Perspectives

guarantee an increase in employment. Agriculture Indeed this was the case in the great depression. criand UnemploymentA further point of theisKeynesian that of classical his belief lowering of wages might therefore not

It is generally recognised that agriculture has a pool of potential surplus manpower that can be redirected elsewhere and incentives have been proposed to guide agricultural labour into industry. But few have argued that the thrust should be to reorganise agriculture and that economic forces will divert surplus labour in the most profitable direction, whether industries or services. What is proposed here is a large, even if possibly wasteful, investment in agriculture for the purpose particularly of bringing arid land under cultivation.
SUDIIR J MULJI

hen Robert Lucas (Studies in Business Cycle Theory, 1981) contested Keynes's notion of 'involuntary unemployment', he changed the discourse of political economy more than has generally been acknowledged. The term 'involuntary unemployment' is emotive. It is similar to the concept 'hunger'; for while hunger and fasting may cause the same degree of pain to the human body, hunger is regarded as something to be prevented whereas fasting is not. 'Hunger'connotes an involuntarycondition whilst 'fasting' is deemed to be, even in the most severe case, an essentially voluntaryact. Similarly we feel thatpeople ought only to be unemployed if they have been able to choose to be. It is involuntary unemployment which is undesirable. Lucas maintained that Keynes's concept of 'involuntary unemployment' was unsound because his definition depended on workers' own views that the wage offered was insufficient to provide their labour. Keynes had not suggested that a lower real wage was not available; but he had defined involuntaryunemployment as existing when a reduction in the real wage did not provide employment. Lucas maintained that if at some lower wage employment was available, it followed that unemployed persons had voluntarily chosen the state of non-work. They were, justly perhaps, unwilling to accept a lower income than that to which they had become

accustomed, but they were voluntarily and not 'involuntarily' unemployed. Since he believed that there must always be the possibility of work at a lower wage, Lucas found Keynes's 'involuntary unemployment' to be an empty concept . In other words he believed that whenever a person was out of work he must have chosen this state of affairs. Yet this proposition did not quite refute the argument. For Keynes's rationale was based on the classical proposition that in a free andcompetitive marketthe economy would move to equilibrium. At this point a reduction in the real wage would give rise to profitable opportunities for producers which should provide employment at the equilibrium wage. As Hoover points out in his book TheNew Classical Macroeconomics (Blackwell 1988), "ForKeynes a workeris involuntarilyunemployed when he is willing to work at the same wage received by workers like him in every respect, yet the employer will not hire him". Clearly the concept of a common wage level is implicit in this statement and its logic flows from the classical notion of free markets. Thatapart,Lucas's propositionthatsome form of appropriate employment will be available if a person is preparedto accept a lower wage is not provable nor is it easy to see how it could be tested. If the labour marketis competitive, a reduction in wage by an individual could be countered by a reduction by others and the net result would be no increase in employment. The

tique theory "it is a great fault in the quantity theory thatit does not distinguishbetween changes in prices which are a function of changes in output and those which are a function of changes in the wage-unit" (General Theory, p 209). A fall in wages should generate employment but wage earners cannot ensure a fall in real wages because of a corresponding fall in product prices, thus a reduction in the nominal wage may not lead to a fall in the real wage. A complication introduced by Keynes was that a reduction in the real wage may cause a fall in product prices adversely by affecting effective demand in the products market. Indeed the final effect of a fall in nominal wages could be quite indeterminate to both outputandemployment. Lucas in his analysis seems to avoid these problems by assuming that employment will always be available at a lower real wage. He thereforeargues that"itdoes not appear possible even in principle to classify individual unemployed people as either voluntarily or involuntarily unemployed depending on the characteristics of the decision problems they face. One cannot even conceptually arrive at a usable definition of full employment as a state in which no involuntary unemployment exists" (Lucas, ibid, p 243). Now Lucas may well be right that an operationally usable definition of full employment cannot be arrived at, but it does not follow that the concept of voluntary or involuntary unemployment depending on the characteristic of the decision problem individuals face cannot be determined. If the individual believes that the market is such that no reduction in his wage will secure him employment either because there are plenty of others who might equally compete at the lower wage thereby creating no additional jobs or because a reduction in wage levels reduces effective demand for output, then such a person must surely be considered as involuntarily unemployed. The major achievement of the controversy about the notion of 'involuntary

