Trade off between Unemployment and Inflation in India

Monetary policy of a country has a short term impact on inflation and the economy-wide demand for goods and services. Hence, the demand for the human resources who produce those goods and services also fluctuates. When monetary policy is used to reduce inflation, countries face problems to control unemployment. This scenario was well explained by economist A. W. Phillips in 1958, where he showed that when inflation is high, unemployment is low, and vice versa. This relationship is now well known as the Phillips curve. If an economy experienced inflation, monetary policy is used to curve the inflation down, either by contracting the money supply or by raising the interest rates, higher interest rates reduce consumer spending and investment leading to lower aggregate demand, while aggregate supply remains the same. With the fall of aggregate demand, inflation would decline. However, if there is a decline in Real GDP, firms will employ fewer employees leading to a rise in unemployment.

In the Indian scenario, let's take a look at the relationship between inflation and

unemployment and see if we can find the Phillips Curve at work, for this purpose we have studied data points of just 3 years (2010-11, 2012-13, 2013-14, the data points of 2011-12 have not been considered due to unavailability of unemployment rate in Labor bureau of India).

In 2010-11, the unemployment rate was about 3.8%, while inflation (WPI) was bit on a higher side 9.7%. Then in 2012-13, we saw a rise in unemployment to 4.7%% (source: Labor bureau of India), whereas inflation declined to 5.7% (source: https://data.gov.in/catalog/wholesale-price-index-base-year-2004-05#web_catalog_tabs_block_10).

It has also been observed that,for high GDP growth, unemployment has fallen sharply, for example in 2010-11 GDP growth rate was at 8.91% and unemployment rate was only at 3.8%, but when GDP growth rate declined to 4.47% in 2012-13, unemployment rate increased to 4.7%.

In some periods , It is also possible to have a rise in both inflation and unemployment. For example, inflation rate increased from 5.7% in 2012-13 to 6% in 2013-14, and during this period unemployment have also increased from 4.7% to 4.9%. This implies that it can happen due to cost-push inflation, the aggregate supply curve would shift and there would be a fall in economic activity and higher prices. However, we could debate this by the Monetarist view, but there can be still a trade off. If the RBI sought to reduce the cost-push inflation through higher interest rates, they could. However, it would lead to an even bigger rise in unemployment. 

By plotting these points on a graph, we can see the normal Phillips curve (unemployment
vs Inflation), which is downward sloping with

following normal linear regression model y = -3.69x + 23.63 with R² = 0.94 and F value=16.86. (** Please note that data points were insufficient to run regression model , minimum of 15-20 observations were required to run that).

Conventionally, the Phillips curve augmented for expectations of inflation represents the tradeoff between inflation and unemployment in an economy in the following way: gp^T = gpe^T - ß (U^T − x̄) + ɛ 

where, (gp) is actual inflation rate, (gpe) is expected inflation rate, (U^T − x̄) is cyclical unemployment given by the difference of unemployment rate (u) and natural rate of  unemployment (x̄) and (e) is an error term. The parameter (ß) measures the response of inflation to cyclical unemployment. The distance between U and x̄is called unemployment gap.

But, we would not get a regular Phillips curve in India because we have to adjust for exogenous factors,some of the studies i.e Paul (2009) , Patra and Ray (2010) , Manoj Kumar (2012) etc. suggest that extended Phillips curve model can be applicable for India.

Impact of education on economic growth and earnings

In the modern era, global economy is very much dependent on the advanced technology, where considerable emphasis is placed on the contribution made by human resources, or you can say the human capital, to economic growth. The principle is that the relative contribution of every individual to the economic growth depends on their human capital – the education, knowledge, skills, competencies and other attributes that are relevant to economic activity.

As a consequence, developing the skills and knowledge of the labor force is regarded as a key strategy for promoting national economic growth. Looking at the macroeconomic level, a number of researchers across the globe, have looked specifically on the effect of literacy on the economic growth, for example Green and Riddell (2003) found that literacy and schooling each influence individuals’ earnings. Sum (1999) also found independent contributions of adult literacy and educational attainment on individuals’ employment and earnings. 

 Though many extraneous Variables may have influence on the growth of economy, but there is ample anecdotal and correlational evidence suggesting that education and economic growth are related, but the evidence points in a variety of directions attainment levels. During 2004-2012 Gross enrolment ratio (GER) in Classes IX-XII has sharply increased by 42% from 39.9 in 2004-05 to 56.8 in 2011-12 and per capita income at constant prices has also sharply increased by 58% from 24143 in 2004-05 to 38048 in 2011-12. (source : https://data.gov.in/catalog/gross-enrolment-ratio-ger#web_catalog_tabs_block_10 and https://data.gov.in/catalog/capita-income-all-india-and-madhya-pradesh#web_catalog_tabs_block_10 ). Increases in skill levels are linked to increase in incomes. For example, improved education can be associated with higher earnings and lower poverty rates.

Percentage of population Below Poverty Line has also sharply decreased by 15.3% from 37.2 % in 2004-05 to 21.9 in 2011-12. (source: https://data.gov.in/catalog/below-poverty-line-india#web_catalog_tabs_block_10  and https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/162T_SHE130914L.pdf ). 

