From poetry to prose

Union budget reinforces the message that India will not be hot or cold but consistently warm.

Written by Manish Sabharwal | Published:March 3, 2016 12:00 am

 

union budget 2016, union budget, Sapiens,Yuval Noah Harari, Sapiens by Yuval Noah Harari, GDP, EPF, tax, india budget, indian express Illustration by: Subrata Dhar

One of the most interesting recent books was Sapiens by Yuval Noah Harari (published in Hebrew in 2011 and in English in 2014), which looked at human history through the lens of cognitive, agricultural and scientific revolutions. The author makes the case that Homo Sapiens won over physically stronger Neanderthals because of their invention of “imagined realities” or narratives about the future.

Countries are narrative and this budget reinforces India’s eight new narratives, five labour market transitions (farm to non-farm, rural to urban, subsistence self-employment to decent wage employment, informal employment to wage employment, and school to work), and three policy priorities (macroeconomic stability, reducing regulatory cholesterol and decentralisation). Narratives matter because we overestimate what policy can do in the short run but underestimate what it can do in the long run. Let’s look at the eight in more detail.

The first two transitions of farm to non-farm and rural to urban are connected, but are not the same thing. Of course, the only way to help farmers is to have less of them — 50 per cent of our labour force works in agriculture but only generates 15 per cent of GDP — but does that mean shoving more people into Delhi, Mumbai and Bangalore? Will Bangalore become like Tokyo with 36 million people and Delhi like Beijing, whose ninth ring road is 900 km long? But they need not. India has only 50 cities with more than a million people (China has 385) and two lakh of our six lakh villages have less than 200 people. The infrastructure spend of Rs 2.8 lakh crore, combined with other Make in India initiatives, will create non-farm jobs in new cities formed by growing existing towns. Migrations are currently retarded by leaky fuel, food and fertiliser subsidies. Aadhaar’s legal legitimacy will reach subsidies to those who need them, reduce corruption, and execute a shift from rigging food prices to managing rural incomes.

The third and fourth transitions of subsistence self-employment to decent wage employment and informal to wage employment are also connected, but are not the same thing. Fifty per cent of our labour force is self-employed but only because the poor cannot afford to be unemployed. Contrary to perception, India’s problem is not jobs — our official unemployment rate of 4.2 per cent is not a fudge — but formal jobs that pay a minimum wage. Yet 100 per cent of India’s net job creation in the last 25 years has happened in informal jobs.

India’s formal wage employment is murdered by three things: One, unproductive enterprises; two, the rising gap between real and nominal wages; three, the 45 per cent mandatory payroll deduction between gross and nominal wages.

India needs fewer total enterprises but more formal ones — today, our 6.3 crore enterprises only translate to 10 lakh companies, of which only 17,000 have a paid-up capital of more than Rs 10 crore — which needs GST, tax simplification and less regulatory cholesterol. The accelerating gap between real and nominal wages will come down further because of this budget’s fiscal prudence. And the budget made four important interventions to reduce the gap between gross (chitthi waali) salary and net (haath waali) salary: One, the waiving of employee pension contribution for three years for new employees; two, the equalisation of the tax regime between the EPF and the NPS that will create competition and allow employee choice; three, the higher tax deduction on rental income; and four, changes to the tax deducted at source regime. It would have been nice for the budget to make employee contribution to provident fund voluntary — salary is the property of individuals and they should be free to invest it where they want — but, hopefully, that is in the pipeline.

The fifth transition of school to work is seeing renewed vigour because of the focus on skill development. The Rs 1,000 crore budget allocation for a new financing body could catalyse a third-party market in education loans. The new repository for degrees would not only be infrastructure for employer fraud verification but also greatly improve student convenience. And, hopefully, the new regulatory architecture indicated for 10 government and private universities is only proof of concept and signals that the government is ready to take an axe through higher education’s licence raj and apartheid against vocationalisation. Missing were school reforms — the current right to education act confuses school buildings with building schools and needs to be amended to become the right to learning act.