Economic and Political Weekly

April 12, 2003

1463

is unemployment' thatit has emphasised that for and figures employment unemployment should not be taken at their face value.The numbers unemployed of alone may not indicate the seriousness of a problemnor indeed whetherthere is a problemat all. The conceptof 'disguisedunemployment', or in other words 'unproductive another illustration employment' provides of the dangers of taking employment figuresat theirface value. Thereare two aspectsto being employed:the earning aspectandthe producing aspect.In order to reflectthe well-beingof an economy, figuresmustbe seen in relationto wages, bothnominalandreal,as well as to what different kinds of wage-earners are to contributing production. Unemployment in India The relevantpoint in Indiatoday is to whatextentthose who are employedare productivelyemployed. Further,when people are underemployed it matters whetherthey are voluntarilyor involuntarilyin thatcategory. Official National Sample Survey (NSSO) estimatesconclude Organisation thatthe level of unemployment India in is not at all high. This outcome,deemed as by the late Mahalanobis "implausible" has come aboutbecausethe definitionof an employedperson,particularly selfa employedperson,is basedupona survey of his activitybasedon timespentandnot on quantification the value of his outof put.It is assumedthatif a person'susual to activitycontributes the NationalProdsuch uct, howeversmallhis contribution, a personis deemedemployed.The unemployed are only those who actively seek elsewhereor those who can employment be shownto makeno contribution work to on the family holding. The relevant pointis thatno one in the stateof disguised unemployment seek may if 'pukka' employment he believesthatthe is for opportunity alternative employment very low. The conceptof 'disguisedunis employment' basedonthecharacteristic of the decision faced by individuals.As Lucasargues,this does not provideeven a conceptualdefinitionfor determining On involuntary unemployment. thatvery logic it does not provide a conceptual definitionof employment. if employFor mentis not measured a nominalwage by it becomes impossible to determinethe sense in which the person is employed.

It is rightto characterise chosenleisure as 'voluntary but unemployment' itis surely even if it is basedonly upon involuntary the individual's assessment themarket. of If the persondoes not believe thathe has anychanceof gettingalternative employmentit is unreasonable classify him as to voluntarilyunemployedsimply because he spendshis timein anactivityconnected with production. The crucial test is not whetherthe person participates ecoin nomic activitybut whetherhis participation addsto production. Whatwe seek to knowis theeffect on marginal production and its value. No one pretendsthatsuch calculations areeasilydetermined; it does notseem but unreasonable suggest that NSSO surto the veys shouldseekto ascertain marginal Since the surveys productof individuals. are based upon the responsesof households it mightbe possibleto discoverthe marginal physical product of its least valuableemployedperson.It might then be possibleto calculate earnings the the of at underemployed least to workout their contribution the NationalProductand to assist to quantifythe qualityof employment. This would enable economiststo considerthe opportunities enhancing for employment. the Recently TaskForceonEmployment underthe chairmanship of opportunities MontekAhluwalia lookedat theproblem, but only concluded,as also have various NSSOsurveys, thelevel of unemploythat mentis not at all high in India.Although they did recognise that the quality of work offered is not as would be desirable,they succeededin buryingthe politically explosive economic issue of unemployment. It is important recognise that the to shift conceptual fromKeynes'sadmittedly defective notionconcealsthe truenature of unemployment. is not the notionof It or involuntary voluntary unemployment that should be debated;but whetherthe formof employment adequately is productiveormerelysuperfluous. otherwords, In if collectiveactionorreorganisation could improvethe existing choices individuals are compelledto make,it may be appropriateto concludethatthereexists a pool of persons who should be deemed unshouldbe employedandthatsomeremedy sought for this state of affairs. If the magnitude of the numbers of underemployedor unproductively employedis sufficiently large,onepossibleconclusion may be that the only sector sufficiently

large to absorb sufficient numbers might be agriculture,and that the remedy lies not in attractingsuperfluous people away from agriculture but in diverting sufficient resources to a rapid expansion of the rural sector. The answer to unemployment and growth in output may lie not only in the industrialor services sector, as Ahluwalia's Task Force concluded, but in increasing credit to the agricultural sector. In Keynesian logic "so long as an expansion in effective demand could continue to raise output", unemployment, however disguised it maybe, exists. Those who accept Keynesian methodology as serving an important purpose in political economy believe that raising effective demand should be the primary purpose behind government policies. Nominally this can be done by increasing government spending, even'if this leads to deficit financing. Such a suggestion is likely to be widely unpopular given the present state of government finances. It therefore behoves a writer to be circumspect in advocating such policies. I shall begin my detour by reviewing China's policies.

