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How Fiscal Policy Can Help Employment Generation

Author(s): Anand P. Gupta

Source: Economic and Political Weekly, Vol. 11, No. 17 (Apr. 24, 1976), pp. 631-636
Published by: Economic and Political Weekly
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the middle and late sixties China longer confined to any particular part one might call the chicken-and-egg pro-
suffered some setbacks in its relations of the world. The whole wide world, blem: Did questions of foreign policy
with third world countries. The Chinese with two 'Super-Powers' (USA and inspire wider changes, or did overall
preoccupation with the dispute with the USSR) and two 'Intermediate Zones' policy shifts force changes in relation-
Soviet Union, nuclear development at (the third world countries and the ships with other countries? We also do
home and the Cultural Revolution were leading capitalist countries of the West) not get a clear insight into the dyna-
the principal factors that led the became a field of China's diplomatic mics of the changes. Was there a
country to a state of "unparalleled iso- activity. China expanded the pro- fundamental struggle between different
lation". But, in the years following the grammes of trade, and foreign aid, interests? Or was there a reasonably
Cultural Revolution, Chinese efforts to and used them to promote its political 'monolithic' leadership deciding that
establish bilateral diplomatic relations and economic objectives. different policies were needed as diffe-
with a large number of countries led rent contradictions emerged as primary?
to significant changes in international While the book covers much ground, Kapur cannot be faulted for failing to
relations, including China's admission to it leaves unexamined several issues answer these basic questions concerning
the United Nations and the normalisa- that are hardly peripheral. Harish China's relations with other countries,
tion of its relations with the United Kapur skilfully weaves together the but he could have explored these issues
States. All these developments resulted changes in China's world outlook and more directly. More extended analysis
in the "globalisation" of Chinese foreign analogous shifts that have taken place of the fundamental issues involved in
policy. In the field of external affairs, in other sectors of Chinese society, but the Sino-Indian conflict would also have
China's interest and action was no the analysis still leaves unanswered what been appropriate.


How Fiscal Policy Can Help Employment

Anand P Gupta

This paper aims to review and analyse the recent trends in labour intensity in India, and to
plore the possible uses of fiscal policy in promoting higher levels of employment in the couintry.
It is divided into four sections. Section 1 attempts to give an idea of the magnitude of the e
ployment problem India faces and takes a careful look at the recent trends in labouir intensity in
country. Sections I1 and III attemnpt to explore the role which fiscal policy! can ,)lay in pronmotin
factor-mix antd otitput-mix which is more compatible with fuller enzployment in India. The final sect
draws some conclusionis from the precedinig analysis.
I continuing decline in t:he labour inten- cent in 1970-71/1972-73.4 This is also
sity of the country's economy.2 What- corroborated by the rising trend of de-
Magnitude of the Employment
ever data are available clearly suggest preciation as percentage of GDP at fac-
Problem and Recient Trends
that growth int employment in India hastor cost: The percentage rose from
in Labour Intensity
lagged far behind growth in productive 5.23 in 1960-61 to 5.79 in 1963-64,
INDIA is plagued by large-scale un- capital employed, in the ex-factory va- 6.52 in 1967-68, and 6.95 in 1972-73.5
employment. The figures are stagger- lue of output and in the value added Available evidence suggests that
ing. According to an estimate obtained by manufacture (see Table 1). What is public policy has played an important
by using the productivity approach, as even worse is that, in certain parts of role in the growth of technologies
many as 42.4 million people were un- the economy (e g, mining, wood pro- which favour a pro-capital factor-mix.
employed in the rural sector alone in ducts), while output and capital employ- It has not only tolerated such technolo-
1971.1 The Planning Commission says ed have gone up, employment has ac- gies, but has even deliberately favour-
that, even if the birth rate were to tually declined. ed their adoption through various means.
decline along the lines postulated in The decline in the rate of growth of Tax policy is a case in point. The tax
the Fifth Five-Year Plan, the total add- employment has been at least partly system has provided and continues to
ition to the labour force over the period due to the increasing capital intensity provide a number of incentives to sti-
1974-86 will work out to nearly 65 mil- in the economy.3 A recent study has mulate industrial development in the
lion people - which is about three- found an almost continuous upward country.6 The use of tax incentives for
and-a-half times the number of people trend in the share of depreciation in thethe purpose of encouraging industrial
currently engaged in the organised sec- gross value added in the private corpo- development rests essentially on the pre-
tor outside agriculture. Such is the rate sector: The share went up from mise that the copferral of tax benefits
magnitude of the employment problem 9.5 per cent in 1950-51/1954-55 to 10.3 will induce domestic or foreign indus-
the country faces. per cent in 1955-56/1959-60, 12.5 per trialists either to initiate activities which
One reason for the stubborn persis- cent in 1960-61/1964-65, 13.1 per cent they would not otherwise undertake or
tence of unemployment in India is the in 1965-66/1969-70, and to 13.4 per to expand their activities in already ex-


