impact of the financial crisis on the poor in india some initial perspectives

8/12/2019 Impact of the Financial Crisis on the Poor in India Some Initial Perspectives

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Global Financial Crisis:Impact on Indias Poor

Some Initial Perspectives

Rajiv Kumar

Bibek Debroy Jayati Ghosh

Vijay Mahajan

K. Seeta Prabhu


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2 Global Financial Crisis: Impact on Indias Poor

Disclaimer: The views in the publication are those of the authorsand do not necessarily reect those of the United NationsDevelopment Programme.

Copyright2009

by the United Nations Development Programme (UNDP) India The articles can be reproduced in whole or part with relevantacknowledgement to UNDP and the authors in the followingmanner:

Name of Author, Year of Publication, Published by UNDP India.


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Contents

Global Financial Crisis: Impact on Indias Poor 5Some Initial Perspectives

Global Financial and Economic Crisis: Impact 7on India and Policy ResponseRajiv Kumar

Growth Downturn and Its Effects 14Bibek Debroy

Global Crisis and the Indian Economy 25 Jayati Ghosh

Impact of the Economic Downturn on Non-farm

Sector Workers 36Vijay Mahajan

Impact of Financial Crisis on Indias March Towards MDGs 45K. Seeta Prabhu

About the authors 56


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Global Financial Crisis:Impact on Indias PoorSome Initial Perspectives

As part of contribution by the United Nations DevelopmentProgramme (UNDP) to the ongoing dialogue on the impactof the global nancial crisis, we present in this collectionsome initial perspectives on its impact on the poor inIndia, written by some of the countrys leading economistsand analysts.

Rajiv Kumar presents a succinct analysis of the channelsthrough which the nancial crisis has impacted the Indianeconomy while Bibek Debroy examines the impact of theslowdown in economic growth at a disaggregated level

both by sectors and by regions. Jayati Ghosh analysesthe impact of the crisis on agriculture, migrants and home-based workers. Vijay Mahajan unfolds the differential impactof the nancial crisis on goods and services consumed bythe masses and the elite. K. Seeta Prabhu from UNDP Indiahighlights the likely impact of the nancial crisis on theachievement of the Millennium Development Goals andon human development.

In keeping with UNDPs perspective, these papers focuson people, particularly the poor: in agriculture, inthe informal sector, in non-farm activities; and on thegoods and services they consume. They delineate theconundrums emerging from the development patternfollowed, thus far, and point to the need for policy actionsto transform the situation to one of enlarging the rangeof choices and opportunities for the vulnerable sections ofthe population.

We hope this compilation of viewpoints from independentanalysts will facilitate debate and the emergence of viablesolutions that strengthen the linkages between economicgrowth and human development.


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Global Financial andEconomic Crisis: Impact onIndia and Policy Response

Rajiv KumarDirector & Chief Executive,

Indian Council for Research on International

Economic Relations (ICRIER), New Delhi

The impact of the global crisis has been transmitted to theIndian economy through three distinct channels, viz., thenancial sector, exports, and exchange rates. On the nancialfront, the Indian banking sector was not overly exposed to thesub-prime crisis. While exports of both goods and services,still account for only about 22 percent of the Indian GDP,their multiplier effect for economic activity is quite large asthe import content is not as high as for example in the case ofChinese exports. Therefore, an export slump will bring downGDP growth rate in this year. The third transmission channelis the exchange rate, as the Indian Rupee has come under pressure.

In terms of policy response, there is not much room for furtherscal policy action as the consolidated scal decit of thecentral and state governments in 2008-09 is already about11 percent of the GDP. Any further increase in scal decit toGDP ratio could invite a sharp downgrading of Indias creditrating and a loss of business condence. It is more importantto focus policy attention on removing some of the manyremaining structural bottlenecks on raising the potential GDP

growth rate. Essentially this will imply efforts at improving theinvestment climate both for domestic and foreign investors;removing the entry barriers for the entry of corporateinvestment in education and vocational training; improvingthe delivery of public goods and services; and expanding physical infrastructure capacities including a major effort atimproving connectivity in the rural regions.

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Introduction The Indian economy looked to be relatively insulated fromthe global nancial crisis that started in August 2007 whenthe sub-prime mortgage crisis rst surfaced in the US. Infact the RBI was raising interest rates until July 2008 withthe view to cooling the growth rate and contain inationarypressures. But as the nancial meltdown, morphed in to aglobal economic downturn with the collapse of LehmanBrothers on 23 September 2008, the impact on the Indianeconomy was almost immediate. Credit ows suddenlydried-up and, overnight, money market interest ratespiked to above 20 percent and remained high for the nextmonth. It is, perhaps, judicious to assume that the impactsof the global economic downturn, the rst in the center of

global capitalism since the Great Depression, on the Indianeconomy are still unfolding.

The severity and suddenness of the crisis can be judgedfrom the IMFs forecast for the global economy. For therst time in 60 years, the IMF is now forecasting a globalrecession with negative growth for world GDP in 2009-10. The IMF has revised its forecasts downwards thrice since

July 2008, and it is not yet certain that this will be the lastrevision. The WTO has predicted that world trade, whichhas virtually collapsed in the second half of 2008 is likelyto decline by as much as nine percent in 2009-10. We havealready seen exports from worlds major exporters, likeGermany, Japan and China, plummeting by more than 35percent in the last quarter of 2008. The sharp decline ineconomic activity is despite the large stimulus, estimated

at more than USD3 trillion, that OECD economies haveput in place. Yet the bad news does not stop. The worstdownside scenario could be for the US economy beingtrapped in a Japan like L shaped recovery for the nextfew years. This will imply a further decline in world exportsand softening of global commodity prices. In turn, it will


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result in sharp slowdown in world exports and result inwidespread unemployment and social stress in majorexporting economies. This could well generate irresistibleprotectionist sentiments and if governments do succumbto these, it will unleash the dreaded downward cycle whichcould see the global economy plunging over the precipiceinto a prolonged recession. It is, therefore, prudent not to

underestimate the severity of the present crisis.

Impact Global Crisis on Indian Economy The impact of the global crisis has been transmitted to theIndian economy through three distinct channels, viz., thenancial sector, exports and exchange rates. The nancialsector including the banking sector, equity markets,

external commercial borrowings and remittances hasnot remained unscathed though fortunately, the Indianbanking sector was not overly exposed to the sub-primecrisis. Only one of the larger banks, ICICI, was partly affectedbut managed to thwart a crisis because of its strong balancesheet and timely action by the government, which virtuallyguaranteed its deposits. The equity markets have seen anear 60 percent decline in the index and a wiping off of

about USD1.3 trillion in market capitalization since January2008 when the Sensex had peaked at about 21,000. Thisis primarily due to the withdrawal of about USD12 billionfrom the market by foreign portfolio investors betweenSeptember and December 2008. The foreign investorswithdrew these funds in order to strengthen the balancesheet of their parent companies. Commercial credit, bothfor trade nance and medium-term advances from foreignbanks has virtually dried-up. This has had to be replacedwith credit lines from domestic banks but at higher interestcosts and has caused the Rupee to depreciate raisingthe cost of existing foreign loans. Finally, while the latestnumbers are not yet available, remittances from overseas

Impact on India and Policy Response 9


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nullied the benets from the decline in global oil and gasprices and increased the cost of commercial borrowings. The weaker Rupee should encourage our exporters andit is possible that with imports declining as sharply asexports, the countrys trade decit may actually improve inthe short-run and the external sector balance may remainstable and not pose any major policy issue.

Overall, it would be fair to say that the timing of the externalshock from the global economic downturn has beenrather unfortunate. Coming right on the heels of a policy-induced contraction in economic activity, its initial impact,as reected in the third quarter GDP growth falling to 5.3percent and the steep decline in exports, has been perhapsexaggerated. This negative impact has been, to an extent,

ameliorated by the quick policy response both by the RBIand the Central government. The RBI has infused aboutUSD80 billion, as additional liquidity by cutting the CRR,lowering the SLR and unwinding the MSS. The RBI has alsosignaled its expansionary preference by cutting its reporate, at which it lends funds to commercial banks from nineto ve percent in less than six months. The reverse-repo ratehas also been brought down to 3.5 percent to discourage

banks from parking overnight funds with the RBI. Threescal stimuli have been announced between November2008 to February 2009. These amount to about 1.3 percentof the GDP. However, to these stimulus packages weshould also add the scal outlay of measures announced inthe 2008-09 Budget in February 2008. These included somemeasures that implied a hefty transfer of purchasing powerto the farmers and to the rural sector in general. Theseincluded, farm loan waivers, funds allocated to the NationalRural Employment Guarantee Scheme (NREGS), BharatNirman (targeted for improving rural infrastructure), PrimeMinisters Rural Road Programme, and a large increase insubsidies on account of fertilizers and electricity supplied



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to the farmers. All this measures, taken more out of politicalconsiderations and not in response to the global crisis,have, nevertheless, helped to shore up rural demand forboth consumer durables and non-durables.

