Tuesday, October 6, 2009

Structure of Growth: A short note

- Alex M Thomas (M Phil Economics)

Today, economists seem to be more concerned about the rates of growth rather than the structure of growth itself, which is a cause for concern. This note expresses this concern in brief.  

Achieving rates of growth of 6% or 9% can take place through multiple routes. The GDP growth rate is a summation of the sectoral growth rates of agriculture, industry and services. Consequently, a high GDP growth rate could be the result of high growth in services coupled with very low growth in agriculture. Should this kind of growth be encouraged? After all, around 60% of Indians are employed in agriculture!

Growth in GDP can take place because of increased profits (owing to increased sales) in the luxury goods sector. In capitalist as well as in mixed economies, there is an immanent tendency towards investment in sectors producing luxury items. Moreover, in India, owing to the huge population, luxury products will continue to have a large market in absolute terms. In contrast, the livelihood of majority of the people in this country is dependent on wage goods (in other words, necessaries). And it is food, the output of the agricultural sector that forms the most important constituent of wage goods.

GDP growth can also take place owing to an increase in profits or wages or both. Sustainable growth takes place only when both profits and wages are rising. However, as it is well established in the literature, there is a conflict between the social classes to whom these earning accrue – the capitalists and the labourers. Hence, arises the need for intervention in the institutions/mechanisms that facilitate these earnings- property rights, labour laws, inflation indexed wages, productivity earnings, infrastructural facilities, credit facilities, etc.  

Lastly, the employment in India can be broadly divided into organised and unorganised employment. According to the NSS survey 1999-2000, around 92% of the Indian workforce (around 370 million workers) is employed in the unorganised sector. Therefore, any macroeconomic model/analysis of India which does not take into consideration the informal sector explicitly is highly incomplete (or even erroneous).

To conclude, GDP growth can show hi-gh rates due to a variety of reasons. It is pertinent that economists analyse the structure of growth alongside the high rates, in order to channelise this growth in accordance with the social commitments like reduction of poverty, providing a better standard of living, etc. 

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