Formal Employment as India’s Path to Prosperity

It is difficult to achieve widespread prosperity for large populations. India’s large remittances from a small population abroad, as well as the employability of the IT sector, reinforce that our mass prosperity strategy should focus on human capital and formal jobs.

Why is human capital formation such a powerful tool for mass prosperity?

  • Disproportionate contribution of IT employees: Our software employment makes a strong case for human capital-driven productivity — 0.8% of workers generate 8% of GDP.
  • Remittances by NRIs: Remittances from our overseas population, which accounts for less than 2% of our resident population, exceeded $100 billion last year.
  • Shift towards formal employment: According to a World Bank report, the qualitative shift in the previous five years from low-skilled, informal employment in Gulf countries (which fell from 54% to 28%) to high-skilled formal jobs in high-income countries (which increased from 26% to 36%) has been significant.
  • Our rich forex remittance harvest is roughly 25% higher than FDI and 25% less than software exports, and it is fruit from the tree of human capital and formal jobs.

Limitations of Fiscal and monetary policy

  • The availability of credit is a bigger issue: Monetary policy is, at best, a placebo, painkiller, or steroid, especially in India, where credit availability is more of a problem than credit cost.
  • The source of finance is more important than the expenditure: Global experience indicates that where governments spend money (pensions, interest, salaries, education, healthcare, roads, etc.) and how this spending is financed (taxes or debt) is more important than how much is spent (about Rs 80 lakh crore in India this year).
  • Covid made enormous fiscal and monetary policy demands, but the bigger the binge, the bigger the hangover. Western central banks are struggling to shrink their balance sheets because they used “unelected power” to pursue goals outside their mandate, administer medicine with unknown side effects, and speed down highways with no known return paths, according to Harvard’s Paul Tucker.
  • India escaped the fiscal and monetary quagmire: Borrowing rates in rich countries have risen by more than 300 percent, and inflation disproportionately affects the poor. These fiscal and monetary policy excesses were avoided by India. This prudence is now being combined with previous structural reforms (GST, IBC, MPC, UPI, DBT, NEP, and so on) and a “tone from the top” reform to create a fertile habitat for productive citizens and firms.

Strategy in next fiscal year for employment generation

  • Targeting job creation: The Finance Bill must prioritise productivity and continuity by enacting previously proposed human capital and formal job reforms.
  • The NEP should be implemented within five years: It should shorten the 15-year implementation glide path for the powerful National Education Policy 2020 to five years.
  • Eliminating licencing requirements: It should eliminate separate licencing requirements for online degrees and allow all of our 1,000-plus accredited universities to freely launch online learning.
  • Accelerating apprentices: The Apprentices Act should allow all universities to launch degree apprentice courses under tripartite contracts with employers, allowing us to increase our 0.5 million apprentices to 10 million.

What other steps can be taken through the next budget?

  • Notify labour code: It should notify the four labour codes for all central-list industries, as well as appoint a tripartite committee to converge them into a single labour code by the next budget.
  • Universal business number: It should continue EODB reforms by designating the PAN number of each enterprise as its Universal Enterprise Number.
  • Get rid of the factory act: It should look into manufacturing jobs by repealing the Factories Act, which accounts for 8,000 of the 26,000+ criminal provisions in employer compliance, and requiring all employers to comply with each state’s Shops and Establishment Act (like Infosys, TCS, and IBM India do).
  • Ensure better employer compliance: It should establish a non-profit corporation (similar to NPCI in payments) to run an API-driven National Employer Compliance Grid, allowing central ministries and state governments to rationalise, digitise, and decriminalise their employer compliances.
  • Making EPFO contributions optional: Making employee provident fund contributions optional while increasing employer PF contributions from 12% to 13%. It should notify employees of a previous budget announcement in order to give them the option of contributing to health insurance (ESIC or insurance companies) and pensions (EPFO or NPS).
  • Subsidy to high-paying employers: Most importantly, it should tie all employer subsidies and tax breaks to the creation of high-wage jobs (a difficult-to-fudge and easy-to-measure effectiveness metric for this public spending is employer provident fund payment).

@the end

Experience and evidence now strongly suggest that anchoring our strategy in human capital and formal jobs rather than fiscal or monetary policy raises the odds of mass prosperity in the world’s most populous nation from possible to probable.

And get notified everytime we publish a new blog post.