The most interesting question of all times is: Why are some countries poor? After most trips to the United States, we ask ourselves: “These Americans aren’t smarter than us, so why are they richer than us?” Cultural explanations for poverty are at best the soft bigotry of low expectations, and at worst, racism; poverty is about productivity. As Nobel Prize-winning economist Paul Krugman says: “Productivity is not everything, but in the long run, it is almost everything”.
India’s poverty has substantially reduced since reforms began in 1991, but we don’t come close to the poverty reduction record of China because we haven’t anchored our reforms around the 3Es (education, employability and employment). Policy tends to focus on hard infrastructure, but the 3Es represent the infrastructure of opportunity. A job changes a life in ways that no subsidy ever can. And it is important to recognise that India does not have a problem of jobs (our official unemployment rate of 4.2 percent is not a fudge), but of formal productive jobs. And since 10 lakh kids will join the labour force every month for the next 20 years, we need to focus on five labour market transitions: farm to non-farm, rural to urban, subsistence self-employment to wage employment, school to work and informal to formal.
The Enterprise Geography of Work
India’s entrepreneurship ecosystem seems healthy; 50 percent of our labour force is self-employed, and we have one enterprise for every four non-farm workers. But most of our enterprises are dwarves (80 percent of manufacturing is done in enterprises with less than 50 employees), vary considerably in productivity (there is a 22-times productivity difference between a firm at the 90th and 10th percentile by size in manufacturing), and 40 percent of our labour force comprises the working poor (people who make enough money to live but not enough money to pull out of poverty).
India’s problem is not jobs but formal jobs; we are just not producing enough enterprises and workers with the productivity to pay or deserve higher wages. Of India’s 6.3 crore enterprises, only 75 lakh have any tax registration, only 15 lakh pay the mandatory Provident Fund and ESI (employees state insurance) contribution, and only 10 lakh are companies. Of these companies, only 55,000 post at least a single job on an online job portal on any day. Only 17,500 companies have a paid-up capital of more than Rs 10 crore.
This is because of regulatory cholesterol-created hostility to entrepreneurship. Changing the ease of doing business could create a Cambrian explosion of new venture creation and massively increase productivity and scale among existing enterprises. This requires rebooting the thought world of the Medium and Small Enterprises (MSME) Ministry, improving access for non-collateral credit, getting rid of the labour and tax inspector Raj, implementing the goods and services tax (GST), growing the venture capital industry, digitising government interfaces, freeing foreign investment, and getting rid of outdated laws.
The Physical Geography of Work
The big question is whether India is going to take jobs to people or people to jobs. The massive divergence between real and nominal wages in our job hubs (cities with more than a million people) is murdering migration at the bottom of the pyramid. India only has 45 cities with more than a million people; China has 375. There will be strong regional disparities in the next 20 years; five states in the south and west of India (Gujarat, Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh) will see 50 percent of the country’s GDP growth but only five percent of the population growth.
We must define urbanisation carefully; it is not about shoving more people into Delhi, Mumbai or Bangalore, nor is it about well-planned economic wastelands like Chandigarh. Considerable economic energy of the last decade has come from Gurgaon near Delhi, Gachibowli near Hyderabad, Magarpatta near Pune, Whitefield near Bangalore and Mohali near Chandigarh. But unfortunately, these job magnets can’t be called smart cities. The problem is not only hardware; new cities need real mayors because impotent or unelected city leadership creates dumb, not smart cities.
The Sectoral Geography of Work
The key challenges for this geography are low manufacturing employment and high agricultural employment. Both are closely related because the migration from farms is retarded by the lack of non-farm jobs, and the poor cannot afford to be unemployed so they are self-employed. China became the workshop of the world because of great infrastructure, low wages and high foreign investment (60 percent of their manufacturing exports come from MNCs using the country as a production base). But Chinese wages have increased by 17 percent in dollar terms every year for the last five years, and they are now at 20 percent of US wages, up from five percent 10 years ago.
This is India’s opportunity. It is also important to recognise that not everybody can be an entrepreneur; our 50 percent self-employment is mostly working poor who cannot find wage employment. Agriculture is not a solution because of low productivity; 240 million Indians produce less food than four million Americans. Jobs must come from enabling manufacturing. This agenda includes the infrastructure of ports, roads, electricity and de-bottlenecking land acquisition. But it will also be substantially driven by the ease-of-doing-business initiatives.