Some of us at the ICRIER have used a model of leadingeconomic indicators to forecast GDP growth for India 1.We have modied the model to not only incorporatethe impact of the external shock provided by the globaleconomic downturn but also to take in to account themitigating impact of the monetary and scal measurestaken by the government. According to this model, Indianeconomy will grow by about 6.3 percent in 2008-09. TheEconomic Advisory Council to the Prime Minister has nowalso brought down its estimate of 2008-09 GDP growth to

6.5 to seven percent and not 7.1 percent as given by CSOin its advanced estimates and used for budget formationby the nance ministry. The GDP growth is likely to furtherdecline to between 4.8 to 5.5 percent in 2009-10. Otheragencies like the IMF, the World Bank and the ADB have alsoestimated Indian GDP growth in 2009-10 at similar levels intheir latest forecasts released in March 2009. Thus, Indianeconomy will come down from the nine percent trend that

it had achieved in the last four years. The growth targets forthe 11th Five-Year Plan will also have to be surely lowered.

Policy Response There is not much room for further scal policy actionas the consolidated scal decit of the central and stategovernments in 2008-09 is already about 11 percent of

the GDP. This is likely to rise further as further necessarypublic expenditures are announced in the next budgetand economic activity slows down. Any further increase in

1 Rajiv Kumar, et al, The Outlook of Indian Economy, ICRIER WorkingPaper No. 235


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scal decit to GDP ratio could invite a sharp downgradingof Indias credit rating and a loss of business condence.With ination down at less than one percent and likely toremain below ve percent in the coming months, there isroom for bringing down the repo rate further. However,the more important issue is to try and induce commercialbanks to bring down their lending rates as these currently

remain at around 10 percent even for their primeborrowers. This is largely a result of the crowding outeffect of the large government borrowing programme. To address it, the government may have to considermonetizing its borrowing requirement so that liquidity isnot squeezed out of the system. This poses the danger ofstoking ination in the medium-term but perhaps moreimportantly the breakdown of macro-prudential disciplinethat has been achieved after considerable effort. It wouldseem, therefore, that governments options for takingcounter cyclical and reationary measures in the shortterm are rather limited.

In our view, it is more important to focus policy attentionon removing some of the many remaining structuralbottlenecks on raising the potential GDP growth rate.

Essentially, this will imply efforts at improving theinvestment climate both for domestic and foreigninvestors; removing the entry barriers for the entry ofcorporate investment in education and vocational training;improving the delivery of public goods and services andexpanding physical infrastructure capacities including amajor effort at improving connectivity in the rural regions. These measures will constitute the package of secondgeneration of structural reforms and will enable the Indianeconomy to climb out of the downward cyclical phase andthen to extend the upward phase for a longer period thanwas achieved in the last cycle.



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Growth Downturn and ItsEffects

Bibek DebroyProfessor,

International Management Institute, New Delhi

It is widely accepted now that the slowdown in the globaleconomy has impacted the Indian economy though notas badly as those in countries which are more globallyintegrated. Impacts in India are spatially as well as sectorallydifferentiated. Despite a variety of media reports about job

losses, there is little empirical evidence of this having occurredoutside of the export sector, meaning the export of goodssector. It should also be noted that export growth is not evenlyspread throughout the country, but is rather concentratedin clusters where the impact of job loss is felt more acutely. At this stage, it is still unclear as to how temporary are these job losses. The media reports about job losses in IT, ITES andnancial services are, quantitatively, not that signicant.

On the positive side, the rural sector, particularly in rice andwheat-growing irrigated areas, seems to have offered somekind of a cushion to India in the growth slowdown . Hopefully,the present episode will lead to policy changes that providenecessary insurance cushions, collectively or individually.

Introduction There is no longer any support for the view, initially putforward in September 2008, that the Indian economy isdecoupled from global shocks, or the related view that anancial sector crisis does not impact the real economy.While in a longer-term sense, growth rates in emerging

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market economies may have become delinked somewhatfrom growth rates in developed economies (especially afterthe east Asian nancial crisis in 1997-98 and the subsequentrecovery), this does not necessarily hold for cyclical effects.

Indias growth picked up in 1992-93 and then moved toa higher trajectory of around 8.5 percent from 2003-04.Consumption, investment and exports have driven thisgrowth. And this growth also occurred when the externalenvironment was benign. If the external environment nowturns malign and export growth becomes zero or negative,this cannot but have an effect on GDP growth.

The most recent official data (2006-07) shows exports ofgoods as 14 percent of GDP and exports of goods andservices as 21 percent of GDP. Since 2002-03, exports of

goods have grown by more than 20 percent in dollar terms,crossing 30 percent in 2004-05. The most recent exportgures (goods alone 2) show that for the period April 2008to January 2009, exports have grown by 13.2 percent in USdollar terms. What is more pertinent, however, is what hashappened since September 2008. In January 2009, exportsdeclined by 15.9 percent, compared to January 2008.

There continue to be differing points of view on threeissues, which are related. First, how bad has the growthslowdown been in 2008-09? Second, owing from the rst,what will be the growth record in 2009-10? Third, whenwill the recovery begin?

Growth Projections

Government projections still talk about 7.1 percent realgrowth in 2008-09 and expect seven percent growth in2009-10. The interim budget presented on 16 February2009 spoke of a nominal GDP growth of 11 percent in

2 January 2009

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2009-10. However, the CSO Q3 2008-09 GDP gures showgrowth of 5.3 percent. What is also pertinent for theseQ3 gures is a growth of 17.3 percent in, the categorycommunity, social and personal services, reecting theimpact of the Sixth Pay Commission. Were this effect to benetted out, growth would probably be of the order of 4.5percent. Therefore, contrary to government projections,

most outside estimates are based on a growth rate ofbetween 4.5 and ve percent in the second half of 2008-09, a rate of growth that continues through the rst half of2009-10 too. There is also some consensus that there willbe recovery in the second half of 2009-10. That does not,however, mean recovery to the dizzying 8.5 percent heights.While individual projections differ, most independentforecasts would be something like ve percent for the rsthalf of 2009-10 and six percent for the second half, with 5.5percent for the entire year. The governments expectationsof seven percent are primarily based on the three scalstimuli packages and monetary policy loosening workingtheir way through.

From the point of view of the poor, the impact of thenancial crisis should not be looked at in isolation. We also

need to factor in the food and fuel crises that preceded it.Indias ination rate, based on the wholesale price index(WPI), is declining and the point-to-point WPI-basedination rate may soon turn negative in early April 2009.However, different CPI (consumer price index) basedination indicators are available for January and February2009 and these still show point-to-point ination rates inexcess of 10 percent. While CPI-based ination is also onits way down, the major reason for a difference betweenWPI and CPI trends is the relatively higher weight in thelatter to food products and high food ination.


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Effects of the SlowdownIn general, we know the kind of effects which a slowdown ingrowth brings about. Firstly, exports, foreign investments(direct and portfolio) and ODA ows suffer, reected inslower growth. Secondly, this means poverty-reductioneffects of growth also suffer. Thirdly, government revenueis adversely affected, limiting the scal space available togovernments. Unlike developed countries, the base fortaxes, especially indirect taxes, is narrower in developingcountries and tax revenue drops relatively more whenthere is a slowdown. The Centres scal decit is likely to be6.5 percent of GDP in 2009-10, with the states contributinganother 3.5 percent. Even without including off-budgetitems (such as oil and fertilizer bonds), this illustrates the

limited scal space the government possesses.Fourthly, there are differential spatial effects, since thosewho are more integrated and connected with global andnational markets suffer more 3. The rural sector, particularlyin rice and wheat-growing irrigated areas, seems to haveoffered some kind of a cushion to India in the growthslowdown. The Rural Marketing Association of India

conducted a study, between July and December 2008,on Indias rural markets and found no evidence (at leastduring this period) of a slowdown, particularly amongthose who earn a living from agriculture. There was amarginal impact among those who earn a living from tradeand manufacturing.

