India’s Jobs Problem: No One Sells Pakodas In Front of Your Office?

So, India does not have a jobs problem. We are generating enough jobs and everybody is living happily ever after.

Or so seems to suggest a new study carried out by Soumya Kanti Ghosh, Chief Economic Adviser at the State Bank of India and Pulak Ghosh, a Professor at IIM Bangalore. The study uses data from Employees Provident Fund Organisation (EPFO).

In a column in The Times of India, the authors write: “Based on all estimates, we believe that 7 million formal jobs are being added to payroll on a yearly basis.”

This new study has caught the imagination of the media and the politicians in power and is being flagged all around. If seven million jobs are being created in the formal sector every year, India does not have a jobs problem. The informal sector does not have to register with the EPFO. Informal sector is that part of the economy which is not really monitored by the government and hence, it is not taxed.

The informal sector in India, up until now, has been creating a bulk of the jobs. There are various estimates available on this. Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a recent research note: “India’s informal sector is large and labour-intensive. The informal sector accounts for ~40% of India’s GDP and employs close to ~75% of the Indian labour force.”

The Institute for Human Development, India Labour and Employment Report, 2014, points out: “An overwhelmingly large percentage of workers (about 92 per cent) are engaged in informal employment and a large majority of them have low earnings with limited or no social protection.”

As the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping If unemployment low.” If seven million jobs are being created just in the formal sector, imagine what must be happening in the informal sector. Firms and individuals operating in the informal sector, must be falling over one another to recruit people for jobs they have on offer. But is that really happening?

As I have mentioned in the past, 12 to 15 million Indians are entering the workforce every year. And given that seven million jobs are being created just in the formal sector, the individuals currently entering the workforce must be having a ball of a time, with so much to choose from.

Of course, all this goes against what I have been writing all along about India having a huge jobs problem and the fact that India’s so called demographic dividend is being destroyed. But it also goes against a lot of other data that is on offer.

Jobs are created when companies invest and expand. Let’s first look at the investment to gross domestic product (GDP at constant prices) ratio of the Indian economy. This ratio as I have written in the past has been falling for a while now. Take a look at Figure 1:

Figure 1: 

As is clear from Figure 1, investment as a part of the overall economy (represented by the GDP) has been falling over the years. How are seven million jobs being created in this scenario? In fact, let’s take a look at the incremental investment to incremental GDP ratio, over the years, in Figure 2. This basically plots the ratio of the increase in investment during the course of a year, against the increase in GDP during that year.

Figure 2. 

The incremental investment to incremental GDP Ratio between 2013-2014 and the current financial year (2017-2018) has varied between 8-25 per cent. India seems to have discovered a new economic model of creating jobs without a pickup in investment, i.e., if seven million jobs are indeed being created every year.

Companies tend to expand when they are unable to meet the demand from their current production capacity. The Reserve Bank of India carries out capacity utilisation surveys of manufacturing firms every three months. The latest survey for the period April to June 2017, found that capacity utilisation stood at 71.2 per cent. In fact, capacity utilisation has varied between 70 and 72 per cent for a while now.

As economist Madan Sabnanvis writes in his new book Economics of India-How to Fool all People for all Times: “The capacity utilisation rate has gotten stuck in the region of 70-72 per cent which means two things: first demand is absent, and second, even if it does increase, production can be scaled up without going in for fresh investment.”

The question is how are jobs being created without expansion?

In fact, the data from Centre for Monitoring Indian Economy suggests that new projects announcement in the period of three months ending December 2017, came in at a 13-year low. Take a look at Figure 3.

Figure: 3 

The new investment projects announced during the period of three months up to December 2017, were the lowest since the period of three months ending June 2004. This is a clear indication of the fact that the industry is not betting much on India’s economic future because if they were they would be expanding at a much faster rate and announcing more investment projects than they currently are.

The industrialists may say good things about India in the public domain and in the media, but they are clearly not betting much of their money on the country. And this brings us back to the question, if the industry is not investing, how are jobs being created?

