When jobs plummet, so will growth

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Published: Wednesday, 04th September 2019

The numbers are in and uncontested this time. The growth of the Indian economy, until recently celebrated as the world’s fastest, has slumped to only 5 per cent. Alarm bells ringing, the government’s fire-fighters are out.

The government wants investors to invest more, to grow the economy to $5 trillion. With capacity utilisation low, and demand falling in many sectors — automobiles, tractors, and even biscuits — the investors’ rationality is over-powering animal spirits. Economists are debating whether the Indian economy is in cyclical decline, or whether there is a deeper structural problem. The Periodic Labour Force Survey data for 2017-18 released by the National Sample Survey reveals the structural problem.

Alarmingly, the Labour Force Participation Rate — the numbers of people at work, and those seeking work — has declined from 54.9 per cent to 49.8 per cent between 2011-12 and 2017-18, in a country which expects to obtain a demographic dividend from a large workforce. The numbers tell us that 75 per cent of those employed are self-employed or have casual wage employment.

Income disparity

People in India cannot buy more because they are not earning enough. Therefore, business sales are not growing. People are not earning enough because the economy is not generating enough good jobs to provide adequate, sustainable incomes. Alarmingly, the Labour Force Participation Rate — the numbers of people at work, and those seeking work — has declined from 54.9 per cent to 49.8 per cent between 2011-12 and 2017-18, in a country which expects to obtain a demographic dividend from a large workforce. The numbers tell us that 75 per cent of those employed are self-employed or have casual wage employment. Casual workers (24.9 per cent of the workforce) earn less than ₹9,750 per month, the figure recommended by an Expert Committee as the minimum income for decent living. Self-employed workers (52.2 per cent) earn hardly more than the minimum required. Only 25 per cent of the workforce with “regular wage and salary (RWS)” employment earn more than enough for their minimum needs. However, with the trend of “flexibilising” the workforce to make it easier for business, the share of RWS workers without secure contracts has increased from 64 per cent to 71 per cent between 2011-12 and 2017-18. Their employment and earnings have become more vulnerable too.

The Indian economy is caught in a structural trap. The precarity of incomes of over 90 per cent of Indian workers, including those self-employed, is dragging down the growth of the economy. Investors want businesses to make profits. Businesses want more sales. For this, people must be enabled to buy more. A principal attraction for investors from abroad is the potentially huge market in India. When the growth of this market slackens, they become less interested to put their money in India. The engine of growth of the Indian economy lies within India, not in demand in foreign markets. The Indian economy is spluttering because incomes are not growing at the bottom of the pyramid.

The fact is, prevalent labour laws apply to less than 3 per cent of all workers in India — those in regular, salaried employment in larger enterprises. Over 50 per cent are self-employed workers, who are free to fire themselves. Above them sit a large number of tiny, informal enterprises, who employ up to 10-20 workers, and are not unencumbered by laws on hiring and firing. These enterprises, who are the largest employment generators, are not able to grow, though they would want to, because they have other problems — access to low-cost finance, access to markets, etc.

Prime-time policy solutions to the Indian economy’s problem will not solve this structural problem. Many economists and big business lobbies advocate more freedom from labour regulations to release the animal spirits of investors. They want the market to set wages. They want more freedom to fire workers. The fact is, prevalent labour laws apply to less than 3 per cent of all workers in India — those in regular, salaried employment in larger enterprises. Over 50 per cent are self-employed workers, who are free to fire themselves. Above them sit a large number of tiny, informal enterprises, who employ up to 10-20 workers, and are not unencumbered by laws on hiring and firing. These enterprises, who are the largest employment generators, are not able to grow, though they would want to, because they have other problems — access to low-cost finance, access to markets, etc. Political energy should be applied to solve their real problems, rather than being wasted on easing laws for firing workers, which could be a problem for larger enterprises.

Employee security

One labour-related reform that is accurately targeted at the structural problem of the Indian economy is a comprehensive reform of social security systems. Fiddling with the present schemes of provident fund, gratuity, etc, provided through employers will not do. Most Indians do not have formal employment contracts. With the growth of the gig economy, their numbers will only increase. Citizens need a good social security system to help them tide over exigencies in their lives — medical emergencies, disabilities etc, as well as for periods of loss of employment and incomes, which will become more frequent when employment is left only to market forces. The structural problem of the economy that makes it difficult to finance universal social security is the paucity of resources with the state. The state is reluctant to raise taxes on rich people and large corporations to provide universal social security because it would dampen investors’ spirits. Therefore, the Indian government has to steer sensitively between the demands of investors and the needs of citizens to devise an adequate, and viable social security system.

While the value of all other assets depreciates over time, human beings are appreciating assets. Moreover, motivated workers can improve the productivity of other assets used in the business also — machines, materials etc. However, conventionally, human workers do not even appear on the asset side of an enterprise’s balance sheet. They appear as costs in the P&L account.

Human resources

A break-through out of this conundrum would be the development of business models that align workers’ and owners’ interests. Human workers are an enterprise’s only asset that can appreciate its own value if it is motivated to learn and improve. While the value of all other assets depreciates over time, human beings are appreciating assets. Moreover, motivated workers can improve the productivity of other assets used in the business also — machines, materials etc. However, conventionally, human workers do not even appear on the asset side of an enterprise’s balance sheet. They appear as costs in the P&L account. Laws that make it easier for businesses to fire their workers weaken the bond between owners and workers. A business can trim costs in the short term, but with less motivation to invest in employees’ learning and skills, the longer-term competitiveness of the enterprise suffers.

India is short of petroleum, water, land, capital and other resources compared to the size of its population. The only resource India has in abundance compared with all other countries is human beings. Smart business models should use more human beings for competitive advantage. The government should nudge businesses in India to do what is in their best interests, and in the national interest too, by providing incentives to employ and develop more people within their enterprises, rather than announce tax incentives for more capital. When more Indians earn, and earn more, the domestic market will grow and make investments in India attractive for Indian and foreign investors. That way, a downward structural spiral in the economy can be turned into an upward one.

(The writer is Chairman, HelpAge International.)