A government focused on jobs should focus on formalization, infrastructure and human capital. This budget did a good job on two out of three
The 2017 budget reinforces the government’s strategy of a) sticking to fiscal responsibility and lower interest rates as more effective than tax tweaks or populist spending, b) creating conditions not for setting things on fire but for spontaneous combustion of formal enterprises, and c) adopting the long view where a 10-year plan is not 10 one-year plans. The first point is politically significant half-way into the government’s term because India’s only two fiscally prudent prime ministers, P.V. Narasimha Rao and A.B. Vajpayee, did not get re-elected. The budget reinforces India’s global brand—not hot, not cold, but consistently warm—for the demand side (enterprises and demand) but I wish it was more aggressive on the supply side (human capital).
The budget recognizes that India’s problem is not jobs but formal enterprises.
The budget recognizes that India’s problem is not jobs but formal enterprises. (Of our 63 million enterprises only 1 million are companies of which only 18,000 have a paid up capital of more than Rs10 crore.) Anybody who wants a job has a job—our official unemployment rate of 4.9% is not a fudge—but they don’t get the wages they want or need. Formal enterprises have the productivity to pay the wage premium, and the budget built on GST and note ban to encourage formal enterprises. No tax liability for up to Rs2.5 lakh income, the tax rate of 25% for 97% of enterprises, the re-emergence of labour reform via four labour codes, the abolishment of Foreign Investment Promotion Board, the 25% infrastructure spending increase, the acceleration of road construction, the programmes for labour intensive sectors, 100% village electrification, and reforming the tax department’s human capital and procedures will boost employment.
But it missed low-hanging fruits such as the single universal enterprise number (replacing the current 25-plus numbers), announcing a deadline for enterprise PPC (paperless, presenceless and cashless for all compliance) and fixing the gap between salary on the offer letter and the take-home pay (the 45% deduction for low-wage employees that goes to poor value-for-money schemes operated by government monopolies).
The human capital announcements—UGC restructuring, focus on school learning outcomes, apprenticeships, etc.—were interesting but should have been more substantial. The budget acknowledged the importance of technology in education but did not lift the unjust ban on Indian universities launching national online campuses.
This budget’s structural innovations (early presentation, merging the rail and Union budgets and ending the silly plan and non-plan distinction) probably mean that budgets are morphing to what they should be: a statement of accounts and intentions rather than a forum for reform announcements. But India must recognize that China’s five labour market transitions—farm to non-farm, rural to urban, subsistence self-employment to wage employment, informal to formal and school to work—was easier not because it does not have the fixed costs of democracy but because it started reforms in 1978 at the start of a 30-year supercycle of global growth, manufacturing outsourcing, and global trade openness.
The global weather of the moment—Trump’s election, secular stagnation, the threats of automation, Brexit, etc.—mean that we should hope for exports and manufacturing but can no longer postpone difficult land and labour reforms that will spur domestic consumption driven by higher wage services employment.
One of the most interesting questions in economics is the role of the government in job creation. Ronald Reagan once said, “The nine most terrifying words in the English Language are I’m from the government and I’m here to help”. Much has changed since the 1980s and India’s problems of the state are no longer sins of commission (what it does wrong) but sins of omission (what it does not do). Our government does too much of what it should not do and too little of what it should do. A government focused on jobs should focus on formalization, infrastructure and human capital. This budget did a good job on two out of three.
This article was published in Mint: https://goo.gl/jNGZYq