Job creation vital

Inviting big investment to generate revenues for social welfare programmes is self defeating because they add to unemployment.

Finance Minister Arun Jaitley has announced in the Budget that the corporate tax rates would be reduced from present 30 per cent to the global norm of 25 per cent over the next four years. He hopes that this measure, along with boost to infrastructure and skill development, would attract large scale investment and help the government collect more taxes. These revenues could then be used for funding social welfare schemes like insurance for the poor and MNREGA.

Compulsion before the finance minister was that the revenues would decline if tax rates were not reduced. Multinational corporations have their operations spread over many countries. They make profits in a host country but remit the profits to their home headquarters. For example Hindustan Unilever manufactures soaps and other consumer goods in India and remits profits to the Netherlands. The finance minister wanted to provide incentives to the MNCs to pay taxes in India by lowering the tax rates. India has Double Tax Avoidance Agreements with many countries. The income is taxable only in one country under these agreements. Whether it is taxable in the host country or home country depends on the specifics of the agreement. Indeed corporate tax collections in India may rise if the ploy works.

The reduction in corporate taxes would lead to a reduction of revenues of the government and a corresponding decline in welfare expenditures for the present, at least. There will be an immediate decline in revenues that may, or may not, be nullified by increased investments in future. The immediate reduction in revenues may get nullified if large scale investments take place in the country and the total tax collected goes up despite the lower rates. This reduction in revenues for the present is reflected in the budget in decreased real expenditures on social welfare schemes like MNREGA. The total outlay for this scheme in the present Budget is Rs 34,000 crore, which, if my memory serves me right, is equal to the budget allocation for the scheme last year. The allocation should be increased by the rate of inflation to keep the allocation in real terms unchanged at last year’s levels.

The finance minister has tried to cover up the reduction in real allocation on welfare schemes by announcing new schemes for insurance to the poor that are essentially cosmetic in nature. These schemes do not entail large government outlays hence the results will also be correspondingly minimal irrespective of the hype.

The key question then is whether the reduction in tax rates will actually translate into torrents of investments. Success is not ensured even if such torrents of investments pour in. Reason is that most investment will take place in capital-intensive industries. Only a handful of new jobs will be created while large numbers of jobs will be lost. For example, manufacture of bread by Britannia and similar large companies may have generated a few thousands of jobs but this has led to large numbers of small bread manufacturers closing their shutters leading to loss of tens of thousands of jobs. Similarly, the establishment of a large textile mill leads to losing of jobs in thousands of hand looms and power looms. A study by CRISIL has reported that between 2005 and 2010 the number of workers required to produce goods worth Rs 1 crore declined from 171 to 105. The total number of jobs in the manufacturing sector in India declined by seven per cent in this period despite we holding to an average 8.4 per cent rate of growth. I reckon it would need a growth rate of about 15 per cent to even create one addition job in manufacturing. The total number of jobs in the private organized sector was 1.2 crore in 2012. About this number of new workers are entering the labour market every year.

In other words every year we need to generate new jobs equal to the total number of present jobs. A growth rate of 30-40 per cent would probably be required to create such number of jobs. It is impossible to attain such high rates of growth hence I predict that the Finance Minister will fail in his resolve howsoever well meaning he may be.

Inviting problems?
Inviting big investment to generate revenues for social welfare programmes is self defeating because these investments add to unemployment and contribute to the creation of the problem in the first place. It is like depriving a poor man of his daily food with a promise to provide him with vitamins; depriving a farmer of water for his crops with a promise to provide him with fertilizers. The Finance Minister is likewise depriving people of their existing jobs with a promise to provide them with welfare benefits.

The finance minister should take an altogether different approach. He should provide incentives to job creation. Companies that generate large number of jobs may be provided with tax breaks. Use of job-eating automatic machines may be banned in the country; and import of goods manufactured with these machines may be subjected to a high rate of tax. That will generate jobs and at least prevent worsening of the employment situation as reported to have taken place in the last few years. Imposition of such restrictions on job-eating technologies and imposition of such taxes is permissible under the WTO. Investment too will flow to make profits from our large market. The Finance Minister must change tracks and not follow other countries to our collective doom.
(Author was formerly Professor of Economics at IIM Bangalore)