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Well-serviced: Explaining Modi government’s popularity

The combined impact of higher wage growth in the services sector coupled with the increasing share of services in total employment partly explains why the government enjoys popular support.

By Biswa Swarup Misra

It is intriguing to find that dislocations caused by demonetisation in November 2016, a hasty implementation of GST on July 1, 2017 coupled with NPAs of around 5% in the banking system and the NBFC crisis beginning with the default by IL&FS in Sep 2018 did not impact the popular support for the government. In fact, the NDA was rewarded with a larger mandate in the 2019 general elections. Besides, the debate over the validity of the growth estimates for India published by CSO seem to lack appeal beyond academicians, economist and the analyst community. What could possibly explain the support for the government notwithstanding macroeconomic challenges?. An analysis of the income accruing to labour in different segments of the economy in the last few years can possibly explain this disdain. We analyse the changing share of income accruing to labour during the seven year period 2012-2018.

The share of labour in the gross value added (GVA) is available in the national accounts statistics (NAS)-2018 published by the CSO. Share of income accruing to labour has two components. One, is the compensation to employees and other, is the share of labour in operating surplus or mixed income in owner managed enterprises. Without considering mixed income, compensation to employees accounted for 15% in GVA of agriculture and 37% each in industry and services. NAS does not provide the share of labour in mixed income and hence, some authors only consider the compensation of employees ignoring the share of labour in mixed income (Wage growth: even agriculture trumps the unorganised sector, FE, July 4). Ignoring mixed income, the authors held that during 2012-2017, nearly one-third of the total income generated in the economy accrues to labour and two-thirds to capital. If this was true, there would have been social chaos and anti-government sentiments. Such an analysis does not portray the correct picture because mixed income account for a sizeable share in the GVA. For instance, mixed income accounted for 81% in agriculture and 48% and 51%, respectively, in industry and services GVA for India during 2012-2018. Thus, ignoring the share of labour in mixed income would lead to incorrect assessment about the wages accruing to labour in the economy and its growth as well as its dispersion across the different sectors.

In the absence of actual data, the international practice is to consider the 2/3 rule of thumb as a proxy for share of labour in mixed income. We have applied the 2/3 rule of thumb to obtain the share of labor in the mixed income in different sectors of the Indian economy. We consider the three major sectors viz, agriculture, industry and services for our analysis.

During the seven years 2012-2018, share of labour in GVA across all sectors was 70% considering both the compensation to employees and the share of labour in mixed income. While compensation to labour accounted for 33%, share of labour in mixed income was another 37%. The average share of labour in income accruing to agriculture, industry and services sector was roughly the same, around 70% between 2012-2018. Not only the share of labour in GVA of the three broad sectors has been relatively high, it has also been quite steady around 70%. Compared to the average 70%, construction within industry has a much larger share of income accruing to labour at 84%. Within services, labour had a share of 76%, 80% and 85% in the GVA of financial services, railways and public administration, respectively.

The combined impact of two factors seem to explain why the disenchantment with the growth process is not shared by the larger public. First, services expanded their share in total employment by 5.6% in 2018 compared to 2012. It is worth noting that agriculture accounted for 49% of the workforce and industry and services absorbed 24% and 27% of the workforce in 2011-12. However, share of agriculture in total employment has declined to 42.4% and that for industry and services has increased to 24.9% and 32.6% by 2017-18. Second, wages grew at a relatively faster pace for services than for agriculture and industry during 2012 to 2018. Wages in services grew by 13.2% per annum compared to 10% in agriculture and 9.5% for industry. In the total wage income from all sectors, share of agriculture, industry and services was 17%, 29% and 54%, respectively, during 2012-2018. However, compared to 2012, share of agriculture and industry in income accruing to labour from all sectors declined by 1.4% and 3.2%, respectively, in 2018. The decline in income share of labour in agriculture and industry was made good by an increase in the share of services from 49.8% to 54.4%, a gain of 4.6%. The relatively faster pace of growth in labour income in services explains the increasing share of services in total wage income in 2018 compared to 2012.

Notwithstanding the economic challenges, the government in the last five years has struck a chord with the population because of initiatives such as Swachh Bharat Mission, Pradhan Mantri Ujjwala Yojana, the Jan Dhan Yojana, Prime Minister Mudra Yojana. In addition, the relatively high and stable share of income to labour in GVA across the sectors during 2012-2018 imparted a sense of comfort to the larger population. Further, the combined impact of higher wage growth in the services sector coupled with the increasing share of services in total employment partly explains why the government enjoys popular support.

(The author is Professor of Economics, XIM, Xavier University, Bhubaneswar. Views are personal)