Dumb Vs Dumber: Quotas Don’t Create Jobs And Loan Waivers May Destroy Jobs

In an otherwise vacuous debate in Parliament over the Narendra Modi government’s 10 per cent quota for economically weaker sections outside the Scheduled Caste/Scheduled Tribe and Other Backward Class (OBC) groups, the one important question that got asked was: “But where are the jobs?”

The political impact of this question has been lost since almost all parties backed the bill, enabling it to become law. A Congress party spokesperson tweeted: “Modiji, the Congress will support reservation for the poor. But, who and how will people get the benefit of reservation in jobs when no jobs are being created?”

This question is both daft and sensible, depending on whether we are talking about jobs in government, which is what the quota bill is about, or jobs growth in general.

It is daft if we consider the reality that quotas don’t create jobs, they merely redistribute available jobs. Jobs grow when the overall pie is growing, not when it is stagnant or shrinking, whether it is in government or the private sector. Quotas are about redistribution, not fresh creation.

A less daft question is whether the government is itself creating more jobs. Here, the answer is more worrisome, for fiscal stress has ensured that both central and state governments have been trying to limit expenditures, and this would have impacted the ability of governments – at both the central and state levels – to expand jobs.

According to a data compilation by The Times of India six months ago, state and central governments had at least 24 lakh vacancies that they had not filled. The biggest job vacancies were in the education sector (10.1 lakh), followed by the police (5.4 lakh), railways (2.4 lakh), anganwadi workers (2.2 lakh), and health centres (1.5 lakh).

This begs that question: why are governments so chary of filling these vacancies, when giving people quality jobs is, by definition, a vote-winner for any politician?

The answer: governments are not spending their revenues in the right areas. If money is spent in the wrong areas, motivated by short-term populism, they will not be spent in areas that create jobs, like physical or social infrastructure, or even filling existing job vacancies.

So if one were to ask, “where are jobs growing even in government?”, the answer is that bankrupt governments can’t spend money even to fill available job vacancies. When government finances are blown up elsewhere, jobs will not grow even in the state sector.

The political incentive structure in a first-past-the-post electoral system is to offer freebies and direct giveaways to narrow voter segments as opposed to instituting policies that benefit everybody. Thus, free laptops and universal farm loan waivers in the name of small and marginal farmers will be preferred over investment that creates more jobs in the medium term.

Take the example of farm loan waivers. In the last five-year election cycle after 2014, states have between them offered over Rs 2 lakh crore of farm loan waivers, and Rahul Gandhi has promised not to let Narendra Modi sleep if he does not announce yet another Central farm loan waiver.

In the 2017 mid-term Economic Survey, the then chief economic adviser, Arvind Subramanian, calculated that if state-led loan waivers went up to a level of Rs 2.2-2.7 lakh crore, it “could reduce aggregate demand by as much as 0.7 per cent of GDP, imparting a significant deflationary shock to an economy yet to gain full momentum.”

Politicians, whether at the Centre or states, should be asking themselves whether jobs can grow when they are busy delivering “deflationary shocks” to the economy.

While it is no one’s case that farmers in distress should not be helped, the counter-question is whether loan waivers are actually helping them. When half the population is dependent on livelihoods related to a sector which produces 15 per cent of gross domestic product, the most important issue is jobs, so that subsistence farmers can move out of farming.

Now consider a simplistic calculation of what kind of jobs Rs 2 lakh crore of farm loan waivers, if not given indiscriminately to all farmers, could have financed.

If we take pure government-created job schemes like MGNREGA, and assuming we want to give all farm workers incomes of upto Rs 10,000 per month, the annual cost of creating each such a job is Rs 1.2 lakh. Thus, every Rs 1 crore invested in direct job-generating schemes creates 83 jobs annually. If we were to assume that all of the Rs 2,00,000 crore spent on waivers had been spent on such schemes, the net jobs created will be a massive 16.6 million.

When the money paid to beneficiaries is spent in the economy, it will have further ripple effects on small businesses and jobs, thus expanding job creation even further.

But this would not be a Eureka moment for job creators. Boondoggles are important in distress situations, but are ultimately not the answer to the jobs crisis. A more sophisticated way of indirectly creating jobs would be to incentivise job creation in the private sector, both by easing labour laws, and by directly reducing the regulatory costs of hiring more by small and medium businesses.

If, instead of spending Rs 2 lakh crore on expanding MGNREGA or similar schemes, the government were to offer a universal social security subvention scheme to employers for every additional person hired upto, say, a maximum of 50 per company, the same money could create five times more jobs, assuming even half the employers bite the bait.

Quotas aren’t the solution; but they may not be avoidable in a society known for social and economic exclusions. But the solution to the question, “How do we create jobs?” is not all that difficult.

The answer is: stop giving freebies and waivers. Shift the money to boosting jobs and skills any which way we can.

We can blame demonetisation and the implementation of the goods and services tax (GST) for the short-term contraction in jobs, but these are one-time disruptions. But if we consistently keep watering the roots of bad populism, by making loan waivers frequent and regular, we are essentially eating the seed corn that will sprout new jobs.

Those who would like to demonise DeMo should doubly demonise farm loan waivers. And the best way to ease the pain of GST, which is forcing tax compliance and formalisation on the small and medium sector, would have been to dump universal farm loan waivers in favour of universal subsidisation of employment creation for the next five years.

Once the economy booms, as it is bound to, jobs will start creating themselves.

The moral: Quotas don’t create jobs, and loan waivers may actually destroy future jobs. It’s dumb versus dumber here.