Moving from jobs to wages
A budget that does not believe that in the long run we are all dead.
Following India’s poverty industry’s curious pre-budget rant about millions of new formal jobs not being jobs, the budget proposals — and the Economic Survey data — were positioned at an interesting crossroads. They had to decide whether our labour market problem is jobs (subsistence) or formal jobs (living wages) and whether our economic problems need the perpetual emergency-room triage (the oft-repeated saying, “In the long run we are all dead”) or patient structural change (a 10-year plan is not 10 one-year plans).
This diagnosis is important because the poverty industry’s perpetual Pavlovian response about jobs involves throwing money from helicopters, dumping fiscal discipline, replacing workers’ shovels with spoons, and mandating a three-day workweek. But India’s problem is not jobs but wages — our official unemployment rate of 5 per cent is not a fudge — and raising wages needs the patient targeting of productivity through multiple reforms that reinforce each other.
Yesterday’s budget builds on the progress in the last 24 months — income-tax payers up 20 per cent, tax registered enterprises up 50 per cent and informal employment down to 75 per cent — while reinforcing the vision that in the long run we are not all dead and prosperity comes from structural change (which ends our sense of humour about the rule of law), fiscal prudence (which generates macroeconomic stability), and a higher tax-to-GDP ratio (a modern state is a welfare state but this ratio has been stagnant for 30 years).
Many of the budget’s proposals will accelerate formalisation, growth and productivity. From a macro perspective, the biggest gift to formal job creation is always fiscal stability — the projected 3.3 per cent deficit is down from a peak of 5.9 per cent and ensures that inflation will not rear its ugly head. The health insurance scheme is probably the most important human capital intervention in recent history: Covering 500 million people for Rs 5 lakh, it addresses one of the biggest reasons for people falling back into poverty and also raises consumption (social security nets provide the comfort to release excess savings).
The budget has a lot of ease-of-doing business interventions for formal job creators. These include moving to an Aadhaar number-like universal enterprise number for enterprises to replace 27 numbers (a pre-requisite to moving all government interfaces towards adopting the paperless, presenceless, and cashless IndiaStack); e-assessment for taxation that will end the inevitable harassment or extortion that accompanies physical contact with tax authorities; lower income tax for all but the biggest companies; replacing the massive paperwork of travel and medical reimbursement with a standard Rs 40,000 deduction for employees; fixed-term contracts for all industries; continuing the shift in the tax regime from one that offers subsidies for investing capital to one that rewards hiring people (80JJA).
The budget finally recognises the two huge costs of formal employment for employees: One, the huge divergence between real and nominal wages in job magnets that retards migration, and two, the huge divergence between gross and net wages for mandatory deductions (chitthi waali vs haath waali) that murders take-home salary. The only way to tackle the first problem is taking jobs to people rather than people to jobs. The Rs 3 lakh crore-plus budgeted for roads, electricity and the smart city programme is a coordinated intervention that could change our current bad urbanisation — which kills nominal wages by shoving more people into our 52 cities with more than a million people — and create another 50 connected cities with infrastructure and more than a million people (China has 375 such cities).
The second problem of take-home wages has been wonderfully addressed in this budget — the government will pay 12 per cent of the employer provident fund contribution and a reduction of the employee provident fund contribution for women to 8 per cent. This elegant policy intervention is the best kind of job-creation subsidy — scalable, hard to game and fully trackable. A big miss in the budget is the reduction of regulatory cholesterol in education. The mentality of prohibited-till-permitted in current regulators must go if we need innovation, quality and employability from our schools and colleges.
The policy negligence of not declaring a war on informality and corruption in the last 50 years means that our institutions have been undermined by transmission losses between how the law is written, interpreted, practised and enforced. Labour laws are unenforceable if they are only enforced for a small part of the labour force. Indirect taxes are not paid if only some enterprises do so. It has been economically corrosive for an Indian to feel she lost a deal if she followed a rule. The move from deals to rules — formalisation — over the last four years and this budget are making India a fertile habitat for job creation. The 3.5 million new enterprises with tax registrations since GST are yet to imagine the productivity upside of access to talent, credit and customers.
John Maynard Keynes is probably turning in his grave at the poverty industry’s repetition of his quip: “In the long run, we are all dead.” He not only knew that short-term thinking was dangerous (he opposed the Versailles reparations on Germany after World War I suggesting they could lead to World War II) but lived his life believing that a good life involves planting trees that you will never sit under. Extreme short-term policy thinking in budgets has been justified on grounds that when the building is on fire, you don’t talk about the building safety code. But if the building is on fire every day, somebody has to think about the building safety code.
The budget builds on reforms that are now starting to reinforce each other — demonetisation, GST, bankruptcy, RERA, shell company evisceration, etc — and break us out of a low-level equilibrium with informal enterprises that can’t or don’t pay the wage premium. This budget shows that it knows without employers there are no employees. But it signals that it knows more: Without formal enterprises there is no wage premium.