Let’s take a look at the money lent by banks to industry, in Figure 4.

Figure 4: 

The bank lending to industry has been falling over the years. In fact, lately, it has been in negative territory, which means that the overall bank lending to industry has contracted.

This means that on the whole, banks haven’t lent a single new rupee to industry, lately. And that is another good example of industries not expanding. This brings us back to the question: how are seven million formal jobs being created then?

One argument that can be offered against Figure 5 is that over the years many corporates haven’t been borrowing from banks to meet their funding needs. This is true. But this is largely limited to large corporates. Global experience suggests that jobs are actually created when micro, small and medium enterprises expand, and become bigger. In order to do that, they need to borrow.

How does the scene look when we leave out large corporates? Let’s take a look at Figure 5.

Figure 5: 

Bank lending to micro, small and medium enterprises, has been in negative territory for a while now. This basically means that the overall lending to these enterprises has contracted and not a single new rupee has been lent by banks to these firms. How are these firms investing and expanding and creating jobs?

Of course, manufacturing is not the only sector creating jobs. The services sector creates a huge number of jobs of India. One of the biggest job creators in the services sector are real estate companies, which are currently down in the dumps. The construction sector is also a heavy job creator, but with real estate being the way it is, construction is not doing too well either. The information technology sector is looking to shed jobs at the lower end, with robots taking over. Tourism was never a heavy employer of people, in the formal sector, which is what we are talking about here.

Arvind Panagariya, who was the vice chairman of the NITI Aayog, until August 2017, maintained during his tenure, that India was not creating jobs, because India’s entrepreneurs were not investing in labour intensive activities.

In fact, on August 25, 2017, a few days before his tenure ended, Panagariya said“The major impediment in job creation is that our entrepreneurs simply do not invest in labour intensive activities.”

This becomes clear from India’s exports. If one looks at labour intensive exports like textiles, electronic goods, gems & jewellery, leather and agriculture, exports have more or less remained flattish over the last few years. (For a detailed exposition on this, you can click here). So, how are jobs being created with exports remaining flat in labour intensive sectors? Further, if we do believe that seven million jobs are being created every year, then was one of the main economic advisers to the prime minister, wrong all along?

Also, if so many jobs are being created, why does India have so much underemployment. Take a look at Table 1.

Table 1: Percentage distribution of persons available for 12 months based on UPSS approach 

What does Table 1 tell us? It tells us that in rural India, only 52.7 per cent of the workforce which was looking for work all through the year, actually found it. 42.1 per cent of the workforce found work for six to 11 months. If there are so many jobs being created, why are these people finding it difficult to find work all through the year, is a question worth asking. Further, if so many people are finding jobs, why has economic growth slowed down over the years. Are these people earning and not spending money? Also, if there are so many jobs going around, why have the land-owning castes across the country been protesting and demanding reservations in government jobs. Is there an explanation for that?

In the end, there is way too much evidence against not enough jobs being created. Trying to brush that aside, on the basis of a shaky study, will do the nation way too much harm. As I keep saying, the first step towards solving a problem is acknowledging that it exists, otherwise there are enough people selling pakodas, bondas, sandwiches, timepass and what not, outside our offices. But that doesn’t really solve the problem.

Postscript: In order to understand the basic methodological flaws in the study carried out by Ghosh and Ghosh, I suggest you read this.

In order to understand the basic problems in using EPFO data to estimate jobs, I suggest you read this.

The column originally appeared in Equitymaster on January 22, 2018.

EPF issue: Why protests against rate cut show cussedness of trade unions

EPFOLogo

The interest on the Employees’ Provident Fund(EPF) for the year 2015-2016 has been set at 8.7%.

The Central Board of Trustees(CBT) of the Employees’ Provident Fund Organisation(EPFO) had proposed an interest of 8.8%, when they had met in February earlier this year. The ministry of finance finally decided on an interest rate which is 10 basis points lower at 8.7%, than what the Trustees of EPFO had proposed. One basis point is one hundredth of a percentage.

