A lot has been written panning the manifesto of the Congress party for the Lok Sabha elections scheduled over the next two months. Given this, I will just concentrate on one point that the party promises in the manifesto.
The grand old party of India has promised to create 10 crore jobs for the youth, if it forms the next government. A very noble idea indeed, at least on paper. Let’s go into this in a little detail.
In order to create 10 crore jobs (or a large number of jobs irrespective of a specific number) primarily four things are required—land, labour, money and electricity.
Let’s look at these factors one by one. If a large number of jobs are to be created, India needs labour intensive manufacturing to progress. But labour-intensive manufacturing in India has slowed down over the years. As Crisil analysts point out in a recent report titled Hire and Lower: Slowdown compounds India’s job-creation challenge “The decline in employment creation has been compounded by falling labour intensity in the economy…The capacity of labour intensive sectors such as manufacturing to absorb labour has diminished considerably in face of rising automation and complicated labour laws.”
Take the case of the apparel sector. A country like Bangladesh does better at it than us. Economist Arvind Panagariya in an open letter to Rahul Gandhi in November 2013 wrote that “India exported less apparel than much smaller Bangaldesh and less than one-tenth that by China.” Most Indian apparel firms start small and continue to remain small.
This leads to a situation where they cannot benefit from the economies of scale and hence, cannot compete in the export market. In their book India’s Tryst with Destiny, Jagdish Bhagwati and Panagariya point out that 92.4% of the workers in this sector work with small firms which have forty-nine or less workers. Now compare this to China where large and medium firms make up around 87.7% of the employment in the apparel sector.
Why is that the case? A surfeit of labour laws are a major reason why Indian apparel firms choose to remain small . Labour comes under the Concurrent list of the Indian constitution, meaning both the state government as well as the central government can formulate laws in this area. “The ministry of labour lists as many as fifty-two independent Central government Acts in the area of labour. According to Amit Mitra (the finance minister of West Bengal and a former business lobbyist), there exist another 150 state-level laws in India. This count places the total number of labour laws in India at approximately 200. Compounding the confusion created by this multitude of laws is the fact that they are not entirely consistent with one another, leading a wit to remark that you cannot implement Indian labour laws 100 per cent without violating 20 per cent of them,” write Bhagwati and Panagariya.
This leads to a situation where the cost of following these laws is very high. Labour costs account for close to 80 per cent of the total costs in the apparel sector. As Bhagwati and Panagariya write “As the firm size rises from six regular workers towards 100, at no point between these two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra cost of satisfying the laws”.
The authors recount an interesting story told to them by economist Ajay Shah. Shah, asked a leading Indian industrialist about why he did not enter the apparel sector, given that he was already backward integrated and made yarn and cloth. “The industrialist replied that with the low profit margins in apparel, this would be worth while only if he operated on the scale of 100,000 workers. But this would not be practical in view of India’s restrictive labour laws.”
Given this, it is not surprising that the Crisil analysts expect the number of fresh jobs being created to fall over the next few years. As they write “Employment generation in the non-agriculture sector will slow down sharply in the coming years as the economy treads a lower-growth path. CRISIL estimates that employment outside agriculture will increase by only 38 million between 2011-12 and 2018-19 compared with 52 million between 2004-05 and 2011-12.”
The Congress party hopes to create 10 crore or 100 million jobs in a considerably lesser period of time. In fact, the Crisil estimate suggests that more people will join the agriculture workforce over the next few years. “Due to insufficient employment creation in industry and services sectors, more workers will become locked in the least productive and low-wage agricultural sector. We estimate that 12 million people will join the agriculture workforce by 2018-19, compared with a decline of 37 million in agriculture employment between 2004-05 and 2011-12,” the Crisil analysts write.
Now let’s take the case of electricity. Every new manufacturing set up requires electricity. India currently has the power plants but it does not have the coal required to feed into those power plants to produce electricity. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a report titled Elections: Much Ado about Nothing dated March 19, 2014 “True utilisation in thermal power generation is below 60%, near 20-year lows (reported plant load factor is 65%).”
India does not produce enough coal to feed its power plants despite having the third largest coal reserves in the world. A major reason for the same is that it takes more than 10 years and many permissions to get a coal mine going. In fact, even if coal mines are auctioned to private sector it will take a while to get these mines going. “From the time the blocks are auctioned to the time coal can start to get mined could be another 3-5 years at least,” write Mishra and Shankar. Hence, by the time, the term of the next Lok Sabha will be more or less over.
Now let’s consider the land factor. Over the years, land has been taken over from farmers by the government at rock bottom rates and been handed over to industrialists and real estate builders, who have profited majorly from this. The Congress led UPA government (along with most of the opposition parties) passed the Land Acquisition Act in 2013. This Act goes to the other extreme in comparison to what was happening till this point of time.
As TN Ninan wrote in a recent column in the Business Standard “The land law stipulates that forcibly acquired land must be paid for at two to four times…market prices, in addition to other relief and rehabilitation costs. So the new law will make land acquisition next to impossible, or unaffordably expensive (which becomes the same thing) in most states.”
Ninan also points out that “land prices “ in significant parts of rural India “are higher than those in any rural area of the United States, and in almost all of Europe barring countries like Holland.”
So, for anyone looking to set up a new business enterprise, land will be a huge cost. And this may make the entire idea of setting up a new enterprise unviable.
Finally, let’s consider the money factor. The interest rates charged by banks on loans have been at high levels over the last few years. This is because the fiscal deficit of the government (or the difference between what it earns and what it spends) has exploded. To finance the deficit the government has had to borrow more and hence, crowding out other borrowers. This has led to high interest rates. If interest rates are to come down, the fiscal deficit of the government needs to come down dramatically.
One final factor that needs to be considered here is the ease with which a new business can be started in India.In a ranking of 189 countries carried out by the World Bank, when it comes to the ease with which a new business can be set up, India stands 179th. Hence, anyone looking to start a new business enterprise in this country, needs to be slightly wrong in the head. And it is ultimately, new enterprises that create many jobs.
If all these factors are taken into account, the promise by the Congress party to create 10 crore jobs, is a big joke played on the people of this country.
The article originally appeared on www.FirstBiz.com on March 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)