Issues related to Economic growth

[op-ed snap] An employment-oriented economic policy


From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Ways to correct macroeconomic policy to boost employment and growth.


In the heated debate on jobs, the crucial link between macroeconomic policy and unemployment has not been flagged.

Tasks associated with economic Policy

  • The first is to review the conduct of macroeconomic policy.
  • Though it must come across as arcane, this is an element of public policy that makes a difference to whether we enjoy economic security or not.
  • This brings up the second task for the winner, namely employment generation.

Impact of poor Macroeconomic Policy

1. Fiscal consolidation

  • The government has continued with fiscal consolidation, or shrinking the deficit, while mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations.
  • This has contracted demand.
  • That high fiscal deficits and high inflation per se can never be good for an economy does not justify a permanently tight macroeconomic stance.
  • The rationale given for one is that it is conducive to private investment, said to be shy of fiscal deficits and held back by inflation.
  • Both the deficit and inflation have trended downward in the past five years, yet investment as a share of national income has remained frozen.

2.Inflation targeting

  •  Arguably though, India has seen a virtual inflation targeting since 2013 when the policies of the RBI became more closely aligned to the practices of central banks in western economies.
  • Thus in 2013-14 the real policy rate saw a positive swing of over four percentage points, and it has more or less remained there.
  • Admittedly, at double digits, inflation had been high in 2012-13 but that could have been due to abnormal hikes in the procurement price and not due to runaway growth.
  • The high interest rate regime in place since 2013 could not but have had a negative impact on growth by raising the cost of capital to industry.

Reviewing RBI’s role

1.Reasons for review

  • A regime of high-interest rates can be bad not only for investment — and thus for growth and employment — but also for financial stability.
  • Sharp increases in interest rates can trigger distress.
  •  There has been a growth of non-performing assets of banks even after a change in the method of classification first resulted in their surging in 2015. This feature along with the spectacular collapse of the giant Infrastructure Leasing and Financial Services Ltd (IL&FS) recently point to the need to review the role of the RBI.

2.Changes in Responsibility

  • Experience suggests that it must be tasked with far greater responsibility for maintaining financial stability while being granted wider powers.
  • Finance Ministry and its nominees on the RBI Board should desist from insisting upon actions that could jeopardise financial stability in trying to quicken the economy.
  • It also suggests that the movements in the financial markets are to be treated as the bellwether in economic policy-making.
  • Actually, over the past 30 years, from Mexico to southeast Asia, financial markets can be seen to have been fickle, self-serving and capable of causing great harm as they switch base globally in search of profits through speculation.


Job creation

1.Strengthening Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)

We can assist the unemployed by strengthening the employment programme we already have, namely the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Timely Payment

First, there have been reports that though the budgetary allocation for the scheme may have increased, workers face delay in payment.

Extending the MGNREGS to urban India

Second, as has been suggested, there is a case for extending the MGNREGS to urban India for there is unemployment there.

Review of MGNREGS

  • However, as with macroeconomic policies, a thorough review of how the MGNREGS works on the ground is necessary.
  • The MGNREGS should target the waste dotting our countryside, and when extended to urban India should aid municipal waste-management efforts.
  • We would then have a cleaner environment and have at the same time created jobs.
  • That would a fitting tribute to the man after whom the programme is named, one who had worked for a clean India much of his life.
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