Why Pakodanomics is Not the Answer to Creating Employment

narendra_modi

India gave the world zero, and helped Mathematics, which until then was dependent on Roman numerals, leapfrog.

Last week we also gave the world, what I would like to call pakodanomics (I guess even bondanomics would work fine).

In a television interview, prime minister Narendra Modi, said: “If someone opens a ‘pakoda’ shop in front of your office, does that not count at employment? The person’s daily earning of Rs 200 will never come into any books or accounts. The truth is massive people are being employed.”

Thus, prime minister Modi, helped found a new discipline in economics, pakodanomics.

What was prime minister Modi really trying to say here? This entire jobs crisis is being overblown. What is important is employment and not jobs. This, I think, is a fair point, which most people in India do not get, given our fascination for sarkari (i.e. government) jobs. Of course, expecting the government to create employment for one million Indians entering the workforce every month and the 8.4 crore Indians who need to be moved from agriculture to make it economically feasible, is unfair. That point is well taken.

Employment can come in various forms. Even selling pakodas and making Rs 200 per day is employment. Selling pakodas on the street is incidental here. What is more important is that the prime minister of India is saying that people can sell stuff on the street, make money and employment can thus be generated.

There is a basic problem with this argument. Before I get into explaining that problem, a couple of clarifications: a) I didn’t come up with the example of the selling pakodas, the prime minister did. b) The piece is not about the unit economics of pakodawallahs and how much money they make on a given day (I know, dear reader, you know a pakodawallah who is a millionaire). But it is about selling any product on the street to earn Rs 200 per day and the prime minister of our country offering this as an employment opportunity.

At Rs 200 per day, the annual income of an individual selling pakodas (Again, let me repeat here, pakodas are incidental to the entire example. It is about making money by selling stuff on the street) would be Rs 73,000 (Rs 200 x 365 days). This is assuming that he sells 365 days a year. This is an unrealistic assumption, but we will let it be.

The per capita income of an average Indian was Rs 1.03 lakh in 2016-2017. Hence, the individual selling pakodas earns 29 per cent less than the average Indian. If I were to flip this point, an average Indian makes 41 per cent more than the individual selling pakodas. So, clearly there is a problem.

Of course, someone has to earn lower than the average income. But the difference between the average income and the income of the individual selling pakodas is significant. PM Modi’s pakoda seller is not earning much simply because there are too many people out there selling pakodas. At a broader level there are too many Indians selling stuff on streets. This is primarily because there aren’t proper jobs going around. And if there are, people are unskilled to carry them out.

Let’s get into a little more detail by looking at some data. Take a look at Table 1, which deals with the self-employed people in India.

Table 1: Self Employed / Regular wage salaried / Contract/ Casual Workers
according to Average Monthly Earnings 

What does Table 1 tell us? It tells us that nearly half of India’s workforce (46.6 per cent to be exact) is self-employed. Further, 67.5 per cent of India’s self employed make up to Rs 90,000 a year. A little over 41 per cent make only up to Rs 60,000 a year. What does this tell us? It tells us very clearly that self-employment (selling pakodas for example) does not pay well.

Most of India’s self-employed workers make lesser money per year than the average per capita income of the country, which in 2015-2016 (for which the self-employed data is), was Rs 94,130. So, there is a clearly a problem with being self-employed. (The good part is, it is better than being a casual labourer, which is by far worse. But to be self-employed you need some basic capital to start, which many Indians, who end up as casual labourers, don’t).

People in India are self-employed because they do not have a choice. Currently, the government is busy trying to pass of self-employment in India as entrepreneurship, which are two very different things. People in India become self-employed because there are no jobs going around for them. Entrepreneurship, on the other hand, is by choice.

Further, as can be seen from Table 1, getting a job is more monetarily rewarding than being self-employed. Hence, selling pakodas or being self-employed, is not the solution to the problem. It is a symptom of the problem, an indication of the problem and the fact that barely anything is being done about it.

To conclude, zero was a useful invention, pakodanomics isn’t. It’s better to get rid of it as soon as possible and concentrate on the real problem of creating the right environment which will help the real entrepreneurs create genuine employment opportunities for India’s youth.

As I keep saying, the first step towards solving a problem is recognising that it exists.

The column originally appeared in Equitymaster on January 24, 2018.

Has Arun Jaitley Been Reading India’s Big Government?

indias-big-goverment-book

Self-employment is the new buzzword in the Narendra Modi government. And it is going to rescue the one million youth that are entering the workforce every month. Or at least that is what we are being told.

As finance minister Arun Jaitley recently told ET Now“Bulk of the jobs in India are created by SMEs, by the micro industries, by self employment. Gone are the days where only the government sector created jobs in the government or the organised sector created jobs.”

