Dear PM Modi, India is Already Land of Self-Employed, and It Ain’t Working

narendra modi

The prime minister Narendra Modi in his Independence Day speech made last week said: “The Government has launched several new initiatives in the employment related schemes and also in the manner in which the training is imparted for the development of human resource according to the needs of the 21st century. We have launched a massive program to provide collateral free loans to the youth. Our youth should become independent, he should get the employment, he should become the provider of employment. Over the past three years, ‘Pradhanmantri Mudra Yojana’ has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Adding to this, the Bhartiya Janata Party president Amit Shah recently said: “the youth have turned into job-creators from job-seekers“. Dear Reader, I would request you to keep these points in your head, while I set the overall context of this piece. As I have written on several previous occasions in the past, one million Indians enter the workforce every month. That makes it 1.2 crore Indians a year. There is not enough work going around for all these young individuals entering the workforce every year.

While, it is not possible for the government to create jobs for such a huge number of people, it is possible that the government makes it easier for the private sector to create jobs. (I will not go into this, simply because this is a separate topic in itself and I guess I will deal with this on some other occasion).

Take a look at Table 1. This is a table that I have used on previous occasions as well. But I need to repeat it, in order to set the context for this piece.

Table 1: Percentage distribution of persons available for 12 months 

What does Table 1 tell us? It tells us that only 60.6 per cent of the individuals who were looking for work all through the year, were able to find it. This basically means that nearly 40 out of every 100 Indians who are a part of the workforce and were looking for work all through the year, could not find regular work. In rural India, around half of the workforce wasn’t able to find regular work through the year.

This table is at the heart of India’s unemployment problem. Actually, we do not have an unemployment problem, what we have is an underemployment problem. There isn’t enough work going from everyone who joins the workforce. The solution that prime minister Narendra Modi has to this is that India’s youth should become self-dependent and seek self-employment. In the era of post-truth, this sounds like a terrific idea. But this is nothing more than marketing spin.

Let’s look at some data on this front. As the Report on the Fifth Annual Employment-Unemployment Survey, 2016, points out: “At the All India level, 46.6 per cent of the workers were found to be self-employed… followed by 32.8 per cent as casual labour. Only 17 per cent of the employed persons were wage/salary earners and the rest 3.7 per cent were contract workers.”

The point being that nearly half of India’s workforce is already self-employed. And they aren’t doing well in comparison to those who have regular jobs. Take a look at Table 2.

Table 2: Self-employed/Regular wage salaried/Contract/Casual Workers
according to Average Monthly Earnings (in %) 

What does Table 2 tell us? It tells us very clearly that self-employment is not as well-paying as a regular salaried job is. As is clear from the table nearly two-thirds of the self-employed make up to Rs 7,500 per month. In case of the regular salaried lot this is at a little over 38 per cent. Clearly, those with regular jobs make much more money on an average.

Further, only 4 per cent of the self-employed make Rs 20,000 or more during the course of a month. In comparison, more than 19 per cent of individuals with jobs make Rs 20,000 or more during the course of a month.

What Table 1 and Table 2 tell us is that India’s youth have already taken to being self-employed. Hence, there is nothing new in Narendra Modi’s idea. Further, it is clearly not working.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. The phrase summarises the situation very well.

Other than the reluctant entrepreneurs, more than 30 per cent of the workforce comprises casual labourers, who seek employment on an almost daily basis. The reluctant entrepreneurs and casual labourers looking for daily work essentially tell us that no one can really afford to stay unemployed.

Hence, the problem is not a lack of employment but a lack of employment which is productive enough.

Prime minister Modi talked about his government launching, “several new initiatives in the employment related schemes and also in the manner in which the training is imparted for the development of human resource according to the needs of the 21st century.

How good does the data look on this front? As the Volume 2 of the Economic Survey of 2016-2017 points out: “For urban poor, Deendayal Antyodaya Yojana National Urban Livelihoods Mission (DAYNULM) imparts skill training for self and wage-employment through setting up self-employment ventures by providing credit at subsidized rates of interest. The government has now expanded the scope of DAY-NULM from 790 cities to 4,041 statutory towns in the country. So far, 8,37,764 beneficiaries have been skill-trained [and] 4,27,470 persons have been given employment.

The annual report of 2016-2017 of the Ministry of Skill Development and Entrepreneurship of the government of India makes an estimate about the number of people trained by different ministries during the course of the financial year. For the period April to December 2016, the number is at around 19.59 lakh. The annual target was set at 99.35 lakh. Given this, the gap between the target set and the target achieved is huge.