Deficit Financing in China

Many explanations have been given for the high Chinese growth rates. It is not my intention to concentrate on any other aspect but the one which is normally conveniently ignored, namely, financial deficits. The fiscal consequences of development in China have been summarised as follows: In 1978 broad money (M2) balance was near RMB 150 billion yuan. By the end of 2001 broad money balance was up to RMB 16,000 billion yuan, an increase of over 100 times in the past 20 years...Inthe early phase of economic reform, the monetisation and per capita national income was quite low. For instance the financial interrelationratio was less than 40 per cent. With the deepening of economic reform,the FIRgrew uprapidly. Up to 2001 it had reached 165 per cent. ('China's Financial StructureChange in Liberalisation',publishedby the Japanese government [website:www.mof.go.jp/ jouhou kokint.yousa]) In comparison to the growth of broad money (M2) by 100 times in China, M3 in India has grown from Rs 32,906 crore in 1977-78 to 13,11,583 crore in 2000-01, that is about 40 times. Thus policies in China resulting in high growth rates have

1464

Economicand Political Weekly April 12, 2003

been accompaniedby a rapidexpansion in broadmoney - at 2.5 times the ratein India. ChristopherLingle, a ideological critic of Keynesianism, warns that

losses on substantial This,combinedwith. its state owned public sector, has put a greatstrainon the bankingsystembut it has enabled them to raise their rate of levels. investmentto spectacular China is now flirting with Keynesian can The Chinesegovernment directthe economics. The recent National People's of announcedplans for a substan- deployment credit;the IndiangovernCongress must in tially largerbudgetdeficit aimed at stimu- ment operating a freereconomy domestic spendingto avert an eco- rely to some extent upon incentives to lating resourcesto move in the right nomic slowdown. This attempt to re-in- encourage flateChina'sdomesticeconomy combines direction.Howeverthereis no reasonto interestratecuts (at least seven assume that the Indian system cannot numerous sinceMay 1996)andmassivepublicspend- achieveas muchby meansof free market that began during forces. ing on infrastructure 1998. It does not suffice simplyto arguethat Attemptsto boost overalldomestic spend- it is not possibleto pushup growthrates ing throughcredit expansion and pump The by costlyincentives. factof thematter primingare hallmarksof Keynesian poli- is that Indianslike the Chinese and the cies. (Lingle, 'China's Flirtation with are Japanese very high savers.It is thereKeynesian Economics'. www.liberty from fore an errorto rely uponparadigms haven.com) inflation. for nations estimating developed Whether in the long run Keynesian Indeed in spite of substantial growth in policies are desirable for either China or money supply the prospectsof inflation India is not the matter at issue. All that is havebeenrelatively low in all threecounrelevant is that so far at least the much tries. Howeverit is relevantto look speadmired success of China coincides with cifically at the consequences of fiscal deficits in India. policies of deficit financing.
The cause and effect of these changes are not necessarily that growth in broad money leads to GDP growth. However, it is a fact that the risk of more potential inflation has been accepted more readily by China than by India. Perhaps the set of control instruments available to Chinese authoritiesjustifies such an approach, but one should not underestimatethe capacity of the Indian authorities to direct credit as effectively as China does.

Bugbear of Fiscal Deficits In commonwith the prevailingprejuin dice, writerslike AshutoshRaravikar

his new book on Fiscal Deficit and Infla-

India and China Compared

Whereas in China banks are directed to make loans, in India the policy is for the authorities guide banksalthoughgovernto ment ownership provides the potential to instruct banks. In the last five years the authorities have sought to direct bank credit to commercial sources but it is pertinent to point out that bank advances in India have not kept up with the growth in broad money. Commercial banks have preferred investment in government securities to loans. It is therefore necessary for government or quasi-government institutions to invest directly in desired directions. Both countries are characterisedby high savings rates, but they are differentiated in their investment rates. The Chinese government has borrowed or coerced its banks to lend to infrastructuralprojects.

