Job creation, a challenge

Youth of the country voted Narendra Modi into power. It is time to deliver. The CRISIL, a global analytical company providing ratings, research, and risk and policy advisory services has pointed out that between 2005 and 2010, the number of jobs created was 2.7 crore but the number of self-employed fell by 2.5 crores. The net addition to employment was a meagre 0.2 crore.

The number of the youth work force in this period was about 5.5 crore. Only 4 per cent of the youth entering the labour market got jobs. This, despite the average rate of growth in this period being 8.7 per cent. Challenge before Modi is to provide jobs and usher in ‘achhe din’ with a much lower rate of growth of 5-7 per cent.

The UPA experience also tells that government-led job creation as in MNREGA will not sustain. The government has to impose taxes on the running businesses to garner monies for these programmes. This leads to killing of the productive economy. Challenge before Modi is to generate jobs without increasing government spending.

“Make in India” will not deliver. The CRISIL report points out that employment declined by 7 per cent 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. The intensity of employment, that is, number of workers employed for generating output of Rs 1 crore declined from 171 to 105 in this period because industries used more machines and less labour.

Another study done by Centre for Studies in Economics and Planning at the Central University of Gujarat, Gandhinagar found that increase in FDI of 10 per cent led to reduction in employment of one per cent.

Modi should assess whether his advisers based in New York have delivered in their home countries. It will not do to call in a failed doctor to cure a terminal patient. There is an irreconcilable contradiction between two dimensions of achhe din espoused by Modi. The idea of making India a “developed” country means that frontier manufacturing technologies using robots would be used leading to displacement of workers. That is diametrically opposed to providing jobs to the 5.5 crore workers that will enter the workforce between now and 2019.
The challenge of 2015 is 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, and to do this without increasing government spending so that fiscal deficit and price rise is kept under control.

The way out is to calibrate the technologies used by big businesses. Economic policy should provide incentives to big businesses to employ more numbers of workers. The way forward is to segregate the manufacturing sector in two parts. Industries must be ranked according to the share of wages in the value added. Labour-intensive industries, say tanneries or food processing industries, may pay wages of Rs 40 to add Rs 1,000 to the value of goods produced.

The trick is to reduce the excise duty, sales tax 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. That will provide impetus to labour-intensive industries. This exercise can also be done at the unit level. One labour-intensive sugar mill may employ 1,000 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 government can goad the businesses to employ more workers.

Labour reforms
Labour reforms can be tied to employment. Present policy is to impose harsh labour laws on units that employ more than 300 workers. The line is drawn irrespective of the value added.
An agarbatti factory that produces goods worth Rs 1 crore and a cement factory that produces goods worth Rs 100 crores are subject to the same labour laws if they employ more than 300 workers. This creates an incentive to employ lesser numbers. Way out is to calculate wage payments as share of value added. Industries like agarbatti that have high share of wages in their output should be exempt from labour laws.

Then industries will try to employ more numbers so that they can come out of the scanner of labour department. It would be possible to convince the people, if not the trade unions, that this is 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. Modi’s infatuation with the west is also a big stumbling block. The “Look West” policy of Modi essentially leads to giving free play to big industries.

Modi must realise 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 is small. The game is entirely different in India where numbers of unemployed are exceptionally large. Industries in the United States can kill jobs and the government can provide them with unemployment compensation because the numbers are small. Modi must wake up and not follow the disastrous policies of Manmohan Singh that led to the denouement of the UPA.

(The writer was formerly Professor of Economics at IIM, Bengaluru)