1. Reforms in India: Experience shows success is achieved only when there is an emergency

Reforms in India: Experience shows success is achieved only when there is an emergency

Behind the apparent economic achievements of the NDA government at the Centre lurks a serious concern: will it be able to fulfil its campaign promise of creating jobs for the one million youth who enter the labour force each month?

By: | Published: July 6, 2017 6:31 AM
Reforms in India, job experiance, job experiance value, nda government reforms Of the 300 million youth who entered the labour force between 1991 and 2013, only 140 million found jobs.

Behind the apparent economic achievements of the NDA government at the Centre lurks a serious concern: will it be able to fulfil its campaign promise of creating jobs for the one million youth who enter the labour force each month? Of the 300 million youth who entered the labour force between 1991 and 2013, only 140 million found jobs. In the three years of the National Democratic Alliance government, little has changed for the better. Statistical data indicates that overall unemployment has actually increased since 2013. In FY16, just 1.35 lakhs jobs were created in eight key sectors, making the goal of 100 million additional jobs by the year 2022 seem distant.

Behind these statistics lie unfortunate stories of unrealised human potential. The average entrant into the Indian labour market is a rural male with some schooling. In the village, he faces poor immediate prospects for formal employment outside of agriculture. If he is able to migrate to an urban area, his best options lie in small or micro-enterprises in the informal sector. Here, however, jobs offer modest salaries, no written contracts and almost no protection or long-term benefits. Moreover, there are few opportunities for growth. Rather than investing in their employee skills, entrepreneurs are largely focused on their own economic survival. It takes 12 procedures, 27 days and a paid up capital of 140% of the country’s per capita income to start a business. Once started, businesses must deal with an erratic power supply, a weak urban infrastructure, distorted markets for land and capital and high transactions costs. As a result, the informal sector employs 85% of the workforce but accounts for only 45% of the GDP. On a broad average, a job in this sector is 10% to 50% as productive as comparable employment in the formal sector. Unlike the US or even countries like Mexico, successful businesses in this sector rarely grow. They face perverse incentives to remain small in order to avoid tax, labour and environmental regulations. Even the forthcoming GST provides a threshold limit of `20 lakh. When firms approach such limits, they split themselves into two or more units, rather than reap economies of scale. For a young job-seeker, this is hardly the environment in which he can gain experience and tap his potential.

Young job-seekers often dream of jobs in the lucrative service sector of the economy. 28.7% of the workforce engaged in this sector accounts for 53% of the GDP. There are widespread reports of rapid growth, and a talent crunch. Yet, a rural job-seeker would typically find significant barriers to entry. A lack of fluency in English (or even Hindi), inadequate experience with technology and weak soft skills would make him uncompetitive. Firms would need to expend large amounts of money in training young hirees before entrusting them with real responsibilities.

Policy prescriptions to tackle these problems are clear: One, even a decade from now, agriculture will still have to provide employment to at least 40% of the workforce. Social support and poverty alleviation programmes in rural areas are important, but the basic key to the health of the rural economy lies in the improvement in agricultural productivity. New technologies such as indigenously created GM varieties of seeds, innovative methods of irrigation, investments in agricultural value chains etc, are all needed on a large scale.

Two, investments in multi-brand retail, particularly in food preservation and processing can also spur job creation. Large foreign retailers bring not only jobs but also much-needed technological know-how into the economy. The inclusion of Indian farmers and entrepreneurs in global supply chains would bring gains in productivity. Cold storage supply chains, for example, could reduce post-harvest losses, and lead to higher crop valuations.

Three, the government must continue to make efforts to make it easier for firms to do business, and exit when they fail. There are enough best practices available within India which could be standardised. For example, if procedures to start a business could be reduced to the level of Patna, those to obtain a construction permit to that of Ahmedabad, days to start a business to that of Mumbai or enforce a contract to that of Guwahati, etc, India’s World Bank ranking in ease of doing business could improve from 130 to 67.

Finally, labour laws need to be made more flexible. Hiring an industrial worker need not result in lifelong employment. It should be possible for an employer to retrench him if his performance is below par; or if the firm itself is in distress and is compelled to cut costs.

Experience shows that reforms in India have succeeded only when there is an emergency, as in 1992. They have also succeeded when the government has reached out to its opponents, and built a consensus, as in the case of GST. Since the creation of millions of new jobs in now an economic imperative, the time to build such a consensus has arrived.

Co-authored by-Shareen Joshi 

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