tion in India (Macmillan,2003) titled a in on chapter 'FiscalImbalances theIndian Economy'as a crisis. The authoris able that to demonstrate the GrossFiscalDefiof cit as a percentage GDPhas risenfrom an averageof 4 per cent in the seventies to about 7 per cent in the eighties and has nineties.What Raravikar omittedto point out is that the rate of growth has risen from an averageof simultaneously 3-4 percent in the earlieryearsto 5-6 per cent in the later period. Therecould of course be manyexplanations, distinguishing the closed economy of the earlier years to the opened economy of the latterperiod.Yet it is a peculiar approachto determiningcause and effect to ignorethe rising deficits as of a partof the explanation growthandto dogmatisethatthesedeficitshavecreated a crisis. statisThose who considerRaravikar's tics as inconclusiveandgeneralwill look for otherdata.They shouldthenconsider and the authoritative paperby Sundaram on Tendulkar 'Theworking poorin India', Labour for Orgaprepared theInternational in fiscal profligacy nisation. Theydeplore

Indiabut acknowledgethe improvement in the growthratein the 1980s.They state "Theaverageof the annualgrowthrates for the decade[theeighties]was 5.75 per with 3.4 per cent for cent in comparison the previous decades. There are no inthis depthanalysesof factorsunderlying change." in Further theirdatathey show thatthe of rateof growthof earnings rural persons has gone up by 3.54 per cent per annum in 1993-94 prices duringthis periodbetween 1994 and2000. The rateof growth in percapitaearningsof ruralpersonshas this during periodbeenhigherthanthe3.2 per cent growthof their urbancounterparts.As we all know, at no pointhas the fiscal deficit, however defined,declined duringthis period.A primafacie conclusionmightbe thatfiscaldeficitsmayaffect growth rates positively, but that is certainly not the conclusionthat Tendulkar choose to arrive at. They or Sundaram to continue,as does Ravarikar, condemn fiscal profligacy. Because of the peculiarityof the conclusionbeingproposed, namely,thatfiscal deficitsimprovegrowthandrealincome, to it would be imprudent suggest such a withoutprovidcontroversial proposition some rationale.The old Keynesian ing idea is thatfiscal deficitsincreaseprivate incomes and if they grow more quickly thancosts the surpluswill financeexpaninvestsion andthe profitswill encourage is ment.Theproposition that prices product will rise quickerthanwages, particularly if there is a surplusof labour. The consequentfall in real wages may not be sustained beyondfull employment but beforethatpointis reachedthe quantity of outputin the economymightgrow. This generaleffect in Indiais suggested by Tendulkar and Sundaram's data, thoughit is not the conclusion they have drawn. Directing Resources to Agriculture It is generallyrecognisedthat agriculturehas a pool of potentialsurplusmanpower that can be redirected.Othersin commonwith the AhluwaliaTask Force have proposedincentives to guide agriBut cultural labour industry. few have into argued that the thrust should be in and reorganising agriculture thateconomic labour divert forceswillthemselves surplus it whether in the mostprofitable direction be industriesor services.

Economicand PoliticalWeekly April 12, 2003

1465

The first point that should be observed is that the net sown area in millions of hectares has hardly increased from that of 140.27 million hectares in 1970-71 to 142.02 million hectares in 1997-98 (Table 18, RBI Handbook of Statistics 2001). Duringthis period the acreage under irrigation has almost doubled from 38 million hectares to 72 million while total food-grain production has also almost doubled from 108 million tonnes to 196 million tonnes. The broad conclusion that these statistics suggest is that Indian agriculture's response to known methods of cultivation has-been salutary but that there has not been sufficient etrepreneurship in bringing about wasteland into cultivation. It is surely astonishing that in spite of a doubled population the net sown acreage of land has not increased at all. A preliminary conclusion must be that insufficient equity capital is available for agriculture. It cannot be the case that an increased population ought to be satisfied with only more intensive cultivation of the same land and should not attempt to bring more uncultivated land into production. It is admittedly true that much of the landmass of India suffers from aridity or mountainousterrain,yet the sheerpressure of numbersshould have seen greatereffort to bring more land under cultivation. The direction of government policy should be to encourage equity investment in uncultivated land even if such activities are not immediately profitable. It is generally acknowledged that Gross Domestic Capital Formation (GDFC) has been abysmally low in Indian agriculture. The Reserve Bank's Report on Currency and Finance 2000-01 observed that "the declining capital formation in agriculture has emerged as an issue of paramount concern. This has been compounded by the decline in the share of public investment in the share of public sector investment in agriculture to total public sector investment. The lack of new capital assets has slowed down the pace and pattern of technological change in agriculture"(Paragraph 3.43). The figures are startling. The ratio of capitalformationin agriculturehas dropped from 14.27 in 1970 to 7.96 in 2000. During the period agriculturalGDP has risen from 7.08 to 8.02. It is clear thereforethatcapital formation in agriculture has not even kept pace let alone increased. As the RBI report points out: The lack of capital has been a primary factor impeding the adoption of new