Jobs Lost, Jobs Gone The last rm employment elasticities we have are thosethat were worked out by C. Rangarajan when he was

3 Such differential geographical impacts have been documented ineast Asia, after the nancial crisis of 1997-98.



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the chairman of the Prime Ministers Economic AdvisoryCouncil. Using NSS data for the period 1999-2000 to 2004-05, the derived employment elasticities were 1.52 foragriculture, forestry and shing; 0.34 for manufacturing;0.88 for construction; 0.59 for trade, hotels and restaurants;0.27 for transport; storage and communications; 0.94 fornance, insurance, real estate and business services; and

0.48 for total employment.As a very rough indicator of employment effects of theslowdown, one can make some rough calculations,contrasting Q2 of 2008-09 (before the external shock hit)with Q3 of 2008-09.

Even before the external shock, GDP growth had slowedbecause of the monetary tightening. Q2 of 2008-09

registered growth of 7.6 percent and at the aggregatelevel, this would have meant a creation of 18.2 million jobs.A decline in growth to 5.3 percent means a creation of 12.7million jobs. As a counter-factual, 5.5 million jobs thatwould otherwise have been created, will now no longer becreated.

By the same token, the decline in agriculture in Q3 is

marginal. But in Q2, agriculture grew by 2.7 percent andthis would have led to the creation of 10.3 million jobs.Manufacturing declined by 2.2 percent in Q3, contrastedwith an increase of ve percent in Q2. That increase inQ2 would have meant creation of 800,000 million jobs,contrasted with a possible job loss of 400,000 million inQ3. Construction growth declined from 9.7 percent in Q2to 6.7 percent in Q3, suggesting 500,000 million fewer jobcreation. Similar gures are 1.3 million for trade, hotels,transport and communication. (Given the back-of-the-envelope kind of way these numbers have been derived,one should not read too much into the precise numbers.)

There is a difference between existing jobs being lost and


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employment growth that would otherwise have occurred,not happening. Consequent to the slowdown, mostattention has focused on the former. However, the latteris no less important and, quantitatively, is more signicant. The 11th Five-Year Plan (2007-12) document mentionsthat from 2000 to 2005, the incremental employmentgrowth has been 46.72 million, a not insignicant gure

over a period of ve years. It has to be noted that most ofthis growth has occurred in the unorganized sector. Of that46.72 million, 8.84 million jobs were created in agriculture,8.64 million in manufacturing, 6.44 million in construction,10.70 million in trade, hotels and restaurants, 4.04 millionin transport, storage and communications, 3.12 million innancial, insurance, real estate and business services and4.59 million in community, social and personal services 4.

Other than agriculture, the bulk of employment creationsince the reforms of the early 1990s has occurred inmanufacturing, construction, trade, hotels and restaurantsand transport, storage and communications. It is, therefore,in these sectors that the growth slowdown hurts the most.Financial services may be extremely visible, but particularlyif real estate is excluded, this sector does not account for a

signicant share of employment creation 5.

States with Accelerated Growth Suffering?In terms of the impact disaggregated by state, thefollowing proposition can plausibly be advanced. Thegrowth pick up in the 10th Five-Year Plan (2002-2007) over

4 Agriculture is somewhat different and the problems concerningagriculture have nothing to do with the global slowdown, althoughglobal prices and trade policy do have indirect impacts. Essentially,these problems with agriculture underline a failure to introduceassorted reforms in the rural sector.

5 Much the same can be said about the preoccupation with IT andITES, or H1-B visas and slowdown in out-sourcing.



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the Ninth Five-Year Plan (1997-2002) varied from state tostate. Among non-special category Indian states, this pickup in growth was especially marked in Andhra Pradesh,Bihar, Goa, Gujarat, Haryana, Karnataka, Madhya Pradesh,Maharashtra, Punjab, Rajasthan, Tamil Nadu, UP and WestBengal. There was no signicant increase in the growthrates of the other states.

Therefore, if there is a growth slowdown, states withaccelerated growth should suffer more. This needs to bequalied with the composition of that growth, since ifgrowth is primarily based on agriculture, the state tendsto be relatively more insulated from externally-triggeredslowdowns. By this token, the adverse employment effectshould be concentrated more in states like Andhra Pradesh,

Goa, Gujarat, Haryana, Karnataka, Maharashtra, Punjab, Tamil Nadu and UP. This is an adverse employment effectinterpreted in terms of a slowdown in fresh employmentcreation, as opposed to a loss of existing jobs.

There are rough estimates of direct employment of 6.5million in exports, with perhaps 15 million if indirectemployment is included 6. Based on a survey undertakenby the labour and the commerce ministries, around onemillion jobs may have been lost, especially in sectors likegems and jewellery, garments, engineering goods (cycles,hand tools, etc.), chemicals, leather and handicrafts. Thisgure can be compared with the ILO estimate of 20 million job losses in China, due to itss greater export orientation.An independent, Federation of Indian Export Organizations(FIEO) survey suggests job losses of 10 million. Given what

is known about employment in exports, this may be ratherwide of the mark, as was an earlier ASSOCHAM, an industry

6 There are no rm estimates on exports segregated by states. Norare there any rm estimates of employment generation in theexport sector i.e., exports of goods.


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chamber, report (eventually withdrawn) to the effect thatIndian manufacturing would shed 25 percent jobs acrossthe board as a result of the slowdown. One million seemslike a more realistic gure, at best touching two million. Itshould also be noted that export growth is not evenly spreadout throughout the country, but is rather concentrated inclusters, e.g.: Surat (diamonds), Panipat (blankets), Tirupur

(hosiery), Agra (leather), Ludhiana (woolen garments),Jaipur (hand-printed textiles), Pune (food processing),Ahmedabad (pharmaceuticals), Ambur (leather), Bangalore(machine tools) and Chennai (leather).

Of these, the only instances where there seem to be rm joblosses are in Surat and Ludhiana. Without downgrading theimportance of job losses, one must remember that industry

body estimates of recession may tend to be over-stated, in anattempt to obtain scal concessions from the government.In addition, a second problem concerns the nature of thedownturn. In the period immediately following September2008, there was also a credit problem, spilling over into theexport sector. This has eased off somewhat and needs to bedistinguished from a demand contraction.

Job Losses: Temporary or Permanent?Conceptually, Indias exports depend on the supply-side, the demand-side and the exchange rate. It has alsobeen argued that since Indias exports are in low valuesegments, income reduction in developed countries mightactually increase the demand for exports from India. Thisis an argument that might, for instance, be advanced for

garments. A global demand contraction may also be lessimportant than price un-competitiveness caused by anappreciation in the value of the rupee 7.

7 Post crisis, the rupee has depreciated vis--vis the US dollar.



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Given the fragmentary nature of the information, thebest that one can do is to depend on gures like 20,000construction workers who have lost their jobs in the Gulfand job losses of 40,000 for engineering, 100,000 for gemsand jewellery and 500,000 for garments. Of these, theengineering job losses are spread throughout India; thegems and jewellery ones are especially located in Gujarat

(Surat, Ahmedabad); and the garments losses are locatedmostly in Ludhiana and Tirupur, in that order of importance.At this stage, it is still unclear as to how temporary these job losses, as opposed to more permanent.

Jobs and the Unorganized SectorOverall, these job losses have characterized the

unorganized sector. This should not be taken to meanthat the enterprise impacted is itself in the unorganizedsector. Without getting into these niceties of distinctionsbetween unorganized and informal, it can be notedthat somewhere between 40 and 45 percent of Indiasexports originates in the small-scale sector, whicheffectively means the unorganized or informal sector.And even when an enterprise is in the organized sector,

it may well have informal sector workers, i.e., workers whopossess no formal contracts, since employment is oftendone through contractors. Initially, downsizing adverselyaffects those who are employed in unorganized enterprisesand those who are employed in organized enterprises, butwhose employment contracts are informal. This is true asa conceptual principle and is also validated by anecdotalaccounts of what has been happening.