Now let’s look at this government’s three policy imperatives — macroeconomic stability, reducing regulatory cholesterol, and decentralisation. Fiscal irresponsibility converted India from a high growth-low inflation economy into a low growth-high inflation economy. This budget surely creates conditions for lower interest rates, a stable currency and macroeconomic calm. The budget continues the ease of doing business project by the simplification of taxes; over time, this will change the calculation in six of India’s eight unicorns — start-ups worth more than a billion dollars — incorporating overseas. The budget continues the decentralisation which recognises that India cannot be run from Delhi and shifts power to state capitals by ending Central funding for eight schemes and giving greater funding flexibility to states in 24 schemes.

The budget persists with the overdue shift of policy from poetry to prose because our problems are more chronic than acute. Most flick-of-pen or legislative reforms are done — and we are in the difficult phase of raising state capacity, taking on vested interests, and raising productivity by fixing factor markets of land, labour and capital. The role of a budget is not setting things on fire but creating the conditions for spontaneous combustion, not picking winners or losers but ensuring a level playing field, and lowering the cost of capital.

This budget did that. But, more importantly, it strengthened India’s eight new narratives and reinforced the message to the world that India will not be hot or cold but consistently warm.

 

The writer is chairman, Teamlease Services

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  1. O
    Observer
    Mar 3, 2016 at 10:49 am
    Globally 75% of individuals are self emplo and offer services to each other. That does not need migration and having everyone live in the utter squaler of urban slums. We need a India centric development, not one that small countries have experienced. Delhi and Mumbai are larger than most european countries. Even the USA with a potion of the size of UP has 52 States that are economic and human microsytems themselves. No where in History has anyone managed a migration of a billion people. Perhaps The author can think this thru, before commentating. Also a complex country as large and diverse as India, needs detailing of programs, plans and processes to deliver what is needed to improve the human development index of the people. This Budget has not even attempted any of that.
    Reply
  2. O
    Observer
    Mar 3, 2016 at 10:37 am
    Just too verbose and toeing the govt line. Every one knows about all the above and its linkages. But how on earth will we employ 15% of potion in Farming, and hope the balance will be emplo by Organised Industry?. If that is the vase, we will indeed need hundreds of cities that are megalopolises with a 5 million potion each. Migration from Rural to urban is so traumatic, that only someone whose business uses migrating humans as raw material, will think its a great game changer. This budget has nothing for the Farmer, because this govt is led by a man whose focus has been to loot the farmers lands and hand them to crony capitalists
    Reply
  3. A
    Arun Sharma
    Mar 3, 2016 at 5:32 am
    Only this writer has found this budget very good contrary to impression of all other noted economists who did not find any radical new change in this and found only stamp of Congress policies.
    Reply
  4. G
    Ganesh Kumar
    Mar 3, 2016 at 5:34 am
    5 questions to Arun Jaitley on the EPF tax row Shishir Asthana | Mumbai Mar 02, 2016 05:42 PM IST 5-questions-to-Arun-Jaitley-on-the-EPF-tax-row The imposition of tax on employee provident fund withdrawl has kept social media buzzing over the last couple of days. ried professionals who are facing the prospect of a depletion in their retirement nest have expressed their anger through various forums including change, forcing the finance minister Arun Jaitley to concede that he will consider the suggestions made to him, thus hinting at a possible relief if not complete withdrawal. The finance ministry also came out with a 11-point explainer on Tuesday to clarify its stand on the issue. Taxation is anyways a confusing subject for the ordinary citizen and tax policy planners make sure it remains that way. To add to the confusion, the clarification by the ministry has raised more questions than answers. Here are five questions that have risen on the EPF issue despite the clarifications. 1) The first three points of the 11 point explainer released by the government explains the rationale of the tax and how one can save tax if 60 per cent or more is invested in buying an annuity product. Confusion or rather a logical query on the rationale is; if investment in equities beyond a year is considered non-taxable, why is life-long saving of an employee who invests in a product with lower return taxable? 