After months of denial, the government has finally come to terms with the hard reality that India may also be hit by the global recession. Growth projections for 2008-09 have gone below 6% and prospects for 2009-10 appear bleak each passing day. A much-needed fiscal stimulus package has been announced belatedly. However, even this has failed to take into account the reality of the current crisis.
This reality has to do with the nature of the labour market, which is overwhelmingly informal. Also, a significant part of the labour in the organized sector is employed as informal workers.
A recent report by the National Commission for Enterprises in the Unorganized Sector (Nceus) shows that 47% of all workers in the organized sector are working as informal workers. Informal sector workers account for almost 92.4% of all labourers in the economy. It is these workers who are fired first at the time of crisis such as the current one.
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Accounting for 50.6% of the GDP in 2004-05, a large majority of unorganized enterprises have little access to credit from institutional sources. Flow of bank credit to small-scale industries (SSI) and allied sectors fell from 15.42% of gross bank credit in 1990-91 to 6.34% in 2006-07.
Further break-up of the credit to industries shows that even though large industries and SSIs account for equal share of industrial production (50% each), credit flow to large industries has been 31% compared with only 7% to SSIs. Including all sources of institutional credit, the percentage of unorganized sector enterprises availing such credit is less than 10%. A large majority still depend on family, friends and moneylenders for finance.
It is this sector which will see an immediate contraction of output, particularly those enterprises which are catering to exporters. These enterprises account for almost 30% of our merchandise exports. With export growth already on the downswing, these will be the first ones to be forced out of business with outstanding loans at high interest rates to moneylenders.
The issue is not only extending credit at cheaper rates to those who are already in the net of institutional sources but to also expand the net to those who do not have access to it. The latter part requires a policy response in making credit accessible to these enterprises. This is critical in view of the competing demand for credit from the organized sector, which is expected to corner a large part of the additional liquidity injected into the system.
Another large segment already facing a crisis is the agrarian sector. There are indications that the growth rate of farm GDP may come down to 2-2.5% from an average of 4% in the last three years. Reeling under inflation for almost a year now, farmers are also facing a downslide in prices of most commercial crops.
Despite record cotton production, farmers are facing a crisis because of a slump in global prices. This will be further aggravated by the decline in global demand for textiles in the coming months.
Similar decline in international prices for commercial crops such as oilseeds is already creating a mini rural crisis. This situation may get further aggravated by the large-scale job losses in the urban informal sector and return of migrants to the rural areas.
Coupled with a slow growth rate of real wages for casual workers, there are already signs of declining real incomes in rural areas. Unfortunately, the fiscal stimulus has little to offer for the large majority of rural masses.
The need of the hour is a fiscal stimulus which will cater to these vulnerable sections of society. While this may not be at the cost of the new economy sectors such as housing, real estate and aviation, it is clear that the crisis in the unorganized sector and the agrarian economy is as much in need of a fiscal stimulus as the other sectors because of the sheer size of the workforce engaged in these and the already vulnerable situation of these sectors. This is certainly important to ensure that domestic demand does not fall.
One way of doing it would be to increase fiscal spending directed towards ensuring basic security of employment and income to these sectors by expanding the scope of public works. This may involve relaxing the condition of only 100 days of work for households in the National Rural Employment Guarantee Act to extending the coverage of the programme to urban areas.
Needless to say, a massive dose of public expenditure in infrastructure creation, which is also employment-intensive, is the need of the times. But this is also the right time to invest in social sector expenditures such as education and health.
There cannot be a better time to spend on education by enacting the Right to Education Bill and expanding the scope and coverage of nutrition support programmes such as the midday meal and Integrated Child Development Services scheme.
Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi. Farm Truths looks at issues in agriculture and runs on alternate Wednesdays. Respond to this column at email@example.com