The United Nations Development Programme has warned that India needs to generate 28 crore jobs before 2050 to absorb all the new entrants into the work force. The Government has taken a few initiatives in this direction lately. Incentives have been provided to businesses to generate employment. The Government will pay the Provident Fund contributions of new employees for the first three years. The Government also hopes that its flagship “Make in India” program will lead to creation of jobs. The intent of the Government is good but success will require more than providing petty incentives like those above. A change in the underlying economic policies is necessary. The direction of the economy needs to be modified for these well intentioned policies to deliver results.
The basic problem is that “development” and unemployment go together. Yes, please, development leads to unemployment, not employment. “Development” means creation of wealth which, in turn, means plenty availability of capital. Businesses can borrow at zero rates of interest in developed countries like Japan and the United States. The same “development” also means higher wages. The workers in developed countries earn about Rs 6,000 per day. In consequence, businesses find that it is cheaper to use robots than human beings to manufacture goods. Some new factories do not employ even a single worker in production. As a result numbers of jobs is getting reduced while production is increasing. Therefore, unemployment is a natural consequence of development.
We should not confuse this job eating nature of development with the creation of jobs in the United States these days. The job situation in developed countries as a whole is dismal. Nearly one half of the youth in Spain are unemployed. Thus the developed countries are in the grip of development-and-unemployment syndrome although selected countries like the US, UK and Germany are bucking this overall trend. Unemployment spreads from the outlying areas to the center.
This basic job-eating tendency of the economy is counteracted in the short term by new technologies. Innovation of the personal computer and windows software, for example, has created a large number of jobs in manufacture and service of computers and in software writing. These developments lead to the generation of jobs in the short term until the long term tendency of job eating takes over again.
“Make in India” will not create jobs if development goes together with unemployment. The manufacturing sector has created only few jobs in the last few years. The employment grew at the rate of about 1.5 percent per year in the private manufacturing and construction sectors between 2006 and 2012. The growth rate of GDP in this period was about 8.5 percent. The GDP growth rate is far higher than the employment growth rate. Reason is that manufacturing is being undertaken increasingly by machines. Thus more “Make in India” means more use of robots and less generation of jobs.
The Government must cross subsidize employment generation. Way forward is to rank all industries in the country value added to labour ratio, that is, number of jobs created per Rs one crores of value added. The industries can be divided into three groups—capital intensive, medium, and labour intensive. A surcharge on excise duty can be imposed on capital intensive industries and a parallel discount can be provided to labour intensive industries. This will lead to growth in labour intensive industries and create true employment. The tendency to use robots will be arrested by such cross subsidization.
The Government proposes to provide incentives to Medium, Small and Micro Enterprises (MSMEs). Indeed most jobs are being created by this sector. However, these industries are under severe pressure from big industries. The local bread- and biscuit manufacturing industries have downed their shutters in face of competition from big companies. My eye doctor tells me that all small eye glass frame manufacturing companies have folded shops. This has happened because big companies have come with automatic machines and provided cheaper frames. The Make in India program proposes to take this policy forward. It will kill jobs because big companies will manufacture goods with automatic machines and MSMEs will be killed. It is necessary to impose high levels of excise duties on large industries that kill the MSME sector. This, however, will require us to simultaneously impose high levels of import duties on imported goods manufactured with machines. That, in turn, may require us to walk out of the WTO. There will be no employment generation in industries—big or small—without taking such strong measures.
The Government hopes that its efforts to impart skills to the workers will lead to greater employability and create jobs. Indeed, imparting of skills will reduce the cost of skilled workers in the market. However, the impact on employment may be negative. A skilled JCB operator may become available at Rs 8,000 per month instead of the present Rs 12,000 per month. The number of JCBs in operation may increase. More JCBs will mean fewer jobs for manual labour in digging etc. The increase in number of jobs of JCB operators will be a fraction of the jobs lost in digging. The overall impact will be negative. It is necessary to distinguish between job-eating skills like JCB operators and job-creating skills like handlooms. Once again, this requires first separating the economy in “labour intensive” and “capital intensive” sectors. Imparting of skills in the labour intensive sector alone will help in employment generation.
The industry has been clamoring for labour reforms. Businessmen are afraid to employ large number of workers today because of these laws. Difficulty is that reforming labour laws will enable businessmen to reduce the size of their work force. The way out is to exempt only those industries from labour laws that generate employment in large numbers. Then industries will try to employ large numbers of workers so that they can get themselves exempt from labour laws.
The Government has already completed one-third of its tenure. The remaining three years provide an opportunity to change direction of the economy. The Finance Minister must divide the economy into labour intensive” and “capital intensive” sectors. Lower rates of taxes, imparting of skills and exemption from labour laws must be provided only to the “labour intensive” sectors. Conversely, higher rates of taxes must be imposed on the “capital intensive” sectors and also imports of goods made with machines. Such a strategy alone will lead to large scale creation of the required number of jobs as told by the United Nations. Failure to generate jobs will be disastrous. Unemployment will push the youth towards terror.
Author was formerly Professor of Economics at IIM Bengaluru.