2) Post the online outrage over the tax, the government has said that it is willing to consider the proposal to tax only the interest income and not the contribution of the employee. Consider that an employee joins service from April 1, 2016 and has 35 years of service ahead of him. His ry is Rs 20,000 per month (which is at the lower end in the private sector) or Rs 2.40 lakh at the end of the first year. Even if EPF gives a return of 8 per cent, the compounded amount from the first year’s investment of Rs 24,000 only becomes Rs 3.55 lakhs by the end of 35 years. As the interest component of the final amount will be the major portion, the concession offered by the government does not seem like a good offer. 3) The government has said that exemption will be given to the entire corpus if 60 per cent is invested in annuity products. What is the basis of this 60 per cent? The only reason one can think of is the government does not want you to withdraw a major portion of your money without paying for it. The entire proposal of taxing EPF withdrawal is done for the benefit of the government and not the employees as the government would like us to believe. 4) The government has in their 11 point explanation said that the idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire corpus after retirement. In an earlier point, the finance ministry had said that the scheme is applicable for rich employees. Surely a person who gets a higher ry knows how to use his money post retirement. Why does the government have to take this decision for him on how he should use his retirement money? Further, if such a tax with a floor ry is introduced future budgets will have the opportunity to start tinkering and bringing down the ceiling limits to tax more employees. 5) Finally taxing EPF is changing the rules of the game midway. Because of the liquidity crunch created by blocking his ry in EPF, the employee lives through credit crunch for most of his working career, borrowing money to meet his children’s education, marriage or even buying a modest house. He constantly looks at the amount being piled up in the EPF scheme as he lives on hope of better days ahead from this money on his retirement. Taxing him without giving him another option to save in any other instrument is messing with his long term planning. Taxing lifelong savings either in EPF or NPS is a bad idea. Period.
    Reply
  5. K
    Khushboo
    May 20, 2016 at 4:26 pm
    Most of what Manish talks is utter nonsense. His pitch for a rural to urban shift on such a large scale is neither logical nor required. His verbal diarhoea apart, the skills project he has initiated in Gujarat is a clic example of how NOT to mess up with the education of youngsters who put to stake their future career only to be ruined by suious, fraudulent operators as TeamLease !!!lt;br/gt;lt;br/gt;Can you imagine this guy's....... This guy heads supposedly India's first "skills University" (sic) which is neither UGC approved, nor AICTE recognised, without its on campus, running makeshift cles in a leased building and without conforming to any set standards or regulations pertaining to a proper Educational insution. That UGC has still NOT woken up to such unscrouplous operators is a sad commentary on what ails the Indian education system.lt;br/gt;lt;br/gt;And he has the stupid audacity to take up the wolf-cry for labour reforms, employment and skilling at the drop of a hat at every single opportunity that comes his way.
    Reply
  6. I
    indira
    Mar 3, 2016 at 10:48 am
    Under EPS, even if an employee dies after rendering only 1 month of service, the widow and children get pension. Likewise in case of total disablement , EPS gives the employee pension for the w life. There is no such provision in NPS or any other Pension Plan available today. Can this writer show any annuity plan who can give such pension. Or better; can the writer give pension to all these widow and disabled employees.
    Reply
  7. T
    Tellitasitis
    Mar 3, 2016 at 9:04 am
    Excellent big picture analysis of Indian economy and what the Budget seeks to fix. There are many articles spelling out price increases or reductions but few that look at the larger picture of challenges facing India. This is one.
    Reply
  8. J
    jagar
    Mar 3, 2016 at 11:14 am
    Not only lands but the produce too.Low MSP is known for last four seasons.But each time,a policy changes only to benefit business at cost of farmers.Onion MEP is raised during crop season,removed when business has cornered the produce. Dal not imported (dela) after farmers sold their stock.Oil and oilseeds import duty raised after season was over.Same with rubber.Now in this budget,some crumbs offered.
    Reply
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