During this period, monthly per capita expenditure (MPCE) (Uniform Reference Period) – Urban and Rural have increased by 129% and 128% respectively. It’s truer that in the population, better employment prospects and the increasing earnings that come with higher educational attainment can all contribute to growth and prosperity.

Further analysis and research could deepen understanding of these fairly substantial effects. It could be, for example, that growth in literacy proficiency is a proxy for important omitted variables that influence the rates of both literacy and income.

Understanding the components that contribute to economic growth of a country was always a hot cake of discussions of economists. Most developed economies, has evolved from one based on resources and manufacturing to one based on information, knowledge and skills, growing emphasis has been placed on the role played by human capital – the skills and knowledge embodied in people. Because direct measures of skill have been hard to develop, analysts have relied on indirect measures of human capital, based on the assumption that individuals with more education will also have more knowledge and skill than those with less education. 

Today, the data clearly tell us that the closest thing a country has to a silver bullet for creating a successful 21st century economy and an improved quality of life—better health, lower crime, citizens who contribute—is a dramatic increase in the number of college educated people in its workforce age population. 
It is past time to ready ourselves for the global challenge, be determined to reach goal of increased education attainment and economic development that will secure our future.

Growth of Internet Users in India and its Impact on our life

India has seen a manifold increase in internet users in the last couple of years, India is rapidly becoming a digital nation. According to internetlivestats.com, India has the highest yearly growth rate and currently has the third largest number of internet users globally.  According to latest report of TRAI, total number of internet subscribers has increased from by 12.01% from December 2013 to reach 267.39 million in December 2014.

 If we do further deepdive analysis with the data, we see mobile internet users are the dominating segment among internet users. Among total internet subscribers, wired internet subscribers were 18.86 million (which registered yoy growth of 2.9%) and wireless internet subscribers were 248.53 million (which registered yoy growth 12.77%). Among wireless internet subscribers, mobile wireless (mobile & dongle) subscribers increased by 12.8% from 219.92 to 248.02 million in December 2014, whereas fixed wireless ((Wi-fi, Wi-max, point-to-point radio & VSAT) subscribers increased very marginally by 0.73% to 0.46 million at the end of December 2014.  It’s clear that mainly smart phone penetration is boosting the internet usage across the country and internet usage on mobile devices has already exceeded PC usage. 

Cheaper and faster mobile networks, a rise in the number of users of these networks, and more affordable 3G and 4G handsets will help to increase mobile data traffic.

It’s the true fact that the key driver of data growth on a global scale is mobile apps with billions of devices to be connected each other and the online healthcare and online retail spending expected to grow at a higher rate.

Internet penetration in India is no more only limited in urban area, approx 35% of internet users are from rural India. At the end of December 2014, internet subscribers in rural area was 92.18 million with tele- density of 10.66 and internet subscribers in urban area was 175.21 million with tele-density of  45.33 .

 "Digital India" programme and "NDSAP" policy

(https://data.gov.in/sites/default/files/NDSAP_Implementation_Guidelines_2.2.pdf ) are timely initiative by Govt of India and promises to transform the country into a connected knowledge based economy.

The growing internet penetration in India is producing new probabilities to share information and services among a larger number of people, more rapidly and at lower costs. According to a study by Department of Electronics and Information Technology(DeitY),  the Internet of Things (IoT) industry in India is expected to be a $15 billion market by 2020 and it is expected that India would have a share of 5-6% of the global IoT industry.

We have more data on our fingertips than ever before and as we stand at the apex of this ‘internet of things’ revolution, as we are starting to have more connected devices which are going to put up more data.

There is a clear connection between the maturity of internet usage and rising standard of living.

Our standard of living is not just a function of higher levels of efficiency, but of the quality of products and services. ‘Internet of things’ revolution is helping organizations and service providers a greater opportunity and incentive to boost quality and enables more information about quality to be collected.  It also makes it easier for organizations to design more customized products and services, which are of higher quality because they more closely fit the choices of consumers. Moreover, internet growth boosts innovation by giving users more of a role in shaping innovation, in part by making research more collaborative.

 Internet growth has also lead to massive job creation, as internet/eCommerce companies are hiring employees from IT professionals to sales/services professionals who deliver online products and services.

Internet usage triggers performance improvements of large MNCs, but the impact of the internet growth is more visible on the SMEs, making it possible to reach to a vast consumer base, suppliers and to tap new talents from the day 1 of its business. As a result they can compete with big ones. This has led to the emergence of so called micro-multinationals.

The biggest growth will come in e-commerce, which will expand almost 5-fold, while education and healthcare via mobile internet will expand internet use. Internet growth would indeed motivate entrepreneurship and wealth creation due to the huge potential of untapped Indian market.

In the near future the Internet will basically affect every dimension of our life, as we see the rise in use of IoT things, which make the everyday life of man easy and worthwhile. As it works on the internet connectivity, human engagement and work load will be lessened, thus leading to a better output and growth. Internet growth has already served the notice that it will be a revolutionary force resolutely restructuring the economy and society of this century, we should not lose sight of the immense potential of internet economy to boost growth across India and the globe.