Another way of looking at this is that 1.2 crore Indians are entering the workforce every year. They have had an average education of around five years (i.e. they have passed primary school). Given this, they really don’t have any work-related skillset. At best, they can add and subtract, and perhaps read a little.

Hence, they need to be trained or there need to be enough low skill jobs going around. Real estate and construction, the two sectors that can create these kind of jobs, are in a huge mess. This is something that can be sorted, but in order to do that some serious decisions on black money need to made. This includes cleaning up of political funding and the change in land usage regulations at state government level.

Take a look at the following graphic (Figure 1) reproduced from the annual report of the Ministry of Skill Development and Entrepreneurship.

Figure 1: 

What Figure 1 tells us very clearly is that the scale that is needed to train people is simply not there. And this will lead to a substantial chunk of individuals entering the workforce looking for low end self-employment opportunities anyway, as has been the case in the past. Or people will continue to stick to agriculture.

Prime Minister Modi in his speech further said: “Over the past three years, ‘Pradhanmantri Mudra Yojana’ has led to millions and millions of youth becoming self-dependent. It’s not just that, one youth is providing employment to one, two or three more people.”

Let’s look at this statement in some detail. Between April 2015 and August 11, 2017, the government gave out Mudra (Micro Units Development and Refinance Agency Bank) loans worth Rs 3.63 lakh crore to 8.7 crore individuals. This works out to an average loan of around Rs 41,724. There is no evidence until now whether this is working or not. Can a loan of a little under Rs 42,000 provide employment to one, two or three more people, is a question which hasn’t been answered up until now.

The CEO of Mudra was asked by NDTV recently, as to how many jobs had the Mudra loans created. He said: “We are yet to make an assessment on that… We don’t have a number right now, but I understand that NITI Aayog is making an effort to do that.”Given this, Mudra loans making millions of youth self-dependent is presently nothing more than something that prime minister Modi likes to believe in.

While he is entitled to his beliefs, I would like to look at some data before concluding that Mudra loans are the answer to India’s job crisis.

The column was originally published on Equitymaster on August 21, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

Indian education’s Prussian problem

education
One of the questions that I have often asked myself is what portion of the classroom education that I received, has really turned out to be useful? The simple answer is not much.

My MBA years were clearly a waste. Almost all of what I was taught in my graduation course in Mathematics has turned out to be of no use.  The basic education I received in classrooms up until standard tenth has been of some use.

Over the years I have learnt much more outside the classroom by reading, writing, thinking, doing, watching, copying and so on. But none of this is called education. As Matt Ridley writes in The Evolution of Everything: “Education…is always a top-down activity…When you think about it, it is rather strange that liberated, free-thinking people, when their children reach the age of five, send them off to a sort of a prison for the next twelve to sixteen years. There they are held…in cells called classrooms and made, on pain of…punishment, to sit at desks and follow particular routines.”

And this is how education is delivered to us from school to college. Interestingly, the classroom model of standardised education has been in vogue for a little over two hundred years, when the French emperor Napoleon defeated Prussia [now in Germany] in 1806.

As Ridley writes: “Strung by its humiliation, the Prussian state…devised a programme of compulsory and rigorous education, the purpose of which was mainly to train young men to be obedient soldiers who would not run away in battle.”

This system included teaching students by year and not ability. The teacher stood in front of the class and the students sat in chairs with desks in front of them. The teachers taught a syllabus. Several subjects were taught during the course of the day.

Soon the system found its way into Great Britain. The country at that point of time was looking for clerks to run its global empire and that is how it found its way into India. In fact, the British push to the Prussian education system in India left India more illiterate than before.

As Ridley writes: “A survey in the 1820s found a widespread privately-funded school system reaching more boys than was the case in some European countries, long before the British introduced a public education system in the subcontinent. Mahatma Gandhi complained later that the British had ‘uprooted a beautiful tree’ and left India more illiterate than before.”

In fact, the classroom education that the British introduced to India has stayed and it is one of the reasons behind the sordid state of India’s public education system. As per the Human Development Report 2014, the average Indian male has around 5.6 years of schooling and an average Indian female has around 3.2 years of schooling. This is primarily because after a point students just drop out. One problem is clearly the rampant absenteeism among teachers. The other problem is the focus on completing the syllabus.

Economist Abhijit Banerjee recounted an experience at a literature festival few years back: “We did one experiment in Bihar…The teachers were asked that instead of teaching like you usually teach, your job for the next six weeks is to get the children to learn some basic skills. If they can’t read, teach them to read. If they can’t do math, teach them to do math…At the end of six weeks, the children had closed half the gap between the best performing children and the worst performing children.”