Social Security/Safety Nets and MigrationA key characteristic of informal sector employment is lackof protective labour legislation, including that on social


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security. Social security, of course, may mean differentthings, e.g., unemployment insurance, old-age pensions,medical cover, etc. Of the present work-force of around500 million, not more than 40 million are covered bysocial security, whatever denition one uses. As of now,beyond social security provided by the community or thefamily, workers who have lost jobs because of the growth

downturn have no access to any social security.Indeed, the only form of social security that exists so faris through the National Rural Employment GuaranteeScheme (NREGS), as the more comprehensive socialsecurity scheme for unorganized sector workers has notyet got off the ground. In this context, what needs tobe highlighted is that most workers who have lost their

jobs are migrants from other states. Inter-state migrationhas occurred for many years 8, as states have differed ineconomic performance and geographical areas wherethere has been greater demand for labour have notnecessarily been areas where there has been the supplyof labour. Inter-state migration occurs notably from Bihar,UP, West Bengal and Orissa to states such as Karnataka,Andhra Pradesh, Tamil Nadu, Maharashtra and Gujarat,

and encompasses semi-skilled and unskilled labour in theexport sector.

Other than the obvious negative effect on remittances andconsumption expenditure, the loss of export-related jobsmeans a return ow of migrants to their home states. Thereare anecdotal accounts of this already having occurred forBihar and eastern parts of UP, related to a downturn in the

diamonds sector. If the growth slowdown continues for acouple of years, this reverse migration might also extend toconstruction, trade, hotels and transport (though to date

8 The Green Revolution in Punjab and Haryana was driven bymigration from UP and Bihar.



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there is no evidence of this occurring). Anecdotal accountsso far point only to a loss of employment in the exportgood sector; a sector where NREGS does not provide animmediate safety net. Returning migrants are not alwaysclassied as rural workers a prerequisite for NREGS and,in addition, there can be administrative delays in issuingthe required NREGS job cards.

Opportunities from CrisisIn conclusion, there is does seem to be a consensus thatIndia has not suffered as much as other countries andthat the growth downturn is indeed no more than that -- falling far short of a recession. The recovery in India isalso certain to be faster. In the years of high growth, there

was room to ensure that fallback cushions for a possibleperiod of downturn were put in place. That did not quitehappen, since there was an implicit complacency that thegrowth story would continue. However, globalization andintegration also means greater exposure to uncertaintyand external shocks. Hopefully, the present episode willlead to policy changes that provide necessary insurancecushions, collectively or individually. And it is far better

that this lesson is learnt when growth declines from 8.5 to5.5 percent rather than from 8.5 to zero percent.


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Global Crisis and the IndianEconomy

Jayati GhoshProfessor,

Jawaharlal Nehru University, New Delhi

Recent high economic growth in India was fundamentallydependent upon greater global integration and related tothe deregulation of nance combined with scal concessionsthat spurred a consumption boom among the top twodeciles of the population, especially in urban areas, even asdeationary scal policies, poor employment generationand agrarian crisis kept mass consumption demand low. Theimpact of the crisis on agriculture is much more severe thanhas been recognized. Exposure to global price volatility wasassociated with a growing reliance on private debt, becauseof the lack of extension of institutional credit, coupled withgrowing inability to meet debt service payments because of

the combined volatility of crops and prices. Official sourcessuggest that there has already been a sharp fall in employmentin the export-oriented sectors. Many newly unemployed aremigrant workers, often short-term migrants with casualcontracts whose very existence tends to be ignored byofficial statistics. As opportunities for paid employment havedwindled, even during the boom, home-based subcontractingactivities to women workers, or work in very small units thatdo not even constitute manufactories, and often on piece ratebasis and usually very poorly paid and without any knownnon-wage benets, substituted to some extent.

Foodgrain prices have gone up the most, by more than 10 percent in the year until March 2009. This obviously affects

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household budgets, especially among the poor for whomfood still accounts for more than half of total householdexpenditure. Clearly, much more creative and imaginative policy responses are required, in terms of changing directionsof investment and consumption in the home market toemphasize wage-led growth, diversifying exports andgenerally making moves designed to turn economic adversity

to advantage.

IntroductionIt took some time for policymakers and analysts in India torecognize both the speed and the intensity of the effectsof the global crisis on India. Indeed, there were argumentsthat India, along with China, is decoupled from the

global system and capable of becoming an autonomousgrowth pole, based on its recent high growth from a lowper capita income base, and a young population leadingto falling dependency ratios. In addition, the strongdomestic nancial sector was also seen to be immune toshocks from the international nancial system.

However, it turns out that this presumption was wrong,and even involved a faulty assessment of the previousboom. Recent high economic growth in India wasfundamentally dependent upon greater global integrationand related to the deregulation of nance combined withscal concessions that spurred a consumption boomamong the top two deciles of the population, especiallyin urban areas, even as deationary scal policies, pooremployment generation and agrarian crisis kept mass

consumption demand low. The substantial rise in protshares in the economy and the proliferation of nancialactivities combined with rising asset values to enablea credit-nanced consumption splurge among the richand the middle classes, which in-turn generated higher


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rates of investment and output over the upswing. Thiswas, therefore, quite similar to speculative bubble-ledexpansion in several other countries in the same period. This also made the growth process more vulnerable tointernally and externally generated crises.

By the middle of 2008, even before the global crisis reallyhit India, this process too was reaching its limits. The crisis

made matters much worse by causing sharp declines inexports of manufactures and reversal of capital ows suchthat both current and capital accounts of the balance ofpayments have worsened. The macro issues have beenmuch commented upon, but the specic impact uponcertain groups has been much less widely noted. The crisishas been accompanied by changes in employment andrelative prices that have adversely impacted especially

upon three sections of the population that were alreadyvery vulnerable: cultivators, migrant workers and home-based women workers. In addition, it has sharply affectedfood insecurity which was already a problem in thecountry.

Cultivators

The impact of the crisis on agriculture is much more severethan has been recognized. Cultivators in India have alreadybeen through more than a decade of agrarian crisis, whichpersisted even through the period of rising internationalcrop prices. The problems of farming in India are bothdeep and varied. They include weather problems such asless reliable monsoons, more frequent droughts or oods,soil degeneration, lack of institutional credit and insuranceleading to excessive reliance on private moneylenders,problems in accessing reliable and reasonably pricedinput, difficulties in marketing and high volatility of cropprices.

Global Crisis and the Indian Economy 27


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Except for the rst set, these are all related to publicpolicies from the early 1990s onwards, that systematicallyreduced the protection afforded to farmers and exposedthem to import competition and market volatility; allowedprivate proteering in agricultural input supply and croppurchases without adequate regulation; reduced criticalforms of public expenditure; tried to cut subsidies by

increasing the prices of important inputs like fertilizerand water and electricity rates, ran down or destroyedimportant public institutions that have direct relevance forfarming, including public extension services and marketingarrangements; and did not adequately generate othernon-agricultural economic activities.

At the same time that various forms of public protection

for cultivation were being reduced, trade liberalizationmeant that Indian farmers had to operate in a highlyuncertain and volatile international environment. Theywere effectively competing against highly subsidized largeproducers in the developed countries, whose average levelof subsidy amounted to many times the total domesticcost of production for many crops. In addition to increasingthe risks of farming, volatile crop prices also generated

misleading price signals. Indian farmers tend to respondquickly and extensively to price signals by shifting to morehigh-priced crops. This caused large and often undesirableshifts in cropping pattern which ultimately rebounded onthe farmers themselves.

In dry land areas, traditional staple crops such as milletsand sorghum were abandoned in favour of oilseeds such

as groundnut which require more irrigation and purchasedinputs, and which have also faced major volatility in cropprices. As a result of the shift away from traditional staplegrains to cash crops, there was much greater use of a rangeof purchased inputs, including new varieties of seed andrelated inputs marketed by major multinational companies.


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Small cultivators, who took on debt (often from informalcredit sources at very high rates of interest) in order topay for these cash inputs, then found themselves in realdifficulty if crops failed or output prices remained low.