technological inputs, which are capital intensive. The size and flow of financial resources to agriculture,both in terms of investment and working capital have shrunk significantly. Despite the stipulation of sub-targets for agriculture at 18 per cent under priority sector credit has not flowed to the desired extent. (Paragraph 3.48) It is clear from the report that deficiencies have been well identified yet no action has been taken to rectify the situation. This has happened in spite of the fact thatwithin India there are many structures like the National Bank for Agriculture and Rural Development (NABARD) to support agriculture but their performance has been minuscule compared to the size of the problem.

beneficial effects on the economy through the multiplier. Such spending gives an impetus to economic growth and output. Keynes gave as examples of commercially wasteful expenditure the building of pyramids, or digging for monetary gold only to bury it in the vaults of Fort Knox. Gold mining gave him the opportunity to compare that activity with digging holes, burying bank notes and, on strict private sector principles, digging them up again.

Conclusions
What is proposed here is a large possibly wasteful investment in agriculture for the ofcultivating aridland. purposeparticularly In this paper the arguments in favour of specific incentives for agriculture are somewhat weak. Details of the need for growth in agriculture have not been enteredinto as they arenot sufficiently known by this writer.However the general macroeconomic concepts are sufficiently clear. *What strongly disputed is the notion that is all aspects of public investment and fiscal deficits are unwise. It is readily acknowledged that governments do not have the ideal system for ensuring that funds so disbursed will be utilised optimally; but that proposition in no way supports the argument that fiscal deficits are necessarily bad. It is arguablethat in any society progress can only happen if certain investments, on a conventional calculation, will be profitable. But conventional profitability is not the sole test for sound investment. Economists have often acknowledged that social profits do not conform to conventional profits. Furtherit is well known that social profits are extremely difficult to calculate. The fact that they are elusive is however no logical basis for ignoring them. It is argued here that in India there are no institutions to compute or manage credits to the agricultural sector. It is proposed that this should not be an insurmountable hurdle to redirecting credit. The constant bugbear of fiscal deficits has blinded us from a clear vision of what needs to be done. That these deficits are borne in the first instance by the government is not surprising. After all the government is only the collective carrier of a burden that effectively falls on its people. [13 Address for correspondence: Sjmulji@aol.com

Proposed Financial Structure

It seems logical that the government should use the institutions already established and the demand of the financial markets to greatly expand credit to the agricultural sector. It is therefore proposed that (1) NABARD should be the primary tool. First, its equity capital should be increased from Rs 500 crore to Rs 5,000 crore immediately with the intent of expanding equity to Rs 50,000 crore in a 10-year period. The art of convincing financial markets of the government's determination is not by small marginal increases, which can be overwhelmed by other financial statistics, but by committing itself to substantial sums that can be easily visible. (2) Secondly NABARD should be allowed to issue 30-year maturity bonds guaranteed by the government,just as rupee notes issued by the Reserve Bank are presently guaranteed by the government. The rationale for 30-year bonds is that this fulfils the need for long-term finance for agriculture; furtherit completes and develops the bond marketin Indiaby ensuring a security thatmeets the demandof saversandpension funds. Thirdly, it allows the government to provide a bond with an interest rate that would be justifiably higher than that provided by normal government bond issues. (3) The rate of interest on a 30-year bond would justifiably be around 10 per cent. It should be freely transactedin the capital markets and such an instrument would be popular both in the retail market and in commercial markets. It is an axiom of Keynesian logic that money spent even if it is wasted can have

1466

Economic and Political Weekly

April 12, 2003