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ot certain incdistries is a desirable ob- FACTORY VALUE OF OUTPUT AND VALLuE ADDED BY MANUFACTURE, 1959 TO 1970

jective, what is questionable is the de-

sign of tax incentives employed to Year Employment Productive Ex-factory Value Added
(millions) CapiLal Value of by Manufacture
achieve this objective. A careful review
(million Output (million rupees)
of the relevant literature shows that
rupees) (million
these incentives have been designed in rupees)
such a manner that not only do they 1 2 3 4 5
generally lack selectivity but the tax be- 1959 2.87 17,374 26,914 7,590
nefit associated with them varies in pro- 1960 2.90 19,995 31,504 8,644
portion to the amount of investment in 1961 3.05 23,742 36,933 9,879
capital assets. When calculating this 1965 3.99 64,441 64,923 17,004
1966 3.98 76,811 72,478 18,317
benefit, no consideration is given to the 1967 3.93 83,280 77,840 18,990
employment opportunities created or 1968 3.97 90,061 86,368 20,613
likely to be created. The incentives 1969 4.15 98,945 99,829 24,959
have operated in an environment in 1970 4.26 111,058 113,994 28,782
which the interest rates at which fin- Per cent compound annual rate of increase:
ance has been made available to indus- 1959-70 3.64 18.36 14.02 12.88
try have been maintained at artificially 1959-65 5.64 24.41 15.80 14.38
low levels and in wvhich the interest pay- 1965-70 1.30 11.50 11.92 11.10
ment has been allowed as an item of
Notes: (1) The data in columns 3,4 and 5, being in money terms, cannot be compared
expense for tax purposes.7 with the data in column 2; and even if they were adjusted for the rise in
The implications of such a combina- the price level, the rate of growth of factory employment in rccent years
tion of policy factors for trends in la- would still be found to have been much slower than that of productive
bour intensity are obvious. By reduc- capital employed, ex-factory value of output and value added by manu-
ing, considerably, the tax liability and
(2) The years after 1970 have had to be omitted because of non-availability
thereby improving the net (after-tax) of the required data.
profitabilitv, or by reducing the capital
cost of a project, such a combination of Source: The data relate to the census sector (all industries) of the Annual Survey of
Industries, which now covers all registered factories wbich emplcy 50 or more
policy measures can only induce distor-
workers with the aid of power or 100 or ^more workers without the aid of
tions which work in the direction of re- Power. The data are collected from the factories each year on a complete
ducing labour intensity. This is pre- enumeration basis and are published by the Central Statistical Organisation
cisely what has happened. (Industrial Statistics Wing), Department of Statistics, Minsitry of Plannir.g
Government of India, Calcutta.
To illustrate. Table 2 presents data
on tax incidence and labour intensity,
Bank of India's studies referred to of the private corporate sector has dec-
separately for certain industries as also
above,8 but for the years 1971-72 to lined, industries with labour intensity
for all industries put together. The data
1973-74 the percentage relates to pro- lower than the average for all indus-
are based on the Reserve Bank of In-
fit-making companies only. tries have enjoyed considerably larger
dia's studies on the finances of selected
As regards labour intensity, it has relief in tax incidence than industries
non-government, non-finanicial public li-
been defined as the percentage of wage with labour intensity higher than
mited companies, each having a paid-up
cost to value of production. This may the average for all industries: total r-e-
capital of Rs 500,000 and above, and
not sound like an ideal way of defining duction in tax incidence of industries
they cover a period of 13 years, 1961-
labour intensity in a country like ours, with lower-than-average labour inten-
62 to 1973-74. While the industry-wise
in which the objective of employnent sity (e g, aluminium, cement, and elec-
data are confined to those years in
policy is simply that of increasing the tricity generation and supply) works out
which tax incidence on an industry
numbers employed. But limitations of to 3.59 times10 the reduction in tax in-
worked out to at least ten percentage
data availability did not permit us to cidence relevant to industries with
points lower than the average tax in-
use a more satisfactory definition. higher-than-average labour intensity
cidence on all industries, the data for
(e g, coal mining, cotton textiles, and
all industries represent the average tax It may be noted that the Reserve
jute textiles)." Clearly, the way corpora-,
incidence and average labour intensity Bank of India data on wage cost relate
tion tax policy has operated, it has
of all companies covered bv these stu- to both salary earners and wage earners
tended to induce distortions which have
dies. Data for the years 1961-62 to and no break-up of the data is available
favoured the employment of capital
1965-66 relate to 1,333 companies, those to show the relative changes in the
with the result that the labour inten-
for the years 1966-67 to 1970-71 to shares received by these two groups of
sity of industral output has suffered a
1,501 companies, and those for 1971-72 income earners. But evidence avail-
decline.'2 This is hardly consistent with
to 1973-74 to 1,650 companies. These able from other sources suggests that, in
the objective of promoting employment
companies have covered, in termns of a large number of cases, salary earners
in a country like ours.
paid-up capital. about 80 per cent of all have improved their position relative to
the non-government, non-financial puib- wage earners. This, in other words,
lic limited companies in the country. means that wages as a percentage of
Tax incidence has been defined as the total of wages and salaries have dec- How Fiscal Policy Can Influence
the percentage of tax provision to pro- lined.9 the Factor-Mix in Favour of
fits before tax. For the years 1961-62 to A striking feature of the trends in Labour
1970-71, the percentage relates to all tax incidence and labour intensity is Fiscal policy can be of significant
the companies covered in the Reserve that, while the average labour intensity help in creating conditions which coin-


