Tuesday, January 24, 2023
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Modi govt isn’t giving unemployment enough attention. Inspector raj for SMEs must end

The student protests in Bihar and Uttar Pradesh should make Modi government wake up. And sons-of-the-soil policies are not the answer.

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The recent student protests in Bihar and Uttar Pradesh over alleged irregularities in railways recruitment should be a wake-up call. Growing joblessness in India presents the biggest risk for the revival of consumption and if it remains unchecked, it has the potential to create political instability. Yet, it’s not getting the attention it deserves from the Narendra Modi government, which is difficult to understand.

Despite one of the world’s lowest labour force participation rates, even by developing country standards and slowing population growth, the number of job seekers is steadily and rapidly rising in India. According to the World Bank, the unemployment rate in the 15-24 age group is very high at 23.01 per cent despite a low labour force participation rate (LFPR) at 27.06 per cent. These rates are 12.13 per cent and 41.97 per cent for Bangladesh, and 11.01 per cent and 45.97 per cent, for China. This should worry India’s policymakers.

The genesis of the problem

Private investment in India remains muted for quite some time despite slashed corporation taxes and all-time low interest rates, negative if adjusted for inflation. To add to that, technological disruptions are leading to the creation of fewer jobs for every additional unit of investment. Moreover, because of the stock market preference for leaner organisation, that is fewer jobs per unit of revenue, and archaic labour laws, large companies are using cheap capital (cross-subsidised by households amid a globally oversupplied savings market) to drive labour saving automation.

On the other hand, SMEs with higher labour intensities vis-a-vis large corporations continue to be troubled by forced formalisation starting with the ill-advised demonetisation in 2016, followed by flawed design and implementation of GST that has created a compliance nightmare for smaller businesses and brought back the inspector raj. The Covid pandemic and kafkaesque lockdown measures have made a bad situation worse for smaller businesses and first-time entrepreneurs. This is adversely affecting job creation.

The policy focus on protecting capital-intensive large-scale manufacturing (of say, textile fibres) at the cost of labour-intensive manufacturing (of say, garments) that would have absorbed thousands of unskilled and semi-skilled Indian workers, is not helpful either.

In an enthusiasm to push manufacturing, the Modi government is neglecting services that tend to be more labour intensive. Again, credit appraisal by institutional lenders is more suited to manufacturing than services. Bankers insist on collaterals of ownership of land, factory sites or stock-in-trade that small service firms can’t furnish, and hence are effectively denied bank credit.

Also read: Unemployment and unlimited data pack — UP’s youth are neither angry nor idle

Last but not least is the growing unemployability of graduating students. The extent of unemployment increases with increasing educational levels. This is more so in the country’s two most populous states, Bihar and Uttar Pradesh, which account for roughly one-fourth of India’s unemployed and is a reflection of the kind of courses being taught that has no connection to the jobs market. Thus, enrolment share in non-technical/professional courses is very high at 96 per cent in Bihar and 85 per cent in UP. Humanities account for 56.5 per cent of the enrolment in UP and 70 per cent in Bihar. No wonder, 12.5 million candidates are competing for 35,281 jobs in non-technical popular categories in Indian Railways — it underlines the worsening educated unemployment in the country.

Growing joblessness remains the biggest macroeconomic risk for the revival of discretionary demand for goods and services in the country wherein consumption remains the major growth driver. Increasing unemployment is also leading to widening of the income and wealth gap between the rich and poor that will further dampen the prospects of consumption. Besides, if unchecked, it will also encourage demand for sons-of-the-soil policy. Already many states (Haryana and Andhra Pradesh in particular) have laws reserving 75 per cent jobs for local youths, and many states are contemplating similar moves. This will impose limits on the ability of businesses to hire suitable workers and also raise wage bills.

Also read: Key to India’s biggest election? Creating jobs for people of UP, not jobs in UP

The way forward

Technological disruptions are aiding displacement of workers. However, the solution is not to discourage tech innovation but to promote labour-intensive manufacturing and a renewed focus on SMEs. It’s the latter, which is completely neglected by the Modi government, that helps explain increasing joblessness.

The government often claims that it wants to create entrepreneurs or job creators rather than job seekers. That’s good to hear but increasing compliance burdens are actually a big pain for first-time entrepreneurs and small businesses in general. In a market economy, it’s businesses that create jobs. Thus, compliance burden must ease and inspector raj must end, not only in letter, but also in spirit.

The following two tweaks can help SMEs. At the moment, manufacturing firms with annual sales turnover of Rs 40 lakh are exempted from compulsory GST registration. This limit is Rs 20 lakh for services firms. It would help to raise this limit to Rs 50 lakh for both manufacturing and services. Making GST payment and filing GST returns quarterly, just like income and corporation taxes, will help all kinds of businesses by cutting down compliance burden.

While cheap capital won’t hurt smaller businesses, their real problem is access to institutional credit. Thus, it’s time to focus on improving access to credit for SMEs, especially those engaged in labour-intensive services.

To improve employability of graduating youths, the course curriculum needs urgent overhaul. That calls for better coordination between educational institutions and businesses. There are many corporate professionals who would want to join educational institutes but they can’t. Many B-schools have introduced fancy positions such as professor-of-practice but eligibility criteria remains quite academic, for instance, preference for PhD and articles published in academic journals that not many people read. It would help if it’s replaced by a post-graduate degree and articles published in newspapers. Plus to attract corporate executives, B-schools should be willing to pay more than what they pay academicians. That would help in filling in unfilled faculty positions and also improve employability of students.

Moreover, a big push to government investment in under-invested healthcare will create thousands of jobs for skilled and unskilled youths and is worth pursuing.

The writer is CEO, Indonomics Consulting, a policy research and advisory startup. Views are personal.

(Edited by Neera Majumdar)

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