Dr Bharat Jhunjhunwala
Youth of the country voted Modi into power. CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services that is owned by international ratings agency Standard & Poor’s. CRISIL has pointed out that between 2005 and 2010, the number of jobs created was 2.7 crores but the number of self-employed fell by 2.5 crores. The net addition to employment was a meager 0.2 crores. The number of youth that entered the work force in this period was about 5.5 crores. Only four percent of these got jobs despite the average rate of growth in this period being 8.7 percent. The CRISIL report points out that employment declined by seven percent in the manufacturing sector between 2005 and 2010 despite high rates of growth. Big industries-both domestic as well as multinational-increased production by using automatic machines. They made more profits. The Sensex roared. But large numbers of workers actually lost their jobs. Perhaps it was dissatisfaction with jobless high growth that led to the exit of the UPA Government. Challenge before Finance Minister Arun Jaitley was to provide jobs and usher in achhe din with a much lower rate of growth in the range of 6-8 percent.
The Budget makes yet another push towards aggressive implementation of the same discredited policy under the garb of “Make in India.” Jaitley must realize there is an irreconcilable contradiction between Make in India and employment generation. Making in India means that frontier manufacturing technologies using robots would be used to make Indian products globally competitive. But that will lead to the displacement of workers. The challenge of 2015 was to find a way of creating not five crore jobs for those entering the job market; but to create 10 crore jobs to also clear the backlog accumulated during the UPA Government. Alas! Jaitley prescription will not create these jobs at all. In fact, his policies will eat the jobs that are existing.
Jaitley has provided encouragement to big investors by deferring the much-feared tax proposal known as General Anti-Avoidance Rules or GAAR. He has allowed investment funds to “pass through” the income tax to the actual investor. The tax payable by an investment fund will be paid by the person who has made investment in the fund and not the fund itself. He has declared that the corporate income tax rate will be reduced from present 30 percent to 25 percent. These measures are clearly designed to attract investments in big factories. These same factories are eating up jobs of the people. A textile mill creates 1000 jobs but eats away the livelihood of one lac weavers.
Jaitley has created a Mudra Bank to provide loans to small and medium enterprises. He seeks to create an impression that the Government is soft towards small businesses. The main problem of these industries, however, is disappearance of the market due to competition from big companies. I was recently in Varanasi. A sari manufacturer told me that only about ten percent of the weavers are surviving the onslaught of cheap sarees from big textile mills of Surat. Providing more loans to the weavers will only push them into greater debt when the market is slipping out of their hands.
Jaitley has taken the first steps towards putting in place an universal social security system like one existing in most developed countries. That is a welcome step. But that still does not mean jobs. The poor people will be thrown out of their jobs and will live of the doles handed out by Jaitley’s Government. A fine way indeed of bringing achhe din for the poor! The demographic dividend has been converted into a demographic liability by the Finance Minister.
The way out was to calibrate the technologies used by big businesses. The Budget should have provided incentives to big businesses to employ more numbers of workers. The way forward was to segregate the manufacturing sector in two parts. Industries must be ranked according to the share of wages in the value added. A labour-intensive industry, say a tannery or food processing industry, may pay wages of Rs 40 to add Rs 100 to the value of goods produced. Another capital-intensive industry, say steel or cement, may pay wages of only Rs 10 to add the same Rs 100 to the value of goods produced. The trick was to reduce the excise duty and income tax on the labour-intensive industries and increase them for the capital-intensive industries such that the average rate of taxation remains unchanged. This exercise could also be undertaken at the unit level. One labour-intensive sugar mill may employ 1000 workers while another capital-intensive mill may employ 500 workers to produce the same amount of sugar. Tax policy can be made to impose low taxes on the former and high taxes on the latter. In this way the Jaitley could have goaded the businesses to employ more workers.
Labour reforms could be tied to employment. Present policy is to impose harsh labour laws on units that employ more than 300 workers. The cutoff was made irrespective of the value added. An agarbatti factory that produces goods worth Rs one crore and a cement factory that produces goods worth Rs 100 crores are subject to the same labour laws since they may employ more than 300 workers. This creates an incentive to employ lesser numbers. Way out was to specify wage payments as share of value added. Industries that have high share of wages in their output could be exempted from labour laws. Then industries would employ more numbers so that they could come out of the scanner of labour department. It would be possible to convince the people, if not the trade unions, that this was not an anti-labour policy since exemption from labour laws will be tied to creation of large numbers of employment.
Problem in implementing this approach is that many members of Modi’s cabinet have financial interests in big industries. They are loath to generate more employment. They care nor for the poor. Jaitley’s uncritical infatuation with the West is also a big stumbling block. The “look west” policy essentially gives free play to big industries. Jaitley must realize that there is a deep dissatisfaction in these countries with the present economic model. But this is not so visible because the total numbers on unemployed in these countries was small and the tax receipts were large. The game was entirely different in India where numbers of unemployed are much larger and tax receipts are smaller. Industries in the United States can kill jobs and the Government can provide the unemployed with unemployment compensation but that model will simply not work in India.
(The author was formerly Professor of Economics at IIM Bengaluru)
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