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(per cent)
industry 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973
-62 -63 -64 -65 -66 -67 -68 -69 -70 -71 -72 -73 -74

Coal mining TI - - 39.0 - - _

Li 54.6 - -
Cotton textiles TI ? ? ? ? ? ? ? ? ? 28.7 30.7
LI -?---? ? ? ? 20.5 21.0
Jute textiles TI -?- -? ? ? 29.5 24.0 28.2
LI -?-?- ? ? ? ? 22.4 25.4 28.1
Woollen textiles TI1 -?- 37.2 31.3 -
LI - - - - 23.1 15.0
Ironand steel TI 24.6 20.8 30.2 29.5 31.6 - - 31.3
LI 19.9 19.5 19.3 23.9 23.1 - 26.4 26.0
Aluminium TI - - 16.9 29.0 23.6 4.6 0.1 13.7 -
LI - - 11.3 12.0 12.2 10.9 10.5 10.9 -
Other non-ferrous metals TI - - 23.9 24.0 22.7 - -
LI ? ? ? ?12.1 8.9 8.4 -
MotOr vehicles TI ? ? ? ?30.0 30.0 38.3
LI ? ? ? ?12.3 13.5 13.9 - -
Foundries and engineerinE-
workshops TI 29.2 - 25.7 18.5 - -
LI - - - - 17.9 - 19.9 17.9 - -
Basicindustrialchemicals Ti - 41.3 ? ? ? ? ? ? 29.6 26.8
11.4- - - - - 9.1 9.5
Cement TI - 37.7
- 29.7 23.3 20.4 - 33.2
LI - 14.6 _ 13.6 12.3 11.7 - 12.7 -
Paperand paper products TI - 34.3 40.5 19.5 30.2 38.1 22.5 15.6 30.2 23.3 24.0 29.6
LI - 14.7 15.4 15.7 15.5 16.0 15.6 14.8 15.1 14.5 15.8 15.5
Electricity generation and supply TI 25.0 33.1 37.3 40.4 21.3 30.5 21.5 22.3 22.8 33.1 - -
LI 10.2 9.1 7.9 8.3 8.9 9.4 9.8 9.5 8.8 8.9 - -
Shipping TI - - 29.1 11.8 2.8 9.3 5.6 15.4 4.4 10.0 7.2 11.0 6.8
LI - 15.1 16.3 16.4 15.8 14.6 14.2 13.7 13.0 13.0 13.8 12.7
Average for all industries Ti 43.7 52.3 51.0 50.5 51 .0 47.8 49.4 49.5 43.7 45.9 41.5 43.3 43.4
LI 16.9 16.9 16.7 17.0 17.1 15.9 16.4 16.4 15.9 15.6 15.1 15.6 15.8

Notes: TI=Tax Incidence; LI=Labour Intensity.

