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