This hasn’t gone down well with the trade unions and they have decided to protest. Bhartiya Mazdoor Sangh (BMS), the trade union closest to the ruling Bhartiya Janata Party, given its affiliation to the Rashtriya Swayamsevak Sangh(RSS), has decided to hold protests across the country.

As its general secretary Virjesh Upadhyay told PTI: “BMS strongly condemns the cut in EPF interest rates and will hold demonstrations at EPF offices on April 27,” Sangh general secretary said, adding, the Fund is managed by the Central Board of Trustees (CBT), an independent and autonomous body.”

Other trade unions have also come out strongly against the move. But the entire thing is quite bizarre. The question is what are they protesting about? It seems the ministry of finance’s decision of cutting down the interest rate offered by 10 basis points to 8.7%, from the 8.8% proposed by the CBT of EPFO, hasn’t gone down well with the unions.

As AK Padmanabhan, board member of the CBT of EPFO and the president of Centre for Trade Union Congress told The Indian Express: “It’s unusual that after the CBT recommendation, the finance ministry has decided to cut interest rate.”

Maybe, the move is unusual, but are the trade unions also totally jobless? Allow me to explain. How much difference does the 10 basis point cut actually make? On a corpus of Rs 1 lakh, it makes a difference of Rs 100.

Also, the interest rate paid on EPF in 2014-2015 and 2013-2014 was 8.75%. In comparison to that, the interest for 2015-2016 will be lower by Rs 50 per lakh.

Is it worth protesting on something like this? What are the trade unions actually trying to achieve by doing this? Or since they are trade unions, they need to protest against everything?

Also, don’t the trade unions know that 8.7% interest being paid on EPFO, is the highest interest rate being offered by the government across all its schemes? It is sixty basis points more than the 8.1% per year interest currently being offered on the Public Provident Fund and the National Savings Certificate(NSC).

It is ten basis points more than the 8.6% on offer on the Senior Citizens’ Savings Scheme and Sukanya Samriddhi Account Scheme. Even the senior citizens who typically get paid more otherwise, are being paid lower than the interest being paid on EPF. So what are the trade unions protesting about?

The government is trying to move the country towards a lower interest rate regime. Fixed deposit rates are down by more than 100 basis points in the last one year. In comparison, the EPF interest rate has been slashed by just 5 basis points. Further, interest earned on fixed deposits is taxable. Interest earned on EPF is not.

If all these reasons are taken into account, the planned protests of the trade unions essentially look very hollow.

Also, what is the government trying to achieve by cutting the EPF interest rate by 10 basis points? In an ideal world, the government would have wanted to cut the EPF interest rate much more, to bring it in line with the other prevailing interest rates. But given all the hungama that has recently happened whenever the government has tried to bring any change to the EPF, it basically wasn’t in the mood to take on any more risk.

Having said that a 10 basis point cut in the EPF interest rate essentially achieves nothing.

Further, it needs to be asked, why a provident fund as big as EPF is, is not professionally managed? As on March 31, 2015, the EPFO managed funds worth Rs 6.34 lakh crore in total. Provisional estimates suggest that in 2015-2016, the EPFO saw Rs 1.02 lakh crore being invested in the three schemes that it runs. Of this around Rs 71,400 crore was invested in the EPF. This means as on March 31, 2016, the EPFO managed funds worth Rs 7.36 lakh crore in total.

This is a huge amount of money. The question is why is this money not being professionally managed. The CBT of EPFO essentially comprises of the labour minister, a few IAS officers, a few businessmen and a bunch of trade union representatives. Which one of these categories of people has some the expertise to manage investments?

Further, why does a committee need to meet to decide on an interest rate for EPF? Why can’t it simply be declared on the basis of returns on the investments made? Why can’t returns on EPF investments be declared on a regular basis? Why is there so much opaqueness in the entire process?