Sources: Based on data in 'Finances of Indian Joint Stock Companies, 1965-66', Reserve Bank of India Bulletin. December 1967, pp
1530-1614; 'Finances of Medium and Large Public Limited Companies, 1970-71', Reserve Bank of India Bulletin, September
1972, pp 1425-1584; Finances of Medium and Large Public Limited Companies, 1972-73', in Studies on Company Finances
(issued as a supplement to the Reserve Bank of India Bulletin of October 1974), pp 1-92; and Finances of Medium and Large
Public Limited Companies, 1973-74', Reseeve Bank of India Bulletin, September 1975, pp 710-834.

cide as much as possible with the factor consideration for achieving this result is the incidelnce of taxation on mass con-
ratio that a country is endowed with. a substantial reduction in the incidence sumption goods should be of help in
In the context of a country such as of corporation tax on industries produc- influencing the factor-mix in favour of
ours - which suffers from scarcity of ing specified mass consumption goods. labour.
capital and where the employment pro- If these goods are in adequate supply, Before we proceed further, let us
blem has assumed rather staggeringly prices can be expected to remnain rea- make it clear that we are not opposed
large proportions - fiscal measures can sonably stable and, as a consequence, to the grant of fiscal incentives.15 All
create conditions which are most favour- beneficial effects may be expected not that we are suggesting is that, when
able to the employment of unskilled only on employment but even on income considering the grant of such incen-
and semi-skilled workers in large nuni- distribution.13 tives, their employment implications
bers and which are inimical to thc An attempt should also be made to should be carefully examined. One way
employment of scarce resources such as explore the possibility of reducing the to make sture that a fiscal incentive has
capital. Two measures which we con- incidence of excise duties and other no adverse effect on employment would
sider necessary for achieving this result indirect taxes on goods of mass con- be to make it neutral wvith respect to
are: (a) withdrawal of all fiscal incen- sumption. Whatever data are available employment of capital: If, for example.,
tives related to the employment of capi- suggest that the incidence of taxation it is considered desirable to grant tax
tal, and (b) disallowance of interest as on at least some of these goods has holidlay to indtustry A, the intended
expenditure for tax purposes. These mea- almost persistently increased. This has tax benefit can be defined in terms of
sures, by raising the effective price of tended to cause upward pressures on a specified percentage of its profits be-
capital, should have the effect of influ- the cost of living for the working fore tax, rather than (as is the case
encing the factor-mix in favour of lab.- population; which in turn have exerted nowv) in terms of a specified percentage
our. a perceptible influence on money wage of the capital employed.
The above measures should be com- levels. The net result has been a fur- Some may be inclined to fear that
bined with a deliberate fiscal effort ther distortion between the relative fac- the complete withdrawal of all fiscal
aimied at reordering investment and pro- tor prices - a distortion which has incentives related to the employment of
duction priorities in order to increase favoured capital-intensive rather than capital will almost bring to a stop the
the output of goods of mass consump- labour-intensive production."4 In view industrialisation process in the country.
tion. A policy measure which deserves of these considerations, any reduction in If one works out the implications of all