What brought about this change? As Banerjee put it: The teachers were asked to teach the children what they don’t know. The usual jobs teachers are asked to do is teach the syllabus…Under the Right to Education Act, every year you are supposed to cover the syllabus.”

Given this, the sooner we make improvements to the top-down Prussian education system that we have inherited, the better it will be for us.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on January 13, 2016

The power of context

Vivek Kaul

We live in an era of instant coffee and analysis.
Even before something has happened, the analysis on why it has happened is ready. Given this, it leads to situations where we analyse using what we think is “common sense”.
But common sense does not always work. The simplest answer is not always the right one. Life can get a little more complicated than that.
Consider the story of a woman who the economists Abhijit V Banerjee and Esther Duflo met in the slums of Hyderabad. The economists recount this story in their book
Poor Economics-Rethinking Poverty & the Ways to End It: “A woman we met in a slum in Hyderabad told us that she had borrowed Rs 10,000 from Spandana and immediately deposited the proceeds of the loan in a savings bank account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account.” Spandana is a micro-finance institution.
Common sense tells us that anyone in their right mind wouldn’t do anything like this. But the economists soon found out that there was a method to the madness, once they saw the context in which the woman was operating.
As they write: “When we asked her why this made sense, she explained that her daughter, now 16, would need to get married in about two years. That Rs 10,000 was the beginning of her dowry. When we asked why she had not opted to simply put the money she was paying to Spandana for the loan into her savings bank account directly every week, she explained that it was simply not possible: other things would keep coming up…The point, as we eventually figured out, is that the obligation to pay what you owe to Spandana – which is well enforced -imposes a discipline that the borrowers might not manage on their own.”
Once viewed in this context the story makes immense sense. The woman was borrowing at 24% and investing it at 4% in order to build a savings kitty for her daughter’s dowry. Of course,
prima facie this wouldn’t have seemed obvious at all. As Nicholas Epley writes in Mindwise: How We Understand What Others Think, Believe, Feel, and Want “The mistakes we make when reasoning about the minds of others all have the same central outcome: underestimating their complexity, depth, detail, and richness. When we’re indifferent to others, it’s easy to overlook their minds altogether, treating such people as relatively mindless animals or objects than as fully mindful persons.”
Epley gives a brilliant example of people who chose to stay back in in New Orleans when Hurricane Katrina hit the city in August 2005. The experts were at it with their instant analysis. As ABC News put it, “It’s hard to understand the mind-set of those who ignored evacuation orders.” Michael Chertoff, the Chief of Homeland Security said that those who stayed back made a “mistake on their part”. Psychiatrists suggested that there was a “certain amount of denial involved” on part of those who had chosen to stay back in New Orleans, given that they believed that they could handle the storm.
All these explanations sound pretty convincing, “but it does not resonate as well with the actual experience of most who left and stayed, because the broader context is not quite as easy to see.” It is simple to come to the conclusion that anyone choosing to stay back and take on a category 5 hurricane was not right in the head. But anyone who came to that conclusion ignored the context in which the people who had chosen to stay back, were operating.
As Epley writes “Compared to those who left, those who stayed were disproportionately poor, had geographically narrower social network, had larger families (both children and extended members), had less access to reliable news, and were considerably less likely to own a car.” And given this it was not easy for these people to just pack up and leave.
“If you had money to pay for an extended hotel stay, relatively small family to move, a car to get all of you there, or had far-away friends to stay with, you could
choose to leave. If you had no money for an extended hotel stay, no car to get you out, a large family to move and no long distance-friends to stay with, what choice did you have?” asks Epley.
Of course, people who analysed the situation did not understand this broader context. Given this, before passing judgements it is important to understand the context in which people are operating. People who chose to stay back when Katrina hit New Orleans, did not need convincing to leave the city, what they needed was a bus. As Epley puts it “Many who stayed wanted to desperately to leave but couldn’t. They didn’t need
convincing, they needed a bus.”
And what about the woman who borrowed money at 24% and invested it at 4%? What it clearly tells us is that there is a need for a savings solution which allows the poor to save on a daily basis. If they can discipline themselves to pay back micro-finance institutions every week, they can easily discipline themselves to save small amounts on a daily basis. Of course, there are financial institutions which cater to this market, but most of them are of dubious nature. Hence, there is a clear market out there for anyone who is willing to take the risk.

The article originally appeared in the Wealth Insight magazine August 2014

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])