The Education Geography of Work
This geography has three challenges that are contradictory: quality, quantity and inclusiveness. The school quantity challenge has been licked (enrolment is more than 110 percent in most states), yet the Right to Education Act fights yesterday’s war of enrolment and needs to be replaced by a Right to Learning Act that focuses on outcomes.
We also need to create new pathways to higher education; the 105 lakh and 80 lakh kids who fail the Class 10 and Class 12 exams every year fall off in the rigid and mostly physical 10+2+3 system of today. In pursuing the Twelfth Plan goal of a 30 percent GER (gross enrolment ratio of kids between 18 and 25 in college), we must remind ourselves that college is not what it used to be. Thirty-two percent of retail sales clerks in the United States now have a college degree, while only one percent used to in 1970; 60 percent of taxi drivers in Korea now have a college degree while only five percent used to in 1970; and 15 percent of high-end security guards in India now have a college degree.
So we need new forms of college. In skills, we confront a financing failure; employers are not willing to pay for skills but are willing to pay a premium for skilled candidates, candidates are not willing to pay for skills but are willing to pay for a job, and banks/micro finance institutions are not willing to lend for skills unless a job is guaranteed.
The National Occupation Codes are a poor framework for aligning demand (what employers want) with supply (the skills kids have), and we need to move from periodic interventions to architecting a self-healing structure. Young job seekers are unable to get a job without experience, but it is unclear how they can get experience without a job. Our skill system needs to be better aligned with what employers want. This needs vocational universities which offer academic modularity (mobility between certificates, diplomas, and associate degrees), flexible delivery, and a new apprenticeship regime. We need to deregulate distance education because global MOOCs (massive open online courses) like edX, coursera, udacity, and so on cite India as one of their largest markets, and yet Indian universities are not allowed to compete nationally or innovate.
We also need a radical revamp of our higher education regulator that currently confuses university buildings with building universities and a medical education regulator whose corruption ensures our yearly output of 35,000 doctors is dwarfed by 15 lakh engineers. The proposed National Skill University is important to create new connectivity between skills and degrees. A skill university prays to the one god of employers, has only five percent of kids physically on campus (the rest in apprentices and distance education), and only five percent of kids are doing degrees (the rest are doing certificates and diplomas with modularity to go all the way to degrees).
Apprenticeships are important. If we had the same proportion of our labour force as apprentices as Germany does, we would have 15 million apprentices. It is time for the HRD Ministry to recognise that massifying higher education requires separate regulatory regimes for small research universities (whose target would be global rankings) and large vocational universities (whose target is volume and employer connectivity). It also needs to amend the Right to Education Act to become the Right to Learning Act because we can’t teach people in six-month skill programmes what they should have learnt in 12 years of school, and the most important vocational skills are reading, writing and arithmetic.
The Labour Law Geography of Work
Our labour law regime ensures that 90 percent of our labour force works informally. The biggest problem is a benefits regime that confiscates 49 percent of low-wage worker salary, a toxic trade union regime, and the criminalisation of politics, and an employment contract that is effectively marriage without divorce. We must execute the Budget announcement to fix our benefits regime by giving our employees three choices in how they are paid their salary: opt out of their 12 percent employee contribution to Provident Fund (EPFO); choose to pay their 12 percent employer contribution to EPFO or NPS (National Pension Scheme); and choose to pay their ESI contribution to ESIC (ESI Corporation) or buy health insurance regulated by the Insurance Regulatory Development Agency. Today, ESIC and EPFO do not have clients but hostages.
The next wave of reform should be around inspections, Factories Act, definitions, and so on, and the tricky issue of hire and fire should be deferred for now or left to the states. We need to complete the consolidation of 44 central laws into four labour codes and give employers the choice of complying under the Factories Act or Shops and Establishments Act. But the broader theme needs to be decentralisation; the use of Section 254 (2) of the Constitution that allows states to amend central laws because 29 Chief Ministers matter more than one Prime Minister for entrepreneurship.