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that we are saying, one would find that that, while there is every need to pro- the check on the pace of urbanisation
while some industries will certainly mote the development of village and a check which helps in the full
benefit, a good number of them may small-scale industries using labour-inten- employment strategy.22
find themselves sufficiently induced to sive techniques of production, adequate More recently, attempts have been
take steps designed to reduce the pro- care must be taken to ensure that in- made to develop models for ptoviding
portion of capital in their factor-mix. dustries which are not suitable for the suitable frameworks for empirical test-
small-scale sector do not receive any ing of the link between equality and
We can also think of some other fis-
undue fiscal benefits. At the same time, employment.23 Results, based on appli-
cal measures for influencing the factor-
industries which do not belong to the cation of one such model to data for
mix in favour of labour. These include:
small-scale sector but which are labour- for the Philippines, have confined the
(a) grant of tax relief related to the
intensive should be considered for the existence of positive relationship between
number of workers employed or to the
grant of appropriate fiscal benefitsY2' equality and employment: "...a drastic
amount of wages paid, (b) grant of tax
shift in the income distribution (from a
benefit in such a manner that it varies Another way in which fiscal policy
Gini ratio of about 0.47 to a Gini ratio
directly with the ratio of wages to can be used to promote a more labour-
of about 0.25) would increase employ-
value of plant and machinery, and (c) intensive output-mix within the prevail-
ment by about 10 per cent and GDP
grant of tax rebate related to the ing framework of income distribution,
by' about 7 per cent. It would slightly
amount of tax payable in respect of in- is by using the instruments of taxes and
deteriorate, the balance of payments
come derived from a labour-oriented subsidies for discouraging - or in
and lower rate of growth of employ-
industrial unit newly set up after a spe-somne cases even penalising - the out-
ment and GDP by about half a per
cified date.16 put of capital-intensive goods and en-
cent. All these estimates are rough; but
couraging the output of labour-intensive
indicate that [reduction of income in-
in goods. The Central and state govern-
equality] could be a sound economic
ments have made use of these instru-
How Fiscal Policy Can Promote a measure, even if we do not consider
ments, but the results do not appear
More Labour-Intensive Output-Mix other, equality positive, social and poli-
to have been very encouraging. A good
tical aspects [of reduced inequality]."24
Fiscal measures can also be of help part of the explanation for this lies in
(a) the difficulties experienced in iden- As regards India, a study prepared
in promoting higher levels of employ-
tifying the areas suitable for fiscal in- by the present author shows that a
ment through their impact on output-
tervention by these governments, and fairly drastic redistribution of private
mix. This can be done by deliberately
(b) the various leakages in the design consumption expenditures- in favour of
directing the existing income distribu-
of appropriate policy measures and in the poorer classes (from a Gini ratio of
tion towards the consumption of rela-
their implementation. 0.32 to a Gini ratio bf about 0.20 over
tively more labour-intensive products,
a period of five years) would change
as also by reducing inequality in the
As regards promotion of labour-in- the output-mix in such a manner that
prevailing income distribution in such a
tensive output-mix through a reduction the average annual growth rate of em-
manner that it ultimately favours the
in income inequalities, it must be stated ployment would register an increase of
consumption of more labour-intensive
that this is a relatively new idea. A at least about 15 per cent.25 In more
clear formulation of this idea is avail- practical terms, this means that an ad-
FiscaT measures which have been able in a 1970 report, prepared by an ditional over 2.60 million gainful em-
taken in our country to influence out- international team of specialists orga- ployment opportunities can be expected
put-mix in favour of labour-intensive nised by the International Labour to be created through reduction in in-
products include grant of substantial Office. According to this report, income equality. Thus, assuming that an aver-
excise duty concessions to products of distribution affects the level of employ- age household consists of five members,
small-scale enterprises and reservation ment mainly through its effect on the as many as 13 million additional people
of as many as 221 items17 for exclusive pattem of consumption: as the margi- can be expected to benefit from reduc-
purchase from small-scale industrial nal propensity to consume imported ed inequality. To this should be added
units.'8 Adequate data are not available,goods is higher among the rich than the gains resulting from (a) decline in
for a meaningful evaluation of these among the poor, a reduction in income imports of goods and services demand-
measures but whatever information is inequalities releases additional foreign ed by the rich, (b) increase in exports
available clearly indicates that not all exchange for the capital goods and in- as a result of decline in domestic con-
industries benefiting fron them are termediate products needed to expand sumption of certain products which
labour-intensive: A careful look at the employment; as the basic goods de- have good demand in world markets,
latest available data, on summ-ary re- manded by the poor are precisely the and (c) reduction in the various foreign
sults for factory sector issued by the goods which are (or can be) produced exchange leakages.
Central Statistical Organisation shows with techniques considerably more lab- In our opinion, India has the capa-
that in a number of industries (e g, ma-our-intensive than those used in the city to realise the potential which- exists
nufacture of dairy products, tobacco production of the goods demanded by for the expansion of employment op-
manufactures, manufacture of footwear, the rich, a given amount of income portunities through reduction in inequa-
manufacture of watches and clocks, andwill generate more employment when lity, but the extent to which it is really
manufacture of musical instruments), spent in the purchase of wage goods able to use this capacity will depend
while the invested capital per worker in than in the acquisition of consumer upon the measures which the authori-
the small sector"9 is significantly lowerdurables; and since the poorer classes ties take (a) to mobilise the resources
than that in the large sector,20 the spend a high proportion of their in- required for redistribution through
invested capital per rupee of value add- come on food, the bigger their share of direct taxes, and (b) to effect the trans-
ed in the former works out to be higher total income, the greater -the demand fer of these resources to the poorer sec-
than that in the latter. This underlines for agricultulral goods, and the greater
tions of the population.26