So the inevitable uncertainties associated with weatheructuations were compounded by further problems of

extremely volatile crop prices, which were no longerinversely related to harvest levels but followed aninternational pattern. Further, this dramatic volatility ofoutput prices was associated with continuously risingprices of inputs. This was especially marked because ofgovernment attempts to reduce fertilizer subsidies, andprogressive deregulation of supplies of inputs such asseeds and pesticides.

Such exposure to global price volatility was associatedwith a growing reliance on private debt, because of thelack of extension of institutional credit, coupled withgrowing inability to meet debt service payments becauseof the combined volatility of crops and prices. Farmersalready had inadequate access to institutional credit, butthings got much worse after 1993. Financial liberalizationmeasures caused a signicant slowdown in the growth ofbank credit, particularly from commercial banks to ruralareas, and a relative fall in proportion of bank credit owingto the priority sectors, especially agriculture. The impact ofthe slowdown in rural banking fell disproportionately onpoor and small borrowers.

Volatility of output prices remains a huge problem for

farmers. And the central question of the huge burden offarm debt has really not been solved, despite the loanwaiver for farmers announced in the 2008-09 Budget. This is because most farmers operate in the informal creditmarket, and go to private sources who are typically eitherrural moneylenders or input dealers. Marginal farmers,



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tenants and women farmers still remain outside the ambitof institutional credit, and most farm debt is informal. Thereal problems of rural debt cannot be addressed withoutdealing with cases of both public and private debt andrecapitalizing the moneylenders to alleviate the problemsof borrowers and keep private rural credit channelsowing.

Meanwhile, crop price volatility has become much worsein the past year, dramatically increasing the difficulties ofcash crop producers. Globally, primary commodity priceszoomed upwards in 2007 and the rst half of 2008, andthen collapsed very rapidly, thereafter. So all the pricegains of the period January 2007 to mid-2008 were wipedout by the later fall in prices. Farmers did not benet from

such a short-lived price boom, especially if they producedcash crops. Instead, they now face lower prices of theiroutput even as food prices have continued to increase. This is particularly true for cultivators of cotton andoilseeds, prices of which have crashed compared to a yearago. Cultivators who opted to sow these crops when theirprices were at their peak now face a completely differentenvironment with very different congurations of costs

and prices that could easily make the cultivation processnancially completely unviable.

Migrant WorkersOfficial sources suggest that there has already been asharp fall in employment in the export-oriented sectorslike textiles and garments and gems and jewellery, and

even in industries catering more to the domestic marketlike metal products, automobiles and construction. Manynewly unemployed are migrant workers, often short-termmigrants with casual contracts whose very existence tendsto be ignored by our official statistics. The economic boom


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of the past decade relied heavily on such workers: Not justin the sectors mentioned above but in labour-intensiveservices, such as cleaning, maintenance, private security,driving and related services. These were not simply informalactivities, many of them catered to the requirements of theexpanding corporate sector, and in effect subsidized it byproviding a cheap and exible external labour force.

Such workers are now forced either to stay in precariousconditions in the urban areas, or go back to their placesof origin villages or smaller towns. They consequentlychange from becoming providers of remittance incomesto their households, to becoming dependents of thesehouseholds, even as these households face more fragilematerial circumstances than before. Many of these

migrant workers, for obvious reasons, come from the mostdepressed and backward regions of the country, wherethere is currently little potential for productive incomegeneration. These are often also the regions of dry landagriculture, where remittance incomes play a vital role insheer survival. Unsurprisingly, they are also the regionsin which extremist Maoist activity is widely prevalent,because of the anger bred by persistent backwardness

and rising inequalities.

Home-based WorkersAs opportunities for paid employment have dwindled, evenduring the boom, home-based subcontracting activities,or work in very small units that do not even constitutemanufactories, often on piece-rate-basis and usually very

poorly paid and without any known non-wage benets,substituted to some extent. There are estimated to be morethan 15 million women workers in the unorganised sector,and more than half of them are women involved in home-based work for different types of industry, dominantly



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on a piece-rate basis. This includes zari , charkha or otherhandloom work; bindi, labels, stitching; food processing;and also potentially hazardous work involving acids andchemicals.

Surveys show that most of them are very poorly paid piece-rate workers providing specic products or intermediategoods for manufacturing industries such as textiles andgarments, engineering and chemical industries, leatherand miscellaneous production such as imitation jewelleryand petty cosmetic items. Such work typically does notget incorporated in the employment statistics which arebased on employers records. Very recent micro-evidenceconrms the poor and sometimes even deterioratingconditions of such work. Even during the boom, there was

pressure on piece rate wages because of competition fromother and newer centres of such production, both insidethe country and outside (such as from China).

The marginal utilisation of women workers in amanufacturing industry is typically at the lowest andpoorest-paid parts of the production chain. Such womenworkers are effectively deprived of all the benets thatmay accrue from outside employment except for the lownominal returns that they receive from piece-rate work. They are therefore obviously excluded from any securityof contract, and this means that any downswing is directlyreected in both declining orders or contracts and fallingrates of remuneration.

Very recent evidence suggests that as export-basedindustries such as garments face heightened competitivepressure, they pass this pressure on to home-based womenworkers by reducing the effective rates for piece-rate work. Thus, even nominal piece rate wages have fallen in manysuch activities, even as prices of necessities such as foodhave continued to increase.


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Food security and the price of essentialsMuch has been made of the slowdown in ination ratesto almost zero, and there are those who have pointed outthat this reects the declining rate of economic growthand could even lead to a deation that is damaging forgrowth. But what is often not noted is that even within thisoverall stagnation in prices, food prices have continued toincrease. Foodgrain prices have gone up the most, by morethan 10 percent in the year April 2008 to March 2009. Thiscannot be blamed on higher procurement prices alone,since the prices of pulses, which are not covered by publicprocurement, have also gone up just as much.

The prices of fruits and vegetables and eggs, sh and meathave also increased, even if not by as much as for foodgrains. The only food category for which prices have fallen isedible oils, which reects the decline in oilseed prices asworld prices have crashed. Other food articles prices haveincreased by more than one-fth in this one year.

This, obviously, affects household budgets, especiallyamong the poor for whom food still accounts for more thanhalf of total household expenditure. Meanwhile, non-food

primary product prices have hardly changed. The prices ofbres mainly cotton, jute and silk have barely increasedat all. Oilseed prices have fallen by more than ve percent. This, immediately, affects all the producers of cash crops,who will be getting the same or less for their productseven as they pay signicantly more for food. They are alsopaying more for fertilizer and pesticides, prices of whichhave increased by more than ve percent.

Another major item of essential consumption has alsoincreased in price that of drugs and medicines, up by 4.5percent. This obviously impacts upon the entire population,but especially the bottom half of the population who



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may nd it extremely difficult if not impossible to meetsuch expenditures in times of stringency. a worryingcombination of falling prices faced by agriculturalists whoproduce cash crops as well as petty producers and otherswho produce manufactured goods, even as the prices ofessential items like food and medicines continue to rise. These groups and their families alone account for the

majority of the population in the country.Another little noticed but extremely serious consequenceof the downswing is the impact on the nances of stategovernments, who are responsible for the bulk of thepublic spending which affects human development, suchas basic infrastructure, health, sanitation and education.State governments tax receipts have fallen and so they

are increasingly strapped for cash and unable to meeteven essential spending on basic services, not to mentiondevelopment.

What is to be Done?Clearly, much more creative and imaginative policyresponses are required, in terms of changing directionsof investment and consumption in the home market toemphasize wage-led growth, diversifying exports andgenerally making moves designed to turn economicadversity to advantage.

What is immediately required is signicantly increasedpublic expenditure, directed towards particular areasexpansion of the employment guarantee scheme withinrural areas and extension to urban areas, creative use ofNREGS, especially in urban areas, to enable productive useof the tremendous wealth of labour resources available,especially women workers; more resources providedto state governments to enable them to meet basicdevelopment and social expenditures; and a package for


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agriculturalists to protect them from volatile crop pricesand to deal with the burden of debt.

In the medium term, the government needs to encouragemoves towards more sustainable patterns of consumptionand production, both through newer technologies and byre-orienting demands. If this can be done, the current crisismight even be worth the pain that it is now delivering toso many millions.



