How can 26 per cent of Indians say they work for an enterprise with more than nine employees but only 1.5 per cent of Indian enterprises say they have more than nine employees? How can 92 per cent of our 500 million workers supposedly toil in informal employment when about 100 million Indians pay Provident Fund/ESI, or get a Form 16 of tax from employment, or are employed by government? How can GDP growth of 7 per cent-plus be jobless when the labour force only grew 2 per cent during the same period; does anybody really believe that India just experienced an impossible annual productivity growth of 5 per cent? How can only 4.9 per cent of our population be unemployed when 67 per cent of our population is poor enough to qualify for food subsidy?
India’s labour markets are confusing and I’d like to make the case that, one, India has more formal jobs than we think; two, our primary policy challenge is not creating jobs but wages; and three, creating more formal jobs needs sustained reforms to labour laws and education. Let’s look at all three points in more detail.
First, India doesn’t have “only 7 per cent formal employment” but somewhere between 15-25 per cent. India’s job information suffers from the Kartar Bhooth problem. Tagore expresses the tyranny of being bound to the past in his amusing yet profoundly serious short story Kartar Bhooth (The Ghost of the Leader) where the wishes of a respected but dead leader make present lives impossibly restrained. The Kartar Bhooth of India’s labour market information is the report of the National Commission for Enterprises in the Unorganised Sector chaired by the late Arjun Sengupta. I never met Sengupta but am sure he would regret the confusion his report created between unorganised/organised enterprises and formal/informal employment that has perpetuated the myth of 93 per cent informal employment.
Unsurprisingly, a huge unexplained difference between household and enterprise/production data is not unique to India’s labour markets (research suggests that there may be a 30 per cent-plus unexplained difference in household survey calories consumption and food production calories). So not only do we need to improve the frames and plumbing of our survey data but estimating jobs needs de-duplicated administrative data from provident fund, ESI, government employment, Form 16, Mudra loans, etc.
Second, most people who want a job in India have one (our unemployment rate of 4.9 per cent is not a fudge) but they don’t have the wages they need because of two large low-productivity clusters in our labour markets: 50 per cent of our labour force works on farms and 50 per cent of our labour force is self-employed. Both are “a job” but don’t generate the surplus to pull out of poverty. Farm loan waivers are an emergency response but states doing them should worry about what doctors call “iatrogenic risks”, that is, the problems created by the treatment they prescribe.
Sustainably reducing farmer poverty needs what economist Ashok Gulati thoughtfully calls the 4Is — incentives, investments, institutions, and innovation — but the only way to really help farmers is to have less of them. The poverty of self-employment is obvious; the poor cannot afford to be unemployed, not everybody can be an entrepreneur, and many of India’s 60 million enterprises are only viable with self-exploitation or regulatory arbitrage. Sustainably higher wages can only come from the higher productivity of formalised non-farm jobs in urban areas done by workers with higher human capital.
Formalisation resonates with a new OECD framework for labour market health that includes quantity, quality and inclusiveness that proposes metrics like gender employment gaps, the proportion of people on less than half the median income, etc.
Finally, massive formal job creation needs sustained reforms in labour laws and education. For a government that has taken above average risks — GST, demonetisation, bankruptcy code, and surgical strikes — the pedestrian ambition and performance of the ministries of HRD and labour is unacceptable.
Their alibis of vested interests, political economy or domain complexity are weak and can’t justify not moving forward with second-best or incremental reforms. In labour laws, we should stay away from hire-and-fire for now but we should: One, reform the poor value for money 45 per cent salary confiscation of formal employment by goofy monopolies like EPFO (that has four times more dormant accounts than live ones) and ESI (that only pays out 45 per cent of contributions it receives); two, repeal defunct central laws (nine) and merge the balance (35) into one labour code; three, set an 18-month deadline under all central laws for 100 per cent paperless, presenceless, and cashless compliance for all touch points (registration, licensing, returns, challans, registers, etc).
In education, we should: One, separate the role of regulator, policymakers and service provider and shift education regulation to the global non-profit structure norm; two, make the Right to Education Act the Right to Learning Act and remove the regulatory cholesterol that breeds corruption; and three, remove the ban on online higher education India’s formalisation agenda is making good progress. Over the last three years, we have added more than 1 crore new ESI payers and 1.4 crore new EPFO payers. Of course, not all these are new jobs but they are new formal jobs. Policy-making is not about being right but being successful and it’s always amusing to hear comments like “no GST is better than a multiple rate GST” or “without hire-and-fire or trade union reform all labour reform is useless” or “RBI’s involvement in NPA resolution is conceptually indefensible”. The best reform is small but sustained reform and MHRD and MOL get poor marks for strategy, stamina and sequencing.
India hasn’t had jobless growth; just poor formal job growth. This could change quickly with better infrastructure, lower regulatory cholesterol and higher human capital. India’s infrastructure is getting better; forcing MOL and MHRD to lower regulatory cholesterol and raise human capital will create millions of formal non-farm jobs.
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