The illogical nature of the belief in downsizing as panacea is especially evident in the banking sector, which is currently the focus of the "second generation reforms". A reading of the financial press would suggest that the attempt to reduce employment in public sector banks through Voluntary Retirement Schemes is immensely desirable and much to be lauded. Yet it would be hard for even the most avid job-cutter to argue that the spread of banking service in our country is adequate to meet the needs of the population or of the growing economy.
 
Indeed, if banking is to serve its social function of financial intermediation, the sector as a whole needs to employ many more people in more places in the country, and to expand in terms of branches and activities. Instead, what we are witnessing is a systematic attempt to pare down many of the public sector banks prior to privatisation, and to reduce their ability to deliver various financial services. Of course privatisation in turn would result in additional, and more significant, job loss.
 
None of this needs to happen. Some of the trade unions of bank workers had in fact got together to work out a recovery and restructuring package for several problem-ridden public sector banks, which would not only make them financially viable but would allow them to increase their level of service provision. This proposal got short shrift from the Finance Minister, who claimed that he could not spare the Rs. 5,000 crore that would be required for this scheme. By contrast, the government is apparently willing to spend more than Rs. 7,000 crore on the Voluntary Retirement Scheme, which does not more than reduce the number of employees. The purely political nature of such expenditure decisions could not be more clear.
 
The downsizing bug is not confined to those in control of government or public sector enterprises. It is now the mantra of the private sector as well. And each merger or acquisition is met with eventual reduction in staff, as the recent merger of two foreign banks, Standard Chartered and ANZ Grindlays, is illustrating in India at the moment.
 
What those advocating such downsizing tend to forget is that the issue involves much more than justified concern about the fate of the workers who lose their jobs in this process. It also tends to involve a genuine loss of efficient functioning as the remaining workers are forced into additional workload and insecure contracts. International experience, from countries as far apart as England and Brazil, suggests that the costs of obsessive downsizing of the workforce can be severe and even socially damaging.
 
Thus, in Britain, the reduction of staff strength in the privatised railway system has been associated with a near collapse of the system, with many more accidents, inordinate delays, frequent unannounced changes of schedule and apparently a much more surly workforce which is made to work longer and more intensely without security of contract. Similarly, the Latin American privatisations of several important public utilities has implied not just job loss but also declining safety precautions and reduced effectiveness of services as those workers who remain in employment find themselves unable to match the delivery levels associated with the earlier higher employment.
 
Quite apart from these supply-side considerations, there is the obvious Keynesian point to be made, that public employment is also necessary because it creates purchasing power which is important even from the point of view private growth. Keynes famously argued that in an economy with unutilised capacity, simply getting workers to dig holes and then fill them again would serve as positive economic purpose because it would increase effective demand, and therefore production, by a multiple of the wages paid to such workers. This simple point tends to be forgotten today, but that does not make it any less relevant.
 
In a world context of substantial aggregate unemployment, such labour reduction strategies are therefore hard to justify in any economy-wide perception, and can only be explained by private agents' desire for short term profitability at any cost. But such motivations are not supposed to determine government's actions, which is why societies choose to have governments in the first place.
 
This is what makes the current Indian's government's obsession with downsizing so bizarre. And seen in the immediate macroeconomic context, of declining growth rates in all sectors, poor aggregate employment generation and huge wastage of the country's human resources, such a fixation is nothing short of obscene.