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Impact of the EconomicDownturn on Non-farmSector Workers

Vijay MahajanCEO & Managing Director,

BASIX, Hyderabad

The impact of the global economic downturn is beginning to be pervasive. However, its impact for the lower income segmentsof the population in India seems to be the largest for thoseemployed in export-oriented sectors like diamond polishing,garments, carpets and hosiery. In sectors which cater to thelower end of domestic demand of roti (food),kapda (clothing)aur (and) makaan (shelter) there has been little or no impact.The good news is that the demand for cereals remainedrobust, despite the slowdown. There does not seem to be anydanger of job losses in the food and agriculture sector. In theclothing and textile sector, while demand in the lower end ofthe market continues to be buoyant, it is not so up-market.

The same contrast stable demand and employment at thelower-end and a downturn at the higher end can be seenin the makaan or the building materials and constructionsector. Going beyond roti, kapda aur makaan, the non-farmsectors most affected are the export-oriented handmadecarpet industry, tourism and retail.

Introduction The impact of the nancial sector crisis and the resultingeconomic downturn on the lower income segment ofthe population has been varied in India. In some sectors,particularly export dependent sectors such as diamondsand carpets, there have been a lot of shutdowns and

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layoffs, and thus a corresponding loss of livelihoods. Inthose sectors in which demand was derived from exportand domestic growth (i.e., mainly higher end construction,trade, transport, hotels and restaurants, and personal anddomestic services) there has been a downturn with itsimpact on employment and wages, but it is not a case ofmass layoffs.

In sectors which cater to the lower end of domesticdemand of roti, kapda aur makaan there has been littleor no impact. A large number of the jobs for the lowerincome group come from these sectors, so atleast wageincomes here have been protected. However, quality oflife is a function of real income, which has come underpressure because of a rise in the prices of wage goods,

particularly food items. Thus the effects of the economiccrisis are amplied for the lower income segments ofthe population due to (i) reduction in wage employmentopportunities; and (ii) increase in cost of food.

Food and Agriculture SectorLet us look at roti or food and agriculture sector. The goodnews is that the demand for cereals remained robust,despite the slowdown. While income elasticity of demandfor cereals for the Indian population as a whole is decliningand may now be near zero, low-income groups still showpositive income elasticity of demand for cereals 9. Thus,even if average incomes fall marginally, the demand forcereals will not decline, as people switch to basic foods. This ensures that the demand for farm produce remains

buoyant and thus the demand for labour in agricultureremains strong. While 80 percent of farmers in India aresmall or marginal farmers, producing little or no marketable

9 Indian Wheat and Rice Sector Policies and the Implications ofReform, ERR-41 Economic Research Service, USDA

Impact of the Economic Downturn on Non-farm Sector Workers 37


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surplus, and employing little labour outside the family,the 20 percent of the middle and large farmers whoproduce 80 percent of the marketable surplus of wheatand rice, all need and use labour. Reports from the eldin Punjab and Haryana indicate that, in fact, the demandfor labour outstrips supply in many areas and labourers arenegotiating wages not in terms of dailyrates but in terms

of per acre work contracts. The shortage of agriculturallabour is partly attributed to the staying back of labourersin their homes due to increased work opportunity in theirvillages due to the National Rural Employment GuaranteeScheme.

However, the 10 percent rise in the wholesale price ofcereals over December 2007 to December 2008 period,

and the likely higher increase in retail prices, is a causefor concern. Wheat and rice remain the dominant sourceof calories in the diets of most Indian consumers, andtogether still account for about 22 percent of householdexpenditure in rural areas and 13 percent in urban areas more than any other item. All urban households and alarge segment of the rural population, landless householdsand small and marginal farmers, are net buyers of cereals.

Thus an increase in the price of these staple food itemsamounts to reduction in real income. Politicians of all hueshave sensed this and that accounts for one party afteranother offering rice or wheat at Rs.2 or Rs.3 per kg tolower income households.

The same is true of pulses, the staple protein of poorpeople. The Government of India has extended the import

of pulses at zero customs duty for one more year even asit extended the ban on its exports excluding chickpeas (orkabuli chana ) till March 2010 to help improve domesticsupply and keep price in check. Finally, India continues toimport large tonnages (5.60 million tonnes in 2007-08) ofedible oils, and the government has reduced import duties


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to ensure that domestic price of edible oil is kept low.

There does not seem to be any danger of job losses in thefood and agriculture sector. Nor are there any signicantnews reports about jobs being lost in these sectors. The jobs involved in the production, procurement, transport,storage, processing and retailing of cereals, oilseeds andpulses, remain largely intact whether the volumes aredue to domestic production being exported or due toimports. Interestingly, in the food and agriculture sector,even the segment catering to the higher income segmentsand exports has remained buoyant. For example, over athousand cashew processing units in the Palasa area ofSrikakulam district of AP are unaffected and continue tothrive. This is partly because the Indian food processing

industry exports commodities like basmati rice, pulses,herbs, ready to eat products, pickles, chutney, gravies,poultry, meat, fruits and vegetables, which have a steadydemand. These products are traveling around the world- Europe, US, Middle East and south east Asia. Demand isrobust.

The economic slowdown does not appear to haveaffected investments in the food and agriculturalprocessing industry. The sector is expected to attract freshinvestments of over Rs.5,000 crore in the next two-threeyears, according to an industry estimate. The Ministry ofFood Processing Industries has received 42 expressionsof interest (EoIs) after announcing the revised Mega FoodPark Scheme in October 2008, Business Standard, 27February 2009.

Clothing and Textile SectorMoving on to the kapda sector, we nd the story is moremixed. While demand in the lower-end of the marketcontinues to be buoyant, it is not so up-market. For



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example, in the low-cost garment production centre inPamidi and Anantapur district of Andhra Pradesh, 200 kmnorth of Bangalore, there is no effect at all of the slowdownand over 3,000 units continue to thrive. The same istrue of Raidurg in the neighbouring Bellary district ofKarnataka, which is known as the jeans junction of India,supposedly producing low-cost imitations of all the well-known branded denim jeans. A similar story emerges fromthe saree weaving clusters of Maheshwar and Chanderi inMadhya Pradesh. Reports indicate unabated demand andno reduction in employment.

In contrast, a severe slowdown has been reported fromthe garment export units in Bangalore, with thousandsof workers having been laid off. The sector employsabout seven million workers in readymade garmentmanufacturing 3.9 million for exports and the rest fordomestic market.

Many importers have cancelled orders or postponed theirdelivery schedules. The market sentiment is very weak. The expected export performance is thus expected to beonly 8.8 billion dollars or about 90 percent of the actualachievement in 2007-08. There has been about 25 percentdrop in the winter business during April to September thisyear as compared to the corresponding period of 2007-08.According to industry estimates, nearly 700,000 workers inthe clothing and textile sector have lost their jobs in thepast ve months. By March 2009, another 500,000 couldlose their work due to falling sales overseas: Apparel

Export Promotion Council (AEPC), Press Release, 27November 2008.

The export part of the kapda category has felt thedownturn, not just in Bangalore but also in Tamil Nadus Tirupur hosiery cluster, which saw a reversal in trend with


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exports slipping from Rs.110 billion in 2006-07 to Rs.99.5billion the following year and anticipated a further dropof 10 percent in 2008-09 compared to the 2007-08-level.More than 300,000 people are employed in the hosieryexport sector in Tirupur. The Tirupur Exporters Associationexpects that there would be big job losses in Tirupur anything between 10,000 and 15,000 jobs in the coming

months.

Housing and Construction The same contrast stable demand and employmentat the lower end and a down turn at the higher-endcan be seen in the makaan or the building materialsand construction sector. For example, ooring materials

derive their demand from the construction sector. In theBethamcherla stone polishing cluster in Kurnool districtof AP, again the slowdown effect has been marginal. The Kadappa stone that it produces is mainly used bymiddle and lower middle class homes and its demand isunabated.

The Indian granite and Natural Stone industry is in direstraits, with its major market the US badly hit byrecession. It is estimated that granite exports this year willbe Rs.800 crore less than in 2007-08 (Rs.6,071 crore)Atstake is the livelihood of lakhs of people hailing fromthe most backward districts. Some 300 units in Hosur,Bangalore and Hyderabad are about to close down. In Tamil Nadu, some 30 quarries (of the 165) are closed: TheHindu, Chennai, 22 March 2009.

