IT'S THE JOBS, STUPID!

Bharatiya Janata Party’s Prime Ministerial Candidate, Narendra Modi. Will he makes jobs as a key election plank? 

In his speech in New Delhi today, BJP Prime Ministerial candidate and Gujarat Chief Minister Narendra Modi briefly mentioned some figures about job creation during the NDA regime and compared them to job creation in the UPA II regime. The references were cursory and buried in the other political points that he was making.

But here is the thing, job creation probably offers the most potent political plank for any party. Consider the numbers. Almost 65% of the country is under the age of 35 — a point that Mr. Modi also made briefly in his speech. For over a decade now, basking in a fast GDP growth rate, we have been blissfully regarding this huge under-35 population as a ‘demographic dividend’. True, having among the largest working age populations in the world is a blessing – but only we are able to find this population, productive jobs. Otherwise the ‘Demographic Dividend’ could well turn into a ‘Demographic Curse’.

There are already signs of that happening. As India GDP growth rate slows down, where it is going to hurt most is on employment. A prominent infrastructure company recently announced sacking half its work force – about 4,000 people – because of economic slowdown and the fact that several of its projects are stuck for government clearance. It is not the first and will definitely not the last.

And it is not just the job losses in a slowing economy that we need to be worried about. Inevitably, as a society transitions away from agriculture – as India is in the middle of doing – agriculture jobs are lost and have to be replaced by enhanced job creation in the industrial sector. This year’s economic survey, brain child of Dr. Raghuram Rajan, then Chief Economic Advisor and now Reserve Bank of India Governor, predicted that by 2020 – over 11.8 million jobs will be lost in agriculture and will have to be replaced by jobs in the Industry. This is not an easy task by any means.

If India does not create enough jobs, the ‘Demographic Dividend’ could turn out to be ‘Demographic Curse’

During 2009, 2010 & 2011, again according to the Economic Survey, Indian GDP grew at 8%, 8.5% and 6.5% respectively. Yet during this period, employment in the organized sector grew by only about 3% — just about 900,000 jobs.

Of course, this figure is only half the truth, because almost 80% of the jobs in India are in the Micro, Small and Medium Enterprises (MSME) sector – which the government classifies as unorganized. As a result, it has no data on the number of jobs being created or lost in this sector. And if we have no data, can any effective policy really be designed to help this sector to create more jobs? But this lack of data is a topic for a separate discussion.

In the last two years, the Indian Rupee has depreciated against the Chinese Yuan by 33% of its value. If we get our industrial policies right, this depreciation can prove to be a huge competitive advantage. The key to this is to address the MSME sector.

According to various estimates MSMEs employ 81 million people. Clearly if we have to create more jobs, it has to come from the MSME segment. Yet the fact is an overwhelming (almost 70%) of these MSMEs are micro-enterprises that do not grow to become Small or Medium enterprises clearly inhibiting prospects for job creation.

While there are a number of reasons inhibiting growth in this sector, one major contributing factor is the eco-system that they operate in. And correcting that is a low hanging fruit.

India ranks 132 out of 185 in the ease of doing business according to the World Bank“Doing Business – 2013” report. Yet, according a similar World Bank report in 2009, if a hypothetical city say, “Deshpur” were to adopt the best practices from several Indian cities — number of procedures to start a business from city A, days to start a business from City B, procedures around construction permits in City C etc. — the country’s rank in Doing Business would jump to about 67. With improved ease of doing business will come growth and that will bring in more jobs.

After agriculture, MSMEs employ the most people in India. Any strategy for job creation should be aimed at boosting these enterprises. 

But for the MSMEs to grow and create more jobs, we also need to concentrate on the growth of the organized sector since MSMEs typically supply goods and services to the larger enterprises. This would require a slew of measures from creating an industry friendly climate to increased investments in infrastructure and getting stalled projects off the ground.

The most important of these reforms would have to centre on our labour laws. India has the dubious distinction of having some of the most comprehensive labour laws in the world, even while having one of the largest fractions of the working population unprotected. There is enough evidence to point that our labour laws actually hinder the growth of large-scale manufacturing. And when companies do expand production, it is most often done through the use of contract labour. Inevitably these jobs have low productivity and companies make little investments in training and skill upgradation.

Probably the one sector which can have the highest multiplier effect on the economy and job creation is the BFSI sector. Whether it is Banking or other financial services like insurance, the penetration in India is far below globally accepted standards. If we deregulate the BFSI industry and allow it to grow; while giving incentives for financial inclusion; the potential for job creation is massive. The entry of private sector insurance companies has seen almost two million jobs created in the last decade. According to estimates, if de-regulated, the banking sector itself has a potential to employ over one million people through direct employment, work as banking correspondents and financial inclusion initiatives.

There are two other advantages of a thriving BFSI sector. First, various studies of employee productivity show that productivity among the BFSI sector is seven times the average productivity in the country.  So the economic spin-off from a job created in the BFSI sector is far greater.

Second, a strong BFSI sector would help solve one of the biggest problems confronting the MSME sector – lack of adequate credit. The conditions laid down by the RBI in the new banking license applications, will ensure that MSMEs will get a greater flow of credit, helping them to prosper, with a multiplier effect on job creation.

The rapid GDP growth of 2003-2010 led to a kind of complacency among policy makers and analysts. But what the last 18 months have shown is that India’s continuing on a rapid growth path is not pre-ordained. It requires vision, fortitude and deft policy making.

In the 1992 US Presidential Election, Bill Clinton’s team came up with a memorable slogan – “It is the Economy, Stupid”, which many analysts say played a significant role in his winning the election. As India nears what promises to be an intensely contested general election, perhaps it is time to paraphrase this to “It is the Jobs, Stupid” and ask our political leaders their plans in this regard!