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Fiscal policy can be of significant made to reverse the present trend of intensive industrialisation in itself
help in both of these areas, but India's declining labouir intensity. is not necessarily inconsistent with
record so far with this policy does not the objective of employment pro-
We believe that a sustained improve-
motion. It is rather the linkages
give much ground for optimism. A. re- ment in the country's employment- in the form of patterns of final de-
cent study of the incidence of taxes situation is possible and that fiscal po- mand and the related choices of
collected by the Central Covernment licy can play an important role in technology that finally determine
shows that, while the rich pay a con- achieving higher levels of labour inten- the relationship between industria-
lisation and employment. For a
siderably higher proportion of these sity. However, in order that fiscal po- discussion along these lines, see
taxes than what the poor pay, the tax licy can play its role in an effective K N Raj, "Linkages in Industria-
system cannot be credited with any manner, changes in two broad areas lisation", paper prepared for the
noticeable degree of effectiveness in will be necessary. UN Committee for Development
Planning, February 1, 1974, mimeo-
reducing inequality in the distribution graphed.
First, it is necessary to evolve a whole
of disposable incomes in the countly.27 4 The Economic Times Research
new approach toward the tax treatment
This is due to the failure of direct taxes Bureau, 'Structural Pattern of Fac-
of capital. The tax system in our count-
to mobilise a growing proportion of the torial Payments - I, The Econo-
ry has been, and continues to be, bias- mic Times (New Delhi), July 14,
incomes which have accrued to the rich.
ed in favour of the employment of 1975.
As regards the incidence of public capital. This bias, by causing distor- 5 These figures have been obtained
expenditures, the situation is no better. by using the data in: Government
tions between the relative prices of
of India, Ministry of Planning, De-
According to a recent estimnate, the capital and labour, has favoured a pro- partment of Statistics, Central
share of the poor works out to less thancapital factor-mix. In our opinion, a Statistical Organisation, "National
even one-sixth of the total benefits of situation of this kind should not be Accounts Statistics 1960-61 - 1972-
expenditures incurred by the Central allowed to continue. Policy measures 73" (Delhi: Controller of Publica-
tions, 1975), Tables 6 and 11.
Government.28'29 What is worse, the which can be expected to change this
fiscal operations of the Central Govern- situation and favour a pro-labour factor- 6 For a discussion of these incentives,
see Indian Investment Centre,
ment seem to have worked in the direc- mix include: (a) withdrawal of all fis- "Taxes and Incentives" (New
tion of making the poor / poorer: for cal incentives related to the employ- Delhi, 1975). Also see the author's
every rupee which the poor paid as tax ment of capital, (b) disallowance of "Tax Incentives in India" (Bom-
in 1973-74, they received only about 80 interest as expenditure for tax purposes, bay: Vora Publishers, 1971); Go-
paise in return.30 vemment of India, Ministry of
(o) substantial reduction in the inci- Labour and Rehabilitation, Com-
All this suggests that far-reaching dence of corporation tax on industries mittee on Unemployment, Report
changes will be required to realise the producing goods of mass consumption, of the Working Group on Finan-
potential which exists for the expansion and (d) reduction in the incidence of cial and Fiscal Measures (Delhi:
Controller of Publications, 1973);
of employment opportunities through re- excise duty and other indirect taxes on
and Harish K Singhal, 'Taxing for
duction in inequality. The thrust of these goods.31 Development: Incentives affecting
these changes will have to be on shift- Second, a detennined effort will also Foreign Investment in India",
ing the incidence of taxation in favour have to be made to create conditions Harvard International Law Jour-
nal, Volume 14, 1973, pp 51-88.
of direct taxes, and on re-orienting and which are most favourable for the
improving the design and iinplementa- consumption of labour-intensive goods 7 Another feature of this environ-
ment has been that foreign ex-
tion of various public expenditure and which are inimical to the consump- change needed for meeting the
schemes so that the poor may benefit tion of capital-intensive products. Fis- import requirements has been
from these schemes on the intended cal policy can be of significant help in made available at prices consider-
scale. creating these conditions by directing ably lower than what it would
have fetched if sold through com-
the prevailing income distribution to-
petitive bidding.
IV wards the consumption of more labour- 8 Measurement of tax incidence in
intensive products, as also by reducing terms of percentage of tax provi-
Conclusion sion to profits before tax of all
inequalities so that the resulting pattern
companies suffers from certain
The persistent decline in labour in- of consumption ultimately favours such
limitations. For a discussion of
tensity is one of the main factors res- products. these limitations, see the author's
ponsible for the massive problem of 'Burden of Taxation on Corporate
unemployment in India. Available evi- Notes Sector', The Financial Express
dence shows that fiscal policy has not (Bom,bay), July 21, 1973.
only tolerated the adoption of technolo-[This paper draws upon a study pre- 9 For details of this evidence, see
pared recently by the author within the Anand P Gupta, 'Inflation, Income
gies which are inappropriate for labour general framework of the WEP Income
Distribution and Industrial Rela-
conditions prevailing in the country, Distribution and Employment Pro- tions in India', International La-
but has even deliberately favoured theirgramme, International Labour Office, bour Reveitw, Volume 110, No 2,
Geneva.] August 1974, pp 178-79.
adoption through various means. The
1 Amartya Sen, "Dimensions of
result has been an appreciable decline Unemployment in India", Convoca- 10 Represents the ratio of total tax
in the labour intensity of output in the tion Address, Indian Statistical In- saving enjoyed by industries with
country. This means that, while measu- stitute, Calcutta, December 31, lower-than-average labour intensity
1973. to that enjoyed by industries
res designed to (a) control population which have higher-than-average
2 Other reasons for the stubborn
growth, (b) increase the rate of effec- labour intensity. Tax saving equals
persistence of unemployment on a
tive investment, and (c) achieve fuller large scale include: (a) the high the difference between average tax
utilisation of existing production capa- rate of population growth, (b) the incidence on all industries and
low rate of effective investment, that on an industry.
cities in the economy, are essential for
and (c) significant under-utilisation 11 As between companies in an in-
solving the employment problem, a
of existing production capacities. dustry, this means considerably
determined effort will also have to be 3 It has been suggested that capital- larger tax benefit to the companies