The only possible explanation is that if things do become transparent, then the trade unions controlling the CBT of EPFO, will essentially become useless. When it comes to transparency, it’s the same story everywhere.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on April 26, 2016

All You Wanted to Know About Restriction on EPF Withdrawal

EPFOLogo

 

This is one of the changes that I should have written about at least five-six weeks back, but somehow I did not. Nevertheless, given the long term impact of this change, it’s still not very late to discuss it.

From February 10, 2016, onwards, the government has restricted the total amount of money that any contributor to the Employees’ Provident Fund can withdraw. As the government notification points out: “The Central Board, or where so authorised by the Central Board, the Commissioner, or any officer subordinate to him, may on an application made by a member in such form as may be specified, authorise payment to him from his provident fund account not exceeding his own total contribution including interest thereon up to the date the payment has been authorised on ceasing to be an employee in any establishment to which the Act applies.”

The notification further points out: “The member making an application for withdrawal under sub- paragraph (1) shall not be employed in any factory or other establishment, to which the Act applies, for a continuous period of not less than two months immediately preceding the date on which such application is made.

So what does it mean? It basically means that anyone who has been unemployed for two months or more can now withdraw only his own contribution into the Employees’ Provident Fund and the interest that has accumulated on it.

The employer’s contribution and the interest that has accumulated on it thereon, can only be withdrawn at retirement i.e. at the age of 58. The age of retirement has also been increased from 55 to 58.

This change does not apply to “female members resigning from the services of the establishment for the purpose of getting married or on account of pregnancy or child birth.”

Earlier the entire corpus that had been accumulated under the EPF could be withdrawn. And if the corpus had accumulated for five years or more, it was even tax-free.

This was a loophole used by many individuals to withdraw their entire accumulated EPF corpus at the point they changed their jobs. All it needed was a declaration that they were unemployed. The Employees’ Provident Find Organisation(EPFO) had no way of verifying this.

Of course, the move by the government to clamp down on total withdrawal of EPF, comes on account of individuals withdrawing their entire EPF corpus when they changed their jobs. This withdrawal led to people not building a good retirement corpus. If viewed from this angle, this is a good move.

It will help individuals build a good retirement corpus. Also, with only partial withdrawal allowed, it will encourage individuals to transfer their EPF accounts when they change jobs, instead of simply declaring that they are unemployed and withdrawing their contribution to the corpus.

Anyone who understands the power of compounding will know that this is a good move, given that as the corpus grows the compounding has a greater impact. An interest of 8% on Rs 1 lakh amounts to Rs 8,000. But the same interest on Rs 5 lakh amounts to Rs 40,000. A bigger corpus in case of EPF is only possible when employees transfer their EPF accounts when they move jobs.

Also, what happens to people who are actually unemployed and can only withdraw the employer’s contribution to the EPF and the interest accumulated on it, only after the age of 58?

In fact, as I write this, the EPFO has made a decision to give interest on inoperative EPF accounts. These are essentially accounts in which no contribution has been made by the employee or the employer for a period of 36 months. Hence, what this means is that an individual who is facing long-term unemployment and cannot withdraw a part of his EPF corpus, will continue to earn interest on the corpus that he cannot withdraw.

This was not possible earlier. This change had to be made given that if the government does not allow people to withdraw their entire EPF corpus, it should at least be paying interest on the part of the corpus that cannot be withdrawn.

But all this is just one side of the coin. What happens in case of individuals who actually lose their jobs and face long-term unemployment? In this day and age this is possible. Even though they have money in the form of the employer’s contribution to the EPF, and the interest earned on it, they cannot withdraw it.

This may force them to borrow money from money lenders. Hence, it is not fair on them. The trouble is that the EPFO up until now has had no way of verifying if the individual withdrawing the corpus is actually unemployed or is simply changing jobs. This is a weakness at the level of the EPFO.

Given the information technology infrastructure available these days, it shouldn’t be so difficult to figure out whether the individual is actually unemployed or is simply moving jobs. Let’s say the individual withdraws the entire corpus accumulated under EPF and then takes on another job, his permanent account number(PAN) continues to remain the same. So how difficult is it for the EPFO to figure out whether the person has actually changed jobs? Not very.

