Now about the employment aspect of economic development. Let us make a few assumptions, to start with. Let us assume that the output-capital ratio (O/C), the labour-capital ratio (L/C), the rate of population growth, the proportion of labour force to total population are all constant over the period that we have in view.
Let us assume further that there is full employment whatever one means by it to start with. If then population grows at the rate of 2 per cent per minimum, then if full employment is to be maintained over time, aggregate employment must increase at the rate of 2 per cent per minimum. Now, since L/C is constant, aggregate capital must also increase at the rate of 2 per cent per minimum. We shall, therefore, get the same percentage increase in output, assuming what economists call constant returns to scale. For a 2 per cent increase in aggregate output we need a rate of saving of 6 per cent of the national income if, as before, we assume the output-capital ratio to be 1:3. So economic development is important .
What does all this mean? It means that under the assumed conditions we have an increase in national income at a constant rate, a constant rate of consumption per capita and full employment conditions in the economy over time. I am presenting this simplified picture in order to be able to highlight the complications that beset an under-developed economy of the type that we have in view. Let us remind ourselves of two things which have already been noted, namely that, to start with, we have a large volume of unemployment and average living levels are below standard. So we have two responsibilities. First, we have to raise the rate of employment so as to be able within a prescribed period to absorb the current volume of unemployment; and this will require a rate of investment higher than that postulated above.
Further, the more quickly we want to realize a state of full employment, the higher will have to be the rate of investment in the transition period. Suppose, for example, that there is initially a backlog of unemployed of the order of five millions and, considering the rate of population growth and the proportion of labour force to the aggregate population, an addition to the labour force of the order of ten millions over the planning period of, say, five years. Suppose also that in the absence of current unemployment, we would need an investment rate of 6 per cent of annual income for absorbing the yearly additions to the labour force. Then again on the assumption of constant labour-capital ratio—we have to raise the rate of investment to 9 per cent if we wish to attain a level of full employment in the course of five years.
If the period of transition is extended we may go in for a lower rate. But in any case the rate has to be higher than 6 per cent. So economic development is important .
Secondly, we have to raise the average level of living which, to start with, is below a tolerable minimum. It is true that the productive employment of people who had been hitherto unemployed would in itself mean a rise in per capita income. Yet, so long as the output-labour ratio remains the same, the rise in the per capita income such as would result from just the absorption of the unemployed cannot be of an appreciable order. After all, the proportion of current unemployment to total population cannot be very large in any case; in our economy it will be somewhat around 2 per cent, if we leave out ‘disguised’ unemployment, and perhaps around 5 per cent, if we include it. If an impression is to be made on per capita income, we cannot be content with merely having enough additional capital to provide for the unemployed; we have to raise the output-labour ratio itself.
Now, this latter can be-achieved, as we have seen, by raising the output-capital ratio or by lowering the labour-capital ratio. Both involve a change in the technique of production—the former of a capital-saving character, let us say, and the latter of a labour-saving character. In an economy where capital is scarce and labour is abundant, it is clear that capital-saving techniques must be preferred to labour-saving techniques; at any rate the former should be made to overbear the latter. The scope of the former, however, appears to be limited. For, it may well be argued that in so far as there was any such scope, it would be adopted as a matter of course; the scarcity of capital is expected by itself to impose on the economy a full use of any known technique of production of the capital-saving variety. So economic development is important .
Now of course this is not altogether correct. It so happens that in most of the under-developed economies the price of capital (i.e. the rate of interest) in the organized sector is not as high relatively to the wages of labour as is warranted by the relative degree of scarcity of capital and labour. One does have a feeling that cases can be discovered in the organized sector of our economy of misdirection in the use of capital arising from a divergence between the warranted rate of interest, as we may call it, and the market rate of interest. It is indeed very necessary that in our planned projects whether in the private sector or in the public sector calculation of relative costs in respect of different lines of production and in respect of different techniques within each line should be based on an estimate of the warranted rates of interest and wages rather than on the actual rates in the market.
Yet when all is said it appears that if we are to have a structure of production which is enough capital-saving to yield a satisfactory output-labour ratio, we must discover new lines of production and new techniques. And this involves research and, at the initial stage at any rate, capital to finance research. On the other hand, if new capital-saving devices are not forthcoming, the alternative is to follow the traditional method of industrialization, which is to use techniques involving less labour relative to capital. The latter process is easier, for we can import these techniques already in use in the more developed Western economies. Now this, if widely used, results in what is called technological unemployment. And in order to accommodate this newly created body of unemployed, the economy must be provided with more capital than would be the case if the labour-capital ratio had remained constant.
Here again, if, with constant labour-capital ratio, the full employment rate of saving (and investment) is 9 per cent of the national income, as on our previous hypothesis, then it has to be 18 per cent, if the labour-capital ratio is halved, 13-5 per cent if the labour-capital ratio is made two-thirds, and so on. In general terms, if, with a given labour-capital ratio, L/C, the full employment rate of saving (and investment) is S, then as L/C is changed into L’/C, where L = L’/x, the new full employment rate of saving (and investment) becomes Six. The extent to which the rate of saving has to be raised under the changed conditions thus depends upon the value of x; the higher it is, the higher will be the rate of savings and investment that would satisfy full employment conditions.
The test of economic progress is not just maintenance of full employment. A country which is already advanced and has a high average standard of living can afford to take full employment as a unique goal of economic policy, a certain minimum level of growth being implicit in it.
But for an under-developed country such as ours where in the past the rate of capital formation has failed to keep pace with the growth of population and where peoples’ standard of living has been systematically pressed down, the essential test of economic progress is rising productivity of labour; maintenance of full employment is not enough. This is what makes the task of economic development of an under-developed economy so formidable. The twin task of creating employment opportunities and raising labour productivity requires the level of saving to be pushed up a good deal higher than the level to which the people are used. In our case, the Planning Commission put the required rate of saving at 17-18 per cent of national income as against the normal level of 5 per cent, as they guess it was at the time planned economic development started.
So long as the additional savings are drawn out of annual increments in per capita income, the target is obviously within the bounds of possibility. Yet who will deny that the realization of the target involves tremendous organizational effort unlike any that a democratic society has hitherto experienced? It is just this that lends special significance to India’s experiment in economic planning. So economic development is important .