India has many plausible alibis for her poverty: religion, the weather, the British, the Mughals, diversity, corrupt politicians, crony capitalists, and many others. It is racist to believe that there is something cultural about our poverty; the same people generated vastly different growth rates over the last 200 years; 1820-1950 (0.1% per year), 1950-1990 (2.5%), 1990-date (6%), and 2003-2008 (8%). But the more interesting question than why are we poor is what can we do about it. The previous government believed that the best way to fix poverty was to legislate rights; food, work, education, service, etc. But legislating rights that people do not have in reality diminishes the state and the subsidies spent on these rights converted a high growth, low inflation economy into a low growth, high inflation economy because they did not raise productivity. India's poverty cannot be fixed by taxpayer funded social security because we can't afford it; if we were to pay half our per capita income as social security to the fourth of the population that lives in poverty we would wipe out tax receipts. Jobs change lives in ways that no subsidy ever can and India needs massive formal, non-farm, private sector job creation. This agenda is not only about salvaging our demographic dividend - the 10 lakh new entrants joining the labour force every month for the next 20 years - Catalysing job creation needs vertically organised central and state governments to deliver on five horizontals; urbanisation, manufacturing, ease of doing business, employability, and labour laws.
EASE OF DOING BUSINESS
India's policy hostility to entrepreneurship has created the two related birth defects of too few formal enterprises and too many sub-scale enterprises. India's 6.3 crore enterprises only translate to 9 lakh companies. Of these companies, only 40,000 post even a single job on an online job portal on any day. Only 10,000 are members of CII. Only 7,500 companies have a paid up capital of more than Rs10 crore. Only 6,000 companies have a credit rating. This massive informality leads to sub-scale enterprises; 84% of our manufacturing is done by companies with less than 50 employees. An enterprise can be a dwarf (something small that will stay small) or a baby (something small that will grow) and India has become a nation of corporate dwarfs. There is nothing cultural about informality and small enterprises; regulatory cholesterol has created a hostile habitat for entrepreneurship. Improving the ease-of-doing business across the board would massively increase formality, productivity and scale among our enterprises. Instead of special economic zones, we need to fix the whole country by moving from a deals to a rules based system by rebooting the MSME ministry, improving access for non-collateral credit, getting rid of the labour and tax inspector raj, implementing GST, growing the venture capital industry, digitising government interfaces, freeing foreign investment, and getting rid of outdated laws.
The key challenges in this ecosystem are urbanisation and regional disparities. We only have 50 cities with more than a million people; China has more than 350. Exploding job creation needs new cities because the short-run response of taking people to jobs needs to be replaced by the long -run response of urbanisation that involves taking jobs to people. We need to carefully imagine what kind of urbanisation we want. Urbanisation may not be about shoving more people into Delhi, Mumbai or Bengaluru, but is it also not about well-planned economic wastelands such as Chandigarh? We must reflect on how infrastructure and planning wastelands such as Gurgaon near Delhi, Gachibowli near Hyderabad, Magarpatta near Pune, Whitefield near Bengaluru and Mohali near Chandigarh became job magnets. Twenty-nine chief ministers are more important than one Prime Minister for fixing our physical ecosystem. But it is time for India to seriously consider real mayors; in 1924 Jawaharlal Nehru was the mayor of Allahabad, Rajendra Prasad was the mayor of Patna, CR Das was the mayor of Calcutta, and Vallabhbhai Patel was the mayor of Ahmedabad. There are wonderful letters of Nehru about street lights and Patel about sanitation; mayoral elections are fought on infrastructure then and now. Unfortunately, the only real mayor in India is the Chief Minister of Delhi. The agenda includes low-cost urban rental housing, infrastructure, city governance, industrial clusters, drinking water, warehousing capacity, toilets, and much else.
Only 12% of India's workers are employed in manufacturing - this is the same as post-industrial US. This creates three painful birth defects for our labour markets; 50% agricultural employment (half our workforce produces only 15% of GDP), 50% self-employment (most are subsistence and involuntary; the poor cannot afford to be unemployed so they are self-employed), and 90% informal employment (this number is unchanged since 1990 and means that 100% of net job creation has happened informally in the last two decades). China became the workshop of the world because of great infrastructure, low wages and high foreign investment (60% of their manufacturing exports come from multinational companies using the country as a production base). But Chinese wages have increased at 17% in dollar terms every year for the last five years and at an individual level are up from 5% of US wages ten years ago to 20% of US wages. This is India's opportunity. The agenda is mostly about infrastructure of ports, roads, electricity, removing bottlenecks in land acquisition and the ease-of-doing-business stuff listed earlier.
The 3Es of education, employment and employability are much more closely related than our current policy architecture allows. We can't teach somebody in six months what they should have learnt in 15 years. Third party financing for skill development can rarely work unless it leads to a job. And we have many degree holders who can't get jobs. Fixing this needs an integrated approach to the 3Es. The school quantity challenge may be yesterday's war won by Sarva Shiksha Abhiyaan and mid-day meals, but we don't have learning outcomes. We also need new pathways and space for the 160 lakh-plus children who fail Class 10 and Class 12 exams every year. We need new forms of college because 15% of high-end security guards now have a college degree, but the social signalling value of a degree seems to matter. 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 online open courses) such as edX, coursera, and udacity cite India as one of their largest markets 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 new medical education regulator to replace the one that has ensured our yearly output of 35,000 doctors is dwarfed by 15 lakh engineers.
People who say that labour laws don't matter for job creation have never created jobs or tried to find one despite being qualified. India's labour laws are the corporate equivalent of marriage without divorce; on paper you can't get rid of an employee once you hire her or him. Some people argue that this does not matter because of the transmission losses between how the law is written, interpreted, practised and enforced. But our labour law regime has painful consequences such as corruption, low manufacturing employment, higher capital intensity of investments, low formal wage employment, high agricultural employment, etc. This needs fixing in four areas; a benefits regime that confiscates 49% of low-wage worker salary, a toxic trade union regime because of the politicisation of unions and the criminalisation of politics, regulatory cholesterol that is vague, contradictory, and an employment contract that is asymmetric. We must start by giving employees three choices in how they are paid their salary; opt out of their 12% employee contribution to Provident Fund (EPFO), choose to pay their 12% employer contribution to EPFO or NPS (National Pension Scheme), and choose to pay their ESI contribution to ESIC or buy IRDA regulated health insurance. Today ESIC and EPFO do not have clients but hostages. After this, the next wave of reform should be around inspections, definitions, and trade unions. The tricky and emotional issue of hire and fire should be deferred for now or left to states.
India and China were 40% of world GDP in 1840. Two hundred years later, that number will finally be the same. But even though India will be among the world's largest economies in a few years, it will still have the largest number of poor people. When Gandhiji came back to India in 1915, Gokhale asked him to make India proud of herself again. We have made considerable progress in that journey but placing jobs at the heart of policy is this government's duty - and opportunity.
Massive job creation needs a vertically organised government to deliver on five horizontals.
(Manish Sabharwal is Chairman, Teamlease Services.)