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with a relatively high proportion Jiri Skolka and Jef Maton, "Re and Employment Programme, 1975,
of capital in their factor-mix. distribution. of Income, Patterns of Chapter 4.
12 This is consistent with a recent Consumption and Employment: A 29 Although the expenditures of the
Government of India estimate ac- Case Study for the Philippines", Central Government from a signi-
cording to which the share of World Employment Programme ficant proportion of the total pub-
workers' wages in the value added Research, Income Distribution and lic expenditures in the country, the
by manufacture fell from 38.5 to Employment Programme Working redistributional impact of public
.33.7 per cent in the decade 1960- Paper No 3, (Geneva, International expenditures in a part of the count-
1970. Labour. Office), 1974. ry may be different from the imp-
13 For some evidence on the relation- 24 Ibid, pp 39-40. ression that one may get from this
ship between per capita availabili- 25 Anand P Gupta, "Solving India's .statement. This may be due to
ty of selected goods of mass con- Employment Problem: Role of differences in the functional com-
sumption and inequality in income Fiscal Policy", World Employment position of public expenditures,
distribution., see 'Distribution of Programme Research, Income Dis- other than Central Government ex-
Rural Income', Economic and Po- tribution and Employment Pro- penditures, as also due to regional
litical Weekly, Volume X, No 38, gramme Working Paper No 28 differences in the degree of suc-
September 20, 1975, pp 1493-95. (Geneva, ILO), 1975, pp 18-46. cess or failure in the implementa-
26 The success of the equality-employ- tion of various expenditure sche-
14 It must be noted that fiscal factors
ment strategy in India will also mes.
represent only one set of factors
depend on what the authorities do 30 This figure has been arrived at on
which have induced distortions
to ensure adequate output within the assumption that the incidence
between the relative prices of la-
the country of foodgrains and of corporation tax is not shifted,
bour and capital. Other factors
other items of essential consump- i e, the tax is borne entirely by
which have induced such distor-
tion demanded by the people. In- the owners of equity capital. If
tioris include labour market imper- even a part of this tax is assumed
deed, if the output of foodgrains
fections arising from trade unioni-
and other items of essential con- to be shifted forward in the form of
sation, minimum wage laws and
sumption fails to keep pace with the higher product prices, the benefit
concessional rates of interest.
increase in demand resulting fron received by the poor for every ru-
15 Indeed, we feel that a case does
consumption redistribution in fa- pee paid by them as tax will work
exist for the grant of fiscal incenti-
vour of the poorer sections of the out to be still smaller.
ves desgined to encourage the pro-
population, the rate of growth in 31 Examined carefully, it would ap-
duction of selected goods (e g, fer-
tilisers). employment with redistibution may pear that the effectivenes.s of these
turn out to be smaller than that measures would depend to a consi-
16 An incentive along these lines was
without redistribution. derable degree upon the extent to
recommended by the Direct Taxes
27 Anand P Gupta, "The Rich, the which such measures are comple-
Enquiry Committee, popularly
Poor and the Taxes They Pay in mented by other policy actions of
known as the Wanchoo Committee.
India: A Study of Central Govern- -the development authorities. This
See Government of India, Minist-
ment Taxes and Their Impact on is true because the latter, in ope-
ry of Finance, Direct Taxes En-
Income Distribution and Patterns rating the devices influencing the