The Legislative Geography of Work
An important priority for the new government is improving the ease of doing business. Here are some suggestions:
- Implementing the decision taken early this year of using PAN as the Unique Enterprise Number. Every company currently has multiple numbers that include Corporate Identity Number (21-digit), Tax Payer Identification Number for commercial taxes (11-digit), Service Tax Number (15-digit), PAN number (10-digit), Central Excise (PAN Number + 2 characters), Provident Fund number (11-digit), Profession Tax Registration Certificate (9-digit), Profession Tax Enrolment Certificate (9-digit), Tax Deduction and Calculation Number (10-digit), ESIC number (17-digit), Labour Department Registration Number (13-digit, but varies from state to state), Importer Exporter Code (10-digit), Shops and Establishments Act Registration (20+ digits), CLRA Registration (15+ digits), Labour Welfare Board (5-digit), and so on.
- We need all government departments to have all registrations, permissions, and licenses online with open APIs within two years. States must be given incentives and ranked based on electronic single-window compliance within a deadline. All new laws should be mandatorily born digitally native.
- We must revisit the Companies Act because it has stopped distinguishing between closely held private companies, widely held public companies, and publicly listed companies. The current lack of nuance not only hinders entrepreneurship (most enterprises in early stages are not financed by formal venture capital but loans and equity investments from friends, family and self) but is creating a trail of compliance or structuring that needs expensive lawyers and accountants. The regulation of listed companies should be left to stock exchanges and SEBI. Revisit the more-than-15 filings required, and remove the ones for the ordinary course of business (management appointments, etc.). Revisit the liabilities of key management personnel or raise the threshold to Rs 50 crore.
- We must revisit tax compliance to become transparent, consistent, and honest; any tax law that cannot be codified into a piece of software code should be reviewed because the current discretion is being misused badly. Tax compliance should be raised by massive doses of technology, analytics, and big data. This will require a radical review of the organisation structure, culture, and incentives of the Central Board of Direct Taxes.
- We must move to service tax becoming due when payments are received rather than when they are invoiced. This has created a huge cash flow problem for all enterprises, particularly the small ones. This not only amounts to working capital funding for the government from small entrepreneurs but also creates huge accounting problems and actual tax losses in the case of bad debts.
One of the most painful lumpings of the last few years was BRICS (Brazil, Russia, India, China, South Africa); India has very little in common with commodity economies. In fact, the global commodity meltdown has made India very attractive; it is one of the few places in the world where genuine growth is left. Europe has the unsustainable combination of 7 percent of the world’s population, 25 percent of the world’s GDP, and 50 percent of the world’s social spending.
The genius of the United States—immigration—faces real political challenges. And China is slowing down, but we are probably comparing ourselves unfairly. Exactly 10 years ago, the Chinese economy was the same size as the Indian economy today, but they were growing at 13 percent while we are growing at 7 percent (guess 6 percent is the fixed cost of democracy). India will never grow at 13 percent, but there is nothing wrong with our consistent growth; our brand is not to be hot or cold but consistently warm.
The productivity of a country is a complex question that involves individuals, enterprises, legislation, and much else. As Nobel laureate Robert Solow said, countries don’t need more cooks in the kitchen but a different recipe. India’s new recipe around job creation has many anchors: macroeconomic stability, decentralisation to states, lower costs of formalisation, focus on manufacturing, whether for India or exports, and better human capital.
Most people overestimate what policy change can do in the short run, but they underestimate what it can do in the long run. Our past policy narratives were about running away from something, rather than towards something, and mostly involved blaming external variables of opening balances rather than taking responsibility. But as Ghalib said “Umar bhar Ghalib yahi bhool karta raha, dhool chehre pe thi aur aina saaf karta raha (All his life, Ghalib kept making a mistake; it was his face that was soiled, but he kept cleaning the mirror)”. There is a new narrative that recognises that the role of the government in Putting India to Work is not setting things on fire but creating the conditions for spontaneous combustion.
To paraphrase historian Samuel Huntington, “the gap between India’s ambition and its reality is not a lie but a disappointment. And it is only a disappointment because its ambitions were very high.” India made an unrealistic democratic gamble at Independence that has paid off. Now, we are finally taking sustainable steps on poverty with a focus on the 3Es. India’s poverty is finally heading to the museum where it belongs.
The authors are with TeamLease Services.
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