There are some occupations which have seen loweremployment because of reduction in domestic demandand the most important of these is construction. Thusdistricts like Mahaboobnagar in Andhra Pradesh, fromwhere a large number of construction workers migrate



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to big cities like Hyderabad and Mumbai, have seen areduction in migration. But some observers attributethis to the intensive implementation of the NationalRural Employment Guarantee Scheme (NREGS). In con-trast, in the Bundelkhand areas of Uttar Pradesh andMadhya Pradesh, where the NREGS is not as intensivelyimplemented as in AP, and from where a large number of

workers migrate to Mumbai, Delhi and other big cities in thewest and north, there has been no reduction in migration.Locally enquiries indicate there is adequate demand formigrant low-skill manual labourers and people continueto migrate.

Other Sectors

Going beyond roti, kapda aur makaan let us look at howthe impact is being felt in the other sectors. The mostwell-known downturn affecting a single cluster was in thediamond polishing cluster of Surat. Nearly 50 percentof the 400,000 workers in Surats diamond cutting andpolishing industry have already lost their jobs due tothe global slowdown by the end of 2008: The EconomicTimes, 17 March 2009. Perhaps we can take solace in the

fact that negative impact of this magnitude has not beenseen in any other cluster. But smaller effects can be seen inmany of the other non-farm sub-sectors, which are export-oriented, such as carpet weaving.

The export-oriented handmade carpet industry has amajor share in the international markets, and providesemployment to millions of people in the country. More

than two million rural artisans depend on this industryfor their sustenance. Over Rs.35 billion worth handmadecarpets are exported to various countries by small andmid-sized carpet manufacturing and supplying units.However, declining demand from international clients


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has led to an uncertain future for the carpet weavers andexporters. According to the All India Carpet ManufacturersAssociation (AICMA) report, export orders worth aboutRs. 3 billion have been cancelled, recently. Thus hundredthousands of workers have been rendered jobless in theBhadoi cluster of Mirzapur district, Uttar Pradesh, whichaccounts for 65 percent of Indias carpet exports.

Another non-farm sector which accounts for a largenumber of jobs is tourism. It is a composite service sector,where transport, hotels and restaurants, handicraftretailers, tour guides, and performers, all provide servicesaround a tourist destination. As per the Government ofIndia gures in January 2009, only 487,262 tourists cameto India, which was a 17.6 percent decline compared to the

same month of 2008. The impact of this on jobs in areaslike Jaisalmer in Rajasthan, which depend substantially ontourism, was quite devastating. Tour operators in Jaipurand Agra, which see a lot of domestic tourists in additionto foreigners, reported a slow down in business. They alsosaid as a result drivers, hotel and restaurant workers andshop assistants were being laid-off.

Slowdown in domestic demand also caused job losses inthe retail sector. As the nancial crisis in the West deepened,its rst visible impact was felt in the organized retail sector,whose demand was fueled by people working in boomsectors like IT. The dramatic collapse of a well-known retailchain like Subhiksha and the closure of several dozens ofReliance retail stores, brought the slowdown home for real. The organised retail sector in the country has witnessed an

11 percent decline in sales in 2008 and the slowdown islikely to continue for the next 12-18 months, says globalconsultancy rm KPMG 10 . The result of this on employment

10 The Hindu Business Line, 31 March 2009



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in this sector can be easily inferred. Wage rates for shopassistants and support staff like security guards, loaders,packers, drivers and housekeeping staff, have startedfalling have fallen in places like Gurgaon, Bangalore andHyderabad.

Conclusion

To summarize, the impact of the global economic downturnis beginning to be pervasive. However, its impact for thelower income segments of the population seems to be thelargest for those employed in export-oriented sectors likediamond polishing, garments, carpets and hosiery. Therehave been large scale job loses and mass unemploymentin many such clusters like Surat, Bangalore, Bhadoi and

Tirupur. In the middle are those who are employed in thesectors which had witnessed a high growth due to deriveddemand such as construction, retail trade, transport,personal services, etc. Here the demand has gone downand so have jobs but there are no mass closures or lay-offs. The situation in the roti, kapda aur makaan producingsectors has remained stable, with little job loss. However,the 11.1 percent per annum increase in the consumer price

index for agricultural labourers over the December 2007 -- December 2008 period has had a negative effect even onthe workers in these sectors whose jobs are intact.


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Impact of Financial Crisis onIndias March Towards MDGs

K. Seeta Prabhu

Senior Assistant Country DirectorUNDP, India

As the full implications of the global nancial crisisunfold, questions are being raised on its impact on Indiashuman development and achievement of the MillenniumDevelopment Goals (MDGs). If the national poverty line isused as the denition, the country is generally considered to

be well on track to reduce the headcount ratio of poverty, butnot if the World Banks estimates of proportion of populationbelow the newly dened extreme poverty line of USD1.25 perday is considered.

Moreover, irrespective of the poverty estimate one uses, thereis a distinct possibility that poverty levels may be higher thanexpected in the next couple of years till the economy resumes

a higher growth path. Higher food prices would aggravatethe situation and push back further the possibility of Indiareaching the target within Goal I which aims at eradicationof hunger by 2015.

With respect to Goal II the objective of achieving universal primary enrollment is widely recognized as being attainablewith some effort. However, the other targets of ensuring

progress such as primary school completion rates and adultliteracy rates seem more challenging. As far as health relatedGoals IV and V are concerned, the situation is not promising asthe health outcomes of women and children have deterioratedeven during the period of rapid economic progress priorto the nancial crisis. To expect an improvement in health

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outcomes when the economic situation of many of the poorhouseholds is deteriorating and when public expenditure onhealth constitutes less than a quarter of total health spendingis unrealistic.

At the macro-level, the Government of India has initiatedseveral schemes such as the National Rural EmploymentGuarantee Scheme (NREGS) in the last couple of yearsthat could cushion to some extent the extent of distress for poorer households, particularly in rural areas. The nancialcrisis offers scope and the opportunity to revamp the socialsector programmes in the country. Innovative design andimplementation of mutually complementary schemes withinan integrated policy framework would enable the reaping ofassociated synergies and fasttrack the achievement of MDGs

in the country.

IntroductionAs the repercussions of the nancial crisis on the Indianeconomy unfold, some of the questions uppermost inthe minds of development practitioners are: What willbe the impact of the nancial crisis on the poor in India?Will we achieve the globally agreed MDGs? Will humandevelopment outcomes be affected? Though it is tooearly to measure actual impacts, some likely trends arealready emerging and are highlighted here for their policyimplications.

While India is considered to be on track with respectto MDGs relating to poverty, safe drinking water andsanitation, though on some measures all three could bedisputed, shortfalls on a number of other targets, mainlygender, health and environment related, are a matter ofgrave concern. Indias HDI value of 0.609 in 2006 (pub-lished in the HDI Update of 2008) and its rank of 132 outof 179 countries highlights the fact that improvement


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in human development outcomes and achievement ofnational and international goals would need acceleratedefforts.

Can India Reach MDG I ?For Target 1 of Goal I, reducing the proportion of peoplebelow poverty by half by 2015, the country is generallyconsidered to be well on track to reduce the headcountratio of poverty if the national poverty line is used. With1990 as the baseline, the MDG goal is to reduce theproportion of poor people to 19 percent by 2015. Withthe head count ratio down to 27.5 percent in 2004-05from 36 percent in 1990, despite prospects of moderategrowth of over ve percent over the next few years, but

with massive investments in anti-poverty programmessuch as the NREGS, it is likely that the country will meetthis MDG target with respect to poverty reduction in themedium-term.

However, the picture that emerges is different if the WorldBanks estimates of proportion of population belowthe newly dened extreme poverty line of USD1.25 perday is considered. As per this denition, the proportionof population in extreme poverty in India in 2008 was39.26 percent. UNDP India estimates using the trend rateof reduction in poverty of 1.9 percent, which is rate ofreduction between 1990 and 2005, for the years 2005-2015, indicates that population in extreme poverty islikely to decline to 34.31 percent by 2015 which is higherthan the target rate of 25.65 percent in 2015. This means

that India will not be on track to meet the MDG goal onpoverty reduction.

