One million Indians are entering the workforce every month. This makes it around 1.2 crore a year, which is around half the total population of Australia.
This is India’s demographic dividend, which is supposed to find a job, earn and spend, pull India’s crores out of poverty. At least, that is the story that we have been sold over the years. But the theory is not translating into practice.
The land-owning communities across large parts of the country have been on the streets, protesting. This includes the Marathas of Maharashtra, the Jats of Haryana, the Kapus of Andhra Pradesh and the Patidar Patels of Gujarat.
The average size of the land farmed by the Indian farmer has fallen over the decades and in 2010-2011, the last time the agriculture census was carried out, stood at 1.16 hectares. In 1970-1971 it had stood at 2.82 hectares.
This has happened because of the division of land across generations. Further, this fall in farm size has made farming in many parts of the country, an unviable activity. And this explains why the land-owning castes across the country have been protesting and want a reservation in government jobs.
The trouble is that the government does not create jobs any more. In fact, between January 2006 and January 2014, the number of central government employees went up by just 30,000. The total number of people working for the public-sector enterprises has fallen over the years.
Only three out of five individuals who are looking for a job all through the year, are able to find one. In rural India, only one out of two individuals who are looking for a job all through the year, are able to find one. This has been the state of things since 2013-2014.
In fact, as far as Indian industry is concerned it favours expansion through capital (i.e. buying more machines and equipment) than recruiting more people.
Nikhil Gupta and Madhurima Chowdhury analysts at Motilal Oswal, use data up to 2014-2015, from the Annual Survey of Industries, and based on it conclude that over a period of 35 years up to 2014-2015, the rate of employment in the Indian industry has increased at 1.9 per cent per year on an average. In comparison, the capital employed by industry has grown at the rate of 14 per cent per year.
Clearly, capital has won the race hands down. Or if I were to put it in simple words, when it comes to Indian industry, machine has won over man for a while now. The Indian corporates like the idea of expanding their production and in the process their business, by installing new machines and equipment, rather than employing more people.
One of the reasons for this is the huge number of labour laws that Indian firms need to follow. As Jagdish Bhagwati and Arvind Panagariya write in India’s Tryst with Destiny: “The costs due to labour legislations rise progressively in discrete steps at seven, ten, twenty, fifty and 100 workers. As the firm size rises from six regular workers towards 100, at no point between the two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying these laws.”
The National Manufacturing Policy of 2011 estimates that, on an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. At the same time, these units sometimes need to file as many as 100 returns a year.
This basically ensures that an average Indian firm starts small and continues to remain small. In the process, jobs aren’t created. This is reflected in the fact that close to 85 per cent of Indian apparel firms employ less than eight people. As per an Economic Survey estimate, close to 24 jobs are created in this sector per lakh of investment. Despite, this firms in this sector continue to remain small.
The points discussed up until now are essentially big structural issues, which have been around for a while. In the recent past, demonetisation which overnight made 86.4 per cent of the currency in circulation, useless, ended up destroying many firms operating in the informal sector. The Goods and Services Tax has added to this.
These days the presence of informal sector is seen as a bad thing because it doesn’t pay its fair share of taxes to the government. This isn’t totally true. People who work for these firms do spend the money that they earn and pay their share of indirect taxes. Also, as the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping unemployment low.”
As economist Jim Walker of Asianomics wrote in a research note sometime back: “There is nothing intrinsic that says that the informal economy is a less effective or beneficial source of activity than the formal economy.” This is something that the Modi government needs to understand.
In its quest for more taxes, it is working towards destroying large parts of the informal economy, which is a huge part of Indian economy. Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a 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.”
And this is something that the government needs to remember in its bid to forcibly formalise the Indian economy.
The column originally appeared in the Deccan Herald on October 15, 2017.