quiry Committee - Final Report
of Consumption", World Employ- relative prices of capital and la-
(New Delhi, 1972), pp 121-22.
ment Programme Research, Income bour, can determine how much of
17 As of November 28, 1974. Distribution and Employment Pro- the potential improvement in la-
18 Applies to government purchases gramme Working Paper No 12 bour intensity will actually be rea-
only. Examples of items reserved (Geneva, ILO), 1975, pp 31-50. lised. For practical purposes, it is
for exclusive purchase from small- 28 Anand P Gupta, "How Fiscal Po- indeed significant that perverse be-
scale industrial units are: animal licy Can Help in Solving India's haviour of certain key variables
driven vehicles, bandage cloth, Employment Problem", a study can choke off the positive effect of
boot polish, cotton pillows, cycle prepared for the International La- the above measures on labour in-
tyres and tubes, electric call bells, bour Office within the framework tensity, thus negating the best of
band gloves, glue, postal weighing of its WEP Income Distribution one set of policy intentions.
scales, razors, safety matches (ex-
cept for defence), shoe laces, steel
racks and desks, umbrellas and
wooden chairs. Mackinnon Mackenzie
19 Consists of factories having a gross
investment in plant and machinery MACKINNON MACKENZIE AND year, the export revenue has touched
of Rupees 750,000 or less, or em- COMPANY is Indianiising itself by Rs 1.92 crores and the company has
ploying 10 to 49 workers with the
offering 15 lakh equity shares of Rs 10, on hand orders for export of seagoing
aid of power and 20 to 99 workers
without the aid of power. each at par, to Indian nationals resi-
craft worth Rs 83 lakhs. The range of
20 Consists of factories having a gross dent in India. This issue will have the
investment in plant and machinery effect of reducing the foreign share- services rendered by the company in-
of over Rupees 750,000 and em- holding of the company from the presentclude shipping and port agencies, ship-
ploying (a) 50 or more workers
broking, ship management, barge owning
with the aid of power, or (b) 100 100 per cent to 40 per cent. Of the
or more workers without the aid of total issue, one lakh equity shares will and operating, ship-manning, clearing
power. be allotted to the directors' friends and forwarding, air freight, travel, and
21 For a discussion of the factors and employees of the company and the tourism; and its business has develop-
which deserve to be looked into ed at a rapid pace over the years. The
balance of 14 lakhs shares will be offer-
when an industry is so considered,
see Alan Peacock and G K Shaw, ed for public subscription. A member of company has to its credit a good fin-
"Fiscal Policy and the Employment the P and 0 group, the company has ancial record. It made a profit of Rs
Problen in Less Developed Count- been engaged in a wide range of shipp- 71 lakhs on a capital base of Rs 100
ries" (Paris: Development Centre ing activities. In its recent venture into lakhs in the 15-month period ended
of the Organisation for Economic
shipowning, the company has selected Deceinber 1975, and Rs 44 lakhs and
Co-operation and Development,
1971), pp 1.04-105. handy-sized bulk vessels that have an Rs 11 lakhs, respectively, for 1973-74
22 International Labour Office, "To- assured cargo and access to small but and 1972-73. The subscription list for
wards Full Employment: A Pro- imnportant high-traffic ports. The com- the public issue, managed by SBI's
gramme for Colombia" (Geneva,
pany's exports have been growing in merchant banking division, is to open
1970), pp 145 and 147.
the Gulf area. Already, in less than a on May 12.
23 See, for example, Felix Paukert,


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