducted by the National Statistical Office (NSO), MoSPI.
• PLFS replaced the quinquennial Employment Unemployment Survey (EUS).
• PLFS provides quarterly data for urban areas and annual data for both rural and urban areas.
• Current Weekly Status (CWS): Reference period of the last 7 days.
• Usual Status (US): Reference period of the last 365 days.
• Labour Force Participation Rate (LFPR): Percentage of the working-age population (15+) that is employed or actively seeking work.
• Unemployment Rate (2019-20): 4.8% (PLFS data).
• LFPR (2019-20): 40.1% (PLFS data).
• Occupational Structure (2018-19): Primary Sector (42.4%), Tertiary Sector (32.6%), Secondary Sector (24.9%).
• Employment Elasticity: Measures the responsiveness of employment growth to GDP growth. It has declined significantly in India, leading to “jobless growth”.
• Angel Tax: Levied on the premium received by an unlisted company from an investor that is in excess of its fair market value.
• NCEUS: National Commission for Enterprises in the Unorganised Sector, chaired by Arjun Sengupta. It provided key definitions for the informal sector.
• Aatmanirbhar Bharat Rozgar Yojana (ABRY): Scheme to boost formal employment post-COVID-19 by subsidizing PF contributions.
• PM-DAKSH: A portal for making skill development schemes accessible to target groups.

---

Mains Insights

The Challenge of Measuring Welfare: Beyond National Income

1. Limitations of GDP/National Income: While National Income is a robust measure of economic production, it is often criticized as a poor indicator of overall societal well-being.
   • Distributional Blindness: It is an aggregate measure and does not reflect income inequality. High GDP can coexist with high poverty.
   • Exclusion of Non-Market Activities: It ignores the value of unpaid work, primarily done by women (e.g., caregiving, domestic chores), and the informal economy.
   • Negative Externalities: It does not account for environmental degradation, pollution, or resource depletion caused by economic activity. In fact, activities to clean up pollution increase GDP.
2. Alternative Frameworks: For a more holistic view of development, it’s crucial to supplement GDP data with other indices like:
   • Human Development Index (HDI): Measures health, education, and standard of living.
   • Gross National Happiness (GNH): Pioneered by Bhutan, it considers psychological well-being, health, time use, and ecological diversity.
   • Green GDP: An accounting framework that deducts the cost of environmental degradation and resource depletion from GDP.

The Paradox of India’s Labour Market: Jobless Growth and Low Participation

1. Jobless Growth Debate:

   • Cause: The decline in employment elasticity indicates that India’s growth has become less labour-intensive. This is driven by capital-intensive technology, automation, and the nature of the sectors driving growth (e.g., IT services, finance), which create fewer jobs for the low-skilled majority.
   • Consequences: Leads to social unrest, widens inequality, and can create a demographic liability instead of a dividend. It fuels the demand for government jobs and reservation policies.
   • Policy Implications: Requires a strategic shift towards promoting labour-intensive sectors like textiles, leather, food processing, and tourism, alongside a massive push for skill development to match industry needs.

2. The Female LFPR Conundrum:

   • Socio-Economic Impact: Low female LFPR is not just an economic issue but a reflection of deep-seated social norms. It limits women’s agency, economic independence, and overall empowerment.
   • Economic Cost: According to the International Monetary Fund (IMF), raising women’s participation in the labour force to the same level as men can boost India’s GDP by as much as 27%.
   • Interventions Needed: Requires a multi-pronged approach: ensuring women’s safety through better law enforcement and public infrastructure, promoting flexible work arrangements, providing affordable childcare, challenging patriarchal norms through education and awareness, and improving women’s access to skills and credit.

Structural Transformation: The Perils of a Weak Manufacturing Sector

1. India’s Unique Trajectory: Unlike the classic development path of East Asian economies (agriculture → manufacturing → services), India has leapfrogged from agriculture to services.
   • Kuznetsian Process: Economist Simon Kuznets observed a pattern of structural transformation where labour shifts from low-productivity agriculture to high-productivity industry. India’s deviation from this path has critical implications.
2. Consequences of Stagnant Manufacturing:
   • Quality of Jobs: The services sector has a dualistic nature, creating high-skill, high-wage jobs (IT, finance) and low-skill, low-wage jobs (retail, domestic help). It has failed to absorb the millions leaving agriculture into productive, well-paying jobs in the middle, a role manufacturing historically plays.
   • Informalization: The surplus labour has been absorbed by the low-productivity construction and informal services sector, leading to widespread casualization and working poverty.
3. Path Forward: Initiatives like ‘Make in India’ and the Production-Linked Incentive (PLI) scheme are steps in the right direction but require consistent implementation. Addressing structural bottlenecks like land acquisition, energy costs, and logistics (e.g., through the National Logistics Policy) is critical to making manufacturing a true engine of growth and employment. The implementation of the four new Labour Codes is also a key reform aimed at improving the business environment while providing a safety net for workers.