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A triumph for plumbing

This budget makes a radical new promise — policy will pray at the altar of jobs.

Written by Manish Sabharwal |
March 2, 2015 12:24:58 am
union budget, arun jaitley, arun jaitley budget It is critical to celebrate the budget’s announcement of the most impactful labour reform since Independence — a radical revamp of India’s dysfunctional employee benefits regime, which currently murders formal employment.

Dadabhai Naoroji’s speech on poverty in 1893 to the Indian National Congress session in Lahore laid the foundations of Indian nationalism by articulating his “drain” narrative, which exposed the colonial system as being not only unable to improve the conditions of the poor but also instrumental in keeping Indians poor. Over the past decade, we had forgotten that politics is all about narratives. In the last few days, the budget speech, the Economic Survey and the prime minister’s speech in Parliament have articulated three narratives that represent radical ruptures: policy will pray at the altar of jobs; technology-enabled cash transfers as income are more effective than price subsidies; and the Central government will partner with the states to create a strong nation. These contrast sharply with the three narratives of the previous government: poverty would be reduced through subsidies rather than jobs; subsidies would be used to lower prices despite leaky delivery systems; and strong states lead to a weak nation, which converted India’s high-growth low-inflation economy into a low-growth high-inflation economy. The three new political and policy narratives lay the foundation of employing India.

Before examining employment initiatives, it is critical to celebrate the budget’s announcement of the most impactful labour reform since Independence — a radical revamp of India’s dysfunctional employee benefits regime, which currently murders formal employment. America’s pension fund market traces its growth to the passing of the Employee Retirement Income Security Act of 1974 (Erisa). The finance minister may have just passed the Indian equivalent of the Erisa by his radical surgery to the Employees’ Provident Fund Organisation (EPFO) and the Employee State Insurance (ESI).

One hundred per cent of net job creation in the last 20 years has happened in informal jobs because our mandatory benefits regime requires employers to deduct 45 per cent of salary for employees with salaries upto Rs 15,000 per month for programmes that “don’t have clients, but have hostages”. This regime breeds informal employment because employees can’t live on half their salary. The EPFO not only operates the world’s most expensive government securities mutual fund (440 basis points), but its 45 million dormant accounts are the children of an architecture that does not offer backpack benefits that are easily portable between employers. The ESI not only offers India’s health insurance programme with the worst claims ratio (45 per cent) but sits on cash reserves of Rs 32,000 crore.

This budget proposes to make the employee provident fund voluntary for low-wage employees (it is already voluntary for high-wage employees) and creates competition for the EPFO and the ESI by allowing employees the choice of paying their contribution to the National Pension Scheme and any IRDA-regulated health insurance programme. This choice for employees in how they allocate, invest or spend their salaries will lead to the creation of a modern benefits market and a massive increase in formal employment, because the regulatory arbitrage of benefits will become less attractive, necessary or practical.

India is a hostile habitat for entrepreneurship; the budget has much to do to make it a fertile habitat for job creation. The fiscal discipline roadmap will bring down the cost of capital for entrepreneurs and reduce the painful divergence between real and nominal wages caused by inflation that is killing labour migration. The reduced corporate tax rate and the phasing out of exemptions will reduce litigation, corruption and ambiguity. The new bankruptcy code will increase the velocity of asset recirculation and make entrepreneurial failure less of the perpetual coma sentence it is today. There is no such thing as India’s land and labour markets, and giving the states more money (62 per cent of total tax receipts) should be accompanied by giving them more power and encouragement to amend their land and labour laws. The disappointment with the lack of labour law reform is misplaced — touching hire and fire in Delhi invites an antibiotic reaction — and the states should use the constitutional route opened up by Rajasthan. Small entrepreneurs cannot substitute for the state, so the focus on roads and power will substantially expand productivity and impact our firm-size distribution by producing more babies (firms that are small but will grow) rather than dwarfs (firms that are small and will stay small). Budget-makers will get many duas from job creators if they implement the ease of doing business plans, but it must be acknowledged that these are trickier because they involve migration from flick-of-pen legislative reforms to building state capacity.

The most magnificent part of this budget was the speech. The narrative, structure and superb style make it clear that the speechwriter was substantially more skilled than last year’s, because of the fine balance between poetry (aspiration and ideals) and prose (specific plans). The previous government tried to govern in poetry; a member of the National Advisory Council once told me, “Your focus on plumbing is a lack of ambition.” The budget’s changes to the benefits regime are the biggest labour law reform since Independence and are in the realm of plumbing. Despite their humble origins, they will have more impact than the Rs 2 lakh crore already spent on the MGNREGA.

India has always deserved and needed a more adventurous and execution-oriented state but has not often had one. A 13th Finance Commission member recently wrote about the boldness of the 14th Finance Commission, implying that earlier finance commissions knew what to do but didn’t, because of the lack of courage.

The political retirement of former Prime Minister H.D. Deve Gowda a few days ago was accompanied by his urging “the prime minister to implement the initiatives taken by me when I was prime minister”. With all due respect to a seasoned politician, the notion that somebody should get credit for “initiating” things 20 years ago, without executing them, is delusional. An adventurous and execution-oriented state recognises the difference between a list of ingredients and a recipe; the last three days suggest that India may finally have one.

The writer is chairman, Teamlease Services.

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