This budget does nothing to address the biggest problem that this country faces.
By now, this statistic has been repeated quite a few times by observers of the Indian economy, but the magnitude of the problem forces a revisit. India needs to create twenty million jobs each year to account for the 12-13 million young adults who enter the workforce each year and the 6-7 million people that have to be shifted from unproductive agricultural work. Even then, this doesn’t address the problem of the stock of unemployed persons and the number of people who have dropped out of the labour force due to an absence of jobs. India, however, is managing to create less than one million new jobs per year, and that is in favourable years. The deficit is huge and growing each year.
Job creation remains India’s biggest economic challenge. Analysing the 2018 union budget through the jobs lens is bound to leave one disappointed. The first impression is that the gravity of the employment situation has not descended on the present government. There was some talk before the budget that this one would focus on the jobs-creation problem, but the issue was largely sidelined. Look at some of the announcements related to employment in this year’s budget.
Small Is Not Beautiful
There was a big push for the MSMEs in this year’s budget. The Finance Minister emphatically stated that “Medium, Small and Micro Enterprises (MSMEs) are a major engine of growth and employment in the country,” and went on to allocate Rs 3794 crores (quite a small number) to the MSME Sector for giving credit support, capital and interest subsidy and innovations. This was lauded by many as a policy push in the right direction.
The wide-ranging consensus on the importance of MSMEs in India is impressive. There is near universality in declaring MSMEs to be the engine of economic growth in India and the driver of job creation. Just for clarity on terminology, a micro enterprise employs less than 10 people, a small enterprise less than 50 people and a medium enterprise less than 300 people. This definition is according to the World Bank, though countries often classify them according to the initial investment (India), turnover, and other criteria.
There are numerous reports, even by reputed consulting firms, that speak about the benefits of MSMEs. The reasoning for this is often fallacious. “MSMEs will generate employment in the future, because they provide employment now” is the general reasoning. Imagine if the same thinking persisted in the 1800s when horse carts were the main form of transportation and a major source of employment – chances are that there would be no investment in the railways at all.
The problem with MSMEs in India is that they remain abysmally unproductive. Despite many measures by successive governments to boost the sector, such as reservation of certain goods, protection from domestic and international competition, all sorts of tax breaks and subsidies, cheaper credit, loan waivers, etc, the sector continues to underperform. One estimate reveals that the growth in Total Factor Productivity (TFP) of unregistered MSMEs was negative between 2006 and 2011. The registered MSMEs did slightly better, though the TFP drastically dropped after 2010.
Labour productivity, in particular, is extremely low and dropping in the MSMEs. This, in effect, raises the effective cost of labour and makes these firms uncompetitive in the market place. This is perhaps the reason why many of the “labour intensive” MSMEs are gradually replacing labour with capital.
There is also a problem of classifying micro, small and medium enterprises together. The reality is that unregistered micro firms dominate the MSME sector. These employ about three people or lesser on an average and are desperately unproductive. Unfortunately, it is the number of unregistered micro firms that are growing, and the number of small and medium enterprises is shrinking. To paraphrase Manish Sabharwal of TeamLease, there are two kinds of companies: babies and dwarfs. Both are small but babies will grow. Unfortunately, almost all of the one-person enterprises in India are subsistence-level dwarfs, at best. The labour and other laws in India almost ensure that the companies are dwarfs and not babies that will grow tremendously and create a lot of employment in the future. This phenomenon is also classified as the “missing middle.”
Pouring more money into the MSME sector will create a few jobs with low productivity and low and inconsistent wages, not livelihoods.
Entrepreneurship is overrated in the Indian context
Related to the push for MSMEs is the big announcement of increasing funds for the Micro Units Development and Refinance Agency (MUDRA) scheme. From the budget speech:
MUDRA Yojana launched in April, 2015 has led to sanction of Rs. 4.6 lakh crore in credit from 10.38 crore MUDRA loans. It is proposed to set a target of Rs. 3 lakh crore for lending under MUDRA for 2018-19 after having successfully exceeded the targets in all previous years.
The objective of this scheme was to promote micro enterprises and new entrepreneurs and generating self-employment opportunities. The government claimed that it was responsible for creating a large number of jobs. An ICRIER working paper by Radhicka Kapoor has some excellent analysis of the MUDRA scheme. A basic mistake that the proponents made was assuming that each loan would create at least one extra job, apart from the person who availed the loan. Each new loan definitely does not imply creation of a new job. The loans were more likely given to people who are moving to self employment from other jobs resulting in no new net job creation. From the working paper:
Further, given that the average size of the loan disbursed under MUDRA is quite small, it is unlikely that the loan seekers are providing a job to anyone other than themselves. The average loan size as computed from the PMMY report (2017) was approximately INR 44,000 in 2016-17. For new entrepreneurs/ accounts this was roughly INR 70,000. This was lower than the average annual emoluments paid to workers in unincorporated non-agricultural enterprises, roughly INR 74,871 in rural areas and INR 92,441 in urban areas in 2015-16.
Small Incremental steps will just not do
There were other small incremental steps taken by the government with regard to employment. It has mostly to do with tweaking the tax rates and government contribution to Provident Fund.
None of the measures are the kind of bold and big measures that are required to solve the problem of job crisis in India. The magnitude of the employment problem in India cannot be tackled by small incremental steps that may help in creating a couple of million jobs at best, but requires a bold new outlook to job creation to the tune of 20 million per year. The normal solutions that have been proposed by nearly everyone are still valid – reform the labour laws and undertake structural reforms. It is a given that the government has to do this and there’s no way around it. However, this might still not be enough to tackle a problem of this magnitude.