Moreover, irrespective of the poverty estimate one uses,there is a distinct possibility that poverty levels may behigher than expected in the next couple of years till the

Impact of Financial Crisis on Indias March Towards MDGs 47


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economy resumes a higher growth path. In fact, UNDPprojections for South Asia (UNDP, 2008 11 ) do point outthose countries in the region may experience a onepercentage point higher poverty level in 2009 due tothe slowdown in economic growth. Quick back of theenvelope calculations indicate that given a 302 millionstrong poor population in 2004-05, and making no

allowance for increase in population since then, at thevery least around three million poor people will not beable to cross the poverty line in 2009. The same trendmay continue in 2010 as well if the growth rate does notresume its upward trend by then with six million poorpotentially left behind over the two years. The estimates ofpeople left behind in poverty could be more than doublethis gure if the current lower growth projections of theInternational Monetary Fund (IMF) are indeed correct 12 .

11 Rising Food and Fuel Prices in Asia and the Pacic: Causes,Impacts and Consequences, UNDP Regional Centre in Asia andPacic, Colombo2008

12 The IMF projected in April 2008 that the growth rate of GDPin India would be 5.4 percent in 2009 and 6.2 percent in 2010.Using the national poverty line and a poverty elasticity of growthof 0.59, recorded during 1993-2004, this growth rate impliesthat the poverty rate would be 22.3 percent and 21.5 percent in2009 and 2010 respectively. The number of poor would be 268million in 2009 and 262 million in 2010. However, in April 2009,the IMF revised downwards its GDP growth projections for thecountry to three percent for 2009 and 4.1 percent for 2010. Theimmediate implication is that the rate of poverty reductionwould be slower, which in turn means that there would be ahigher number of people below the poverty line than projected

in April 2008. The revised forecast indicates that the poverty ratewould be 22.7 percent and 22.1 percent, respectively, for 2009and 2010 and the number of people below the poverty linewould be higher at 273 million in 2009 and 270 million in 2010. This means that 13 million more people (ve million more in2009 and eight million more in 2010) than that projected by IMFin April 2008 would continue to be poor (Poverty calculationsby UNDP, Regional Centre, Colombo).


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In addition, there is the possibility that some proportionof the near poor (with one to 1.25 times the consumptionexpenditure of the poor) whose numbers have beenestimated to be around 200 million at the all-India levelin 2004-05 by the National Commission for Enterprises inthe Unorganised Sector (NCEUS) might slip into povertytemporarily on account of loss of livelihoods due to the

nancial crisis. This group depends mainly on informalcasual employment which is precisely the sector beinghit badly by the nancial crisis. Reports indicate that 45percent of the employment in the formal sector is of aninformal nature and it is these workers who are the primetargets for being laid off due to the slowing down of theeconomy. It is likely that the informal workers in the exportoriented sectors who have lost their jobs could slip belowthe poverty line though the magnitude of the job loss isnot yet known.

A third factor aggravating the slide into poverty is higherfood and fuel prices. Though food prices have declinedfrom their peak levels of mid 2008, they are nonethelesshigher than those prevailing two years ago. Studiesindicate that the pass-through ratio 13 which measures the

extent of transmission of global food prices to domesticprices of food, has been lower in India (30.4 percent) thanin other Asian countries such as Lao PDR (112 percent), oreven Vietnam (72 percent) and Cambodia (66 percent),indicating that policies to protect the domestic consumerfrom escalating global food prices have had a positiveimpact. Nonetheless, the repercussions of the higher pricesare not insignicant. The rise in prices has been sharpestfor cereals which is the main item of consumption of the

13 UNDP denes the pass-through ratio as the ratio of thecumulative annual rates of change in domestic retail pricesover a given period to the cumulative annual rates of change incorresponding international prices during the same period



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poor. For example, the retail price of rice was 60 percenthigher in January 2009 as compared to the level two yearsearlier. Given that expenditure on food constituted over62 percent of the total consumption expenditure of thebottom 20 percent in 2006-08, the soaring cost of cerealsled to 24.7 percent increase in food cost for the poor. This,in-turn, meant that their purchasing power declined by

14.3 percent due to higher food prices alone14

.Higher food prices would aggravate the situation withrespect to hunger and push back further the possibilityof India reaching the target within Goal I, which aims ateradication of hunger by 2015. Bulk of the rural poor arenet purchasers of food and higher food prices would meanthat they would have to spend more out of their incomes

to meet the daily food requirements as the functioning ofthe public distribution system in the country is less thansatisfactory. A recent UNDESA working paper points outthat in the four states of Bihar, Madhya Pradesh, Jharkhand,and Chhattisgarh (which collectively account for nearly 28percent of poor households in the country) the majority ofhouse holds termed officially poor were without a BPL orAntyodaya card. The degree of such exclusion from the PDS

was 77 percent in Bihar, 67 percent in Jharkhand, 54 percentin Madhya Pradesh and 54 percent in Chhattisgarh 15 .

Official sources also concede that it is not possible to reachthe target of halving hunger by 2015. The situation may evenbe termed as alarming, going by the International FoodPolicy Research Institute (IFPRI) hunger-index calculated in2008 that places the extent of hunger in India at 23 percent

with some states such as Madhya Pradesh recording evenhigher levels than some countries in sub-Saharan Africa.

14 UNDP, 200815 Swaminathan, Madhura, 2008, Programmes to Protect the

Hungry: Lessons from India, UNDESA Working Paper, No. 70


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The main cause for Indias dismal record is the high levelof malnutrition of children. The National Family HealthSurveys (NFHS) indicate that between 1998-99 and 2005-06, coinciding roughly the period of rapid economicgrowth, the proportion of underweight children remainedvirtually unchanged at 46 percent (declining marginallyfrom 47 to 46 percent). Under the circumstances, a rise in

food prices is bound make the target of eradicating hungereven more of a challenge than at present. Among the poorwho are undernourished, the most vulnerable groups havebeen identied to be single women, the elderly, physicallychallenged, urban homeless, urban slumdwellers andprimitive tribes. It has been observed by the Eighth Reportof the Commissioners of the Supreme Court that 70percent of slum children are malnourished compared to thenational average of 46 percent. Due to low calorie intake,children suffer the most as they need a proportionatelyhigher intake for their growth and development. Long-termfood security is dependent on livelihood security. However,most slumdwellers continue to work in the informal sector,with harsh work conditions and payment much belowminimum wages. The jobs of these very segments are at risk

as a result of the nancial crisis and hence the prospects ofa deterioration in food security of the vulnerable sectionsof the population is likely unless much wider distribution ofcheaper foodgrains is made possible through public policy.In addition, there has been a rise in the cost of fuel since2006 and more particularly in 2008 which has contributedto a rise in the Consumer Price Index. Despite subsidies onkerosene and LPG, India has the highest retail prices of fuel

due to high level of taxes and duties. A household surveyin 2006 indicated that the expenditure of rural householdson transport increased by over 60 percent. The rise in fuelprices since 2006 would have impacted the poor adverselythrough a rise in the prices of goods of mass consumption(UNDP, 2008).



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Indias Prospects for Achieving MDG IIWith respect to Goal II, the objective of achieving universalprimary enrollment is widely recognized as being attainablewith some effort. Recent independent reports corroboratethe governments claim that enrollment has been rising. The latest Annual Survey of Education Report 16 (ASER),released in 2009, states that 95.7 percent of childrenbetween the ages of six-14 in rural areas were enrolled inschools in 2008. Another independent report released in2009, the PROBE report, tracing progress in the educationsector between 1996 and 2006 also conrms the trendof increased enrollment. It nds that against 20 percentchildren who were out of school in 1996, there wereonly ve percent of children out of school in 2006. More

importantly, enrollment rates among children belongingto Scheduled Caste (94 percent) and minority (95 percent)were as high as the sample average for all children (95percent). The main factors responsible for this positiveoutcome have been massive infusion of public fundsfacilitating the large-scale recruitment of teachers andimproved teacher-student ratio, implementation of mid-day meals schemes and improved policy environment foruniversalisation of elementary education. The impositionof a two percent cess, apart from making available largesums of money to the exchequer, has demonstrated thepolitical commitment to ensuring education for all.

However, despite progress in enrollment, the other targetsof ensuring progress such as primary school completionrates and adult literacy rates seem more challenging. The

official data indicate a drop out rate of 49 percent at theelementary school level which may increase further as thehouseholds of those most hit by the nancial crisis, eg.,

16 http://www.asercentre.org/asersurvey/

impact of the financial crisis on the poor in india some initial perspectives

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