By Siddharth Shah, Partner, Deloitte India
As global geopolitics continue to evolve rapidly, India finds itself at a unique inflection point. On the one hand is a unique demographic dividend – unlike any other around the world, with over 65% of our population under the age of 35, on the other is the continued threat of global trade disruption which will influence our ability to accelerate trade. High public capital expenditure does not naturally translate into job creation. Informality in key sectors also distorts productivity and wages. The rate of change of technology – particularly the emergence of new data sets and the use of Artificial Intelligence to accelerate human, manufacturing and agricultural productivity, further compounds the need for India to make proactive and conscious choices to future-proof its continued GDP growth, in an inclusive and equitable manner.
The upcoming budget offers an opportunity to double down on our existing investments and accelerate fiscal interventions across 5 key pillars
Education quality and foundational learning
Both the central and state-level governments have invested heavily towards primary and secondary education. But despite near-universal enrolment, there is a wide gap in learning outcomes and a weak transition from secondary education to skills/ employment. Allocations or grants that are linked to learning outcomes – particularly around foundational literacy and numeracy and teacher upskilling tied to assessment gains can help address this gap. Credit-linked scholarships for vocational streams that translate into immediate apprenticeship / job opportunities would also encourage enrollment in these courses. And given India’s large successes with digital public infrastructure (DPI), investments and making DPIs available at a state level for measurement and improvement of learning outcomes would be key. As a principle, the budget should seek to shift from input financing to learning-adjusted financing.
Market-aligned skilling
Despite the number of graduates – across high school and undergraduate courses, employability remains a key challenge. This is reflected in low placement rates under existing skilling schemes. Employer participation in curriculum design has also been ad-hoc and not structural across sectors / skilling programs. The Union Budget could prioritize opportunities around co-funded skilling vouchers – where a government, employer and trainee come together. This allows for each stakeholder to have ‘skin in the game’. This augmented by further accelerating investments to drive scale and efficiency of sector-specific skill missions – particularly in high growth area like manufacturing clusters, care economy, green jobs etc. could further help fund skills that convert to jobs, not just certifications. The budget could also consider tax neutrality for employer-led apprenticeships, incentivising a scaled apprenticeship program.
Labour reforms that reduce friction
While the government has continued to work towards labour code simplification, relative to other countries, India continues to experience a compliance-heavy labour regime that could often discourage formal hiring in select conditions. Labour codes implementation is also uneven across states. The union budget could consider time-bound fiscal incentives for states implementing labour codes and digital compliance credits for MSMEs adopting unified labour portals, along with labour courts digitisation. This can help accelerate adoption and compliance, along. A shift in the use of Budget to reward reform adoption, versus simple allocation could help accelerate this transition.
Employer-side incentives for job creation
Given the historical challenges with regards to productivity, India continues to experience a comparatively high cost of formal employment relative to productivity. There is a risk aversion among MSMEs and mid-sized firms to move towards formal employment. The government could consider targeted wage subsidies for first-time formal hires (particularly women and youth), potential EPFO contribution support for incremental employment and some form of credit-linked employment incentives via public sector banks. This will help accelerate the formalization and job creation – particularly in the MSME sector.
Formalisation as a growth strategy, not a compliance burden
MSMEs and small proprietorships in India often see formalisation as tax and compliance burden. This locks informal firms out of formal credit system which impedes their ability to access affordable capital and their long-term growth. The Union Budget could consider ‘formalisation transition grants’ for MSMEs and support for GST compliance simplification. A shift in narrative of formalization being a productive investment, and not enforcement could help accelerate the transition.
As the Finance Ministry announces the Union Budget, it would be key to emphasize the need for fiscal prudence complimented by high employment multipliers. As the adage goes, what is not measured, cannot be improved. Hence as a collective, a disproportionate focus on improving measures like net formal job creation, female labour force participation, apprenticeship-to-employment conversion, learning-adjusted years of schooling, MSME graduation rates (among others) will be key.