Other than people facing long-term unemployment, these days some individuals also like to take a break and go back to studying, in order to improve their job prospects. The money that they have accumulated under EPF can help in paying the part of the fee. People going back to studying at the age of 25-30 are really not thinking about retirement, they are thinking about improving their job prospects by studying more. And if they study more, their job prospects are likely to be better in the years to come.

The EPFO needs to be flexible on this front. A better information technology infrastructure can clearly help.

Also, I think we are reaching a stage, where people who are in a position to manage their money, need not depend on EPF. They need to negotiate with their organisations to have a minimal contribution made to their EPF and the remaining money be paid out to them as a part of their normal salaries, which they can then invest in order to save tax as well as accumulate a corpus. It will also ensure that a portion of their corpus is not stuck with the EPFO until the age of 58. Organisations which are looking to retain talent also need to be flexible on this front.

But given how HR departments in organisations work, I clearly don’t see this happening.

The column originally appeared on Vivek Kaul’s Diary on March 31, 2016.

Why the Rs 7,00,000 crore EPFO needs to look beyond just public sector stocks

EPFOLogoVivek Kaul

A news report in The Times of India today (i.e. October 17,2014) points out that the Employee Provident Funds Organization (EPFO) wants to invest a portion of its corpus in stocks. As the report points out “At an informal meeting with labour minister Narendra Singh Tomar on Monday, representatives from Congress-backed INTUC and Bharatiya Mazdoor Sangh, which is affiliated to the ruling BJP, offered their support to a diversification of the EPFO’s investment mix into public sector stocks. At the same time both recommended that such investment should only be undertaken on expert advice.”
The Rs 7,00,000 crore EPFO currently invests only in government securities. Hence, from the point of view of diversification of investment, this proposal, if it goes through, makes immense sense. Nevertheless, there are several problems with the proposal in its current form.
First and foremost the EPFO wants to currently invest money only in
‘navratna’ public sector stocks. There are a couple of problems with this. If the idea is to give investors in EPFO a certain exposure to equity, then why limit it to only the best public sector companies?
The second problem is that the free float of the public sector companies is a lot lower in comparison to the overall market. Free float is essentially the number of shares that are deemed to be freely available in the market. In case of public sector companies the shares held by the government are not considered to be available for sale.
The free float of the companies that constitute the BSE Sensex works out to 53.3% currently. In comparison the free float of the public sector companies that constitute the BSE PSU Index, it works out to 29.2%.
Even if only 5% of the employees provident fund (EPF) corpus were to be invested in the stock market, this would mean Rs 35,000 crore of new money suddenly finding its way into public sector stocks. With a low free float, so much new money is likely going to drive up the value of public sector stocks. Hence, EPFO will end up buying stocks at a higher price. And this in turn will impact the return that the EPFO investor earns.
This is why it is important that the EPF invests in the best companies and not the best public sector companies. A simple way to do this would be to run an index fund which simply invests in stocks that constitute the BSE Sensex or the NSE Nifty. An index fund simply invests in stocks that constitute a market index.
Further, the EPFO wants experts to manage their equity investment. Experts repeatedly get the direction of the stock market wrong and this is something that EPFO can ill-afford at the beginning of what is basically an experiment. A better bet is to simply run an index fund and keep experts out of the equation totally. It is important that investors in the EPF, at least earn the market rate of return, first.
As far as experts are concerned, it is worth remembering what Nassim Nicholas Taleb writes in
The Black Swan, The Impact of the Highly Improbable, “Simply, things that move, and therefore require knowledge, do not usually have experts, while things that don’t move seem to have some experts. In other words, professionals that deal with the future and base their studies on the non repeatable past have an expert problem. I am not saying that no one who deals with the future provides any valuable information, but rather that those who provide no tangible added value are dealing with the future.”
Stock market experts have to deal with future and base their decisions on a non repeatable past. The EPFO needs to remember this while deciding how to manage its investments into stocks.

This article originally appeared on www.FirstBiz.com on Oct 17, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)