This statement sort of makes me feel that Mr Jaitley has been reading my book India’s Big Government. (The good news is that the book is available at a huge discount on Amazon till Friday, 27th October. The Kindle version is going at Rs 199, against a maximum retail price of Rs 749, and the paperback is going at Rs 499, against a maximum retail price of Rs 999.). What Jaitley said in his statement are some of the points that I make in the book as well:

  • The government (includes all forms from central government to state government to central public sector enterprises etc.) do not create jobs anymore.
  • Globally, the small and medium enterprises as they grow bigger, end up creating a bulk of the jobs.
  • In India, the unorganised/informal sector creates a bulk of the jobs. This is something that the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping unemployment low.”

The thing is that there is nothing new in this. Self-employment may have become the new buzzword with ministers of the Narendra Modi government, but it has been around for a while.

As the report titled Ease of Doing Business: An Enterprise Survey of Indian States: “A major challenge in India has been the preponderance of employment in very small enterprises. Formal sector jobs that exhibit high productivity and pay high wages are limited. According to the latest Economic Census, conducted during 2013 and the first quarter of 2014, of 131 million workers in industry and services, 44.4% were employed in Own Account Enterprises (OAE), which are managed exclusively by their owners and do not employ a single regular worker. Establishments with five or fewer workers, including the OAE, employed 69.5% workers and those with nine or fewer workers employed 79% workers. In other words, establishments with 10 or more workers employed just 21% of the workers in industry and services.”

The above paragraph says multiple things. Let’s look at them one by one.

  1. According to the latest Economic Census, conducted during 2013 and the first quarter of 2014, of 131 million workers in industry and services, 44.4% were employed in Own Account Enterprises (OAE), which are managed exclusively by their owners and do not employ a single regular worker.

    Own account enterprises form a bulk of total Indian firms in services and industry. What does this mean? It basically means that anyone who does not find a job, drifts towards self-employment. Further, he starts small and continues to remain small.

    Jaitley in his interview said that in order to promote self-employment “you have to have a skilling campaign which is going on.” Skilling is very important, given that the Indian education system doesn’t exactly make people employable. This is a point that I make in great detail in India’s Big Government.

    The trouble is that skilling is not happening at the scale that it needs to. Let’s take a look at how things panned out in 2016-2017. The different ministries in the government had accepted a target of training 99,35,470 individuals. Of this, only 19,58,723 or around less than one-fifth had been trained up to December 2016.

    As I keep pointing out, nearly 1.2 crore individuals are entering the workforce every year. This means a bulk of them continue to remain unskilled. At this rate a huge number of people who are and will enter the workforce over the next few years, will continue to remain unskilled. And given that their chances of creating social mischief remain high.

    One challenge the government (and even the private sector) is facing as it tries to scale up skilling quickly is the shortage of individuals who can impart skill training. To get around this, to some extent, the talent and experience of the retired personnel of the army as well as the railways could be used. Between them, the army and the railways have many personnel who introduce, maintain and upgrade electrical and mechanical equipment of various kinds for their own use.i

  2. Establishments with five or fewer workers, including the OAE, employed 69.5% workers and those with nine or fewer workers employed 79% workers. In other words, establishments with 10 or more workers employed just 21% of the workers in industry and services.

    This basically means that most Indian firms start small and continue to remain small. (Again, this is a point that I have made multiple times). So, just saying that small and medium enterprises create jobs, is not enough. They create many sasjobs only if they grow bigger, which in India is clearly not the case with close to 80 per cent of the firms employing less than ten workers.

    So, self-employment and small and medium enterprises creating jobs, are solutions if they are allowed to grow bigger. Currently, that is not the case due to various reasons like rigid labour laws, the lack of ease of doing business and so on.

In the recent past, the informal sector has been declared to be a bad thing because it does not pay its share of taxes. The question is, does it really need to pay taxes? The own-account enterprises form a large part of this sector. And people running these firms, clearly do not make enough money to be paying taxes. Take a look at Table 1.

Table 1: Self Employed/Regular wage salaried/Contract/Casual Workers according to
Average Monthly Earnings (in %) All India 

Table 1 clearly shows that 96 per cent of the self-employed make up to Rs 2,40,000 a year. Income up to Rs 2,50,000 per year does not come under tax bracket. This basically means that a large section of the informal sector in India simply does not pay tax because it does not earn enough to pay tax.

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.

Yes, self-employment is important. But then the government is saying one thing and doing exactly the opposite thing. What explains this dichotomy?

The column originally appeared in Equitymaster on October 23, 2017.

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.