Following India’s poverty industry’s curious pre-budget rant about millions of new formal jobs not being jobs, the budget proposals — and the Economic Survey data — were positioned at an interesting crossroads. They had to decide whether our labour market problem is jobs (subsistence) or formal jobs (living wages) and whether our economic problems need the perpetual emergency-room triage (the oft-repeated saying, “In the long run we are all dead”) or patient structural change (a 10-year plan is not 10 one-year plans).
This diagnosis is important because the poverty industry’s perpetual Pavlovian response about jobs involves throwing money from helicopters, dumping fiscal discipline, replacing workers’ shovels with spoons, and mandating a three-day workweek. But India’s problem is not jobs but wages — our official unemployment rate of 5 per cent is not a fudge — and raising wages needs the patient targeting of productivity through multiple reforms that reinforce each other.
Yesterday’s budget builds on the progress in the last 24 months — income-tax payers up 20 per cent, tax registered enterprises up 50 per cent and informal employment down to 75 per cent — while reinforcing the vision that in the long run we are not all dead and prosperity comes from structural change (which ends our sense of humour about the rule of law), fiscal prudence (which generates macroeconomic stability), and a higher tax-to-GDP ratio (a modern state is a welfare state but this ratio has been stagnant for 30 years).
Many of the budget’s proposals will accelerate formalisation, growth and productivity. From a macro perspective, the biggest gift to formal job creation is always fiscal stability — the projected 3.3 per cent deficit is down from a peak of 5.9 per cent and ensures that inflation will not rear its ugly head. The health insurance scheme is probably the most important human capital intervention in recent history: Covering 500 million people for Rs 5 lakh, it addresses one of the biggest reasons for people falling back into poverty and also raises consumption (social security nets provide the comfort to release excess savings).
The budget has a lot of ease-of-doing business interventions for formal job creators. These include moving to an Aadhaar number-like universal enterprise number for enterprises to replace 27 numbers (a pre-requisite to moving all government interfaces towards adopting the paperless, presenceless, and cashless IndiaStack); e-assessment for taxation that will end the inevitable harassment or extortion that accompanies physical contact with tax authorities; lower income tax for all but the biggest companies; replacing the massive paperwork of travel and medical reimbursement with a standard Rs 40,000 deduction for employees; fixed-term contracts for all industries; continuing the shift in the tax regime from one that offers subsidies for investing capital to one that rewards hiring people (80JJA).
The budget finally recognises the two huge costs of formal employment for employees: One, the huge divergence between real and nominal wages in job magnets that retards migration, and two, the huge divergence between gross and net wages for mandatory deductions (chitthi waali vs haath waali) that murders take-home salary. The only way to tackle the first problem is taking jobs to people rather than people to jobs. The Rs 3 lakh crore-plus budgeted for roads, electricity and the smart city programme is a coordinated intervention that could change our current bad urbanisation — which kills nominal wages by shoving more people into our 52 cities with more than a million people — and create another 50 connected cities with infrastructure and more than a million people (China has 375 such cities).
The second problem of take-home wages has been wonderfully addressed in this budget — the government will pay 12 per cent of the employer provident fund contribution and a reduction of the employee provident fund contribution for women to 8 per cent. This elegant policy intervention is the best kind of job-creation subsidy — scalable, hard to game and fully trackable. A big miss in the budget is the reduction of regulatory cholesterol in education. The mentality of prohibited-till-permitted in current regulators must go if we need innovation, quality and employability from our schools and colleges.
The policy negligence of not declaring a war on informality and corruption in the last 50 years means that our institutions have been undermined by transmission losses between how the law is written, interpreted, practised and enforced. Labour laws are unenforceable if they are only enforced for a small part of the labour force. Indirect taxes are not paid if only some enterprises do so. It has been economically corrosive for an Indian to feel she lost a deal if she followed a rule. The move from deals to rules — formalisation — over the last four years and this budget are making India a fertile habitat for job creation. The 3.5 million new enterprises with tax registrations since GST are yet to imagine the productivity upside of access to talent, credit and customers.
John Maynard Keynes is probably turning in his grave at the poverty industry’s repetition of his quip: “In the long run, we are all dead.” He not only knew that short-term thinking was dangerous (he opposed the Versailles reparations on Germany after World War I suggesting they could lead to World War II) but lived his life believing that a good life involves planting trees that you will never sit under. Extreme short-term policy thinking in budgets has been justified on grounds that when the building is on fire, you don’t talk about the building safety code. But if the building is on fire every day, somebody has to think about the building safety code.
The budget builds on reforms that are now starting to reinforce each other — demonetisation, GST, bankruptcy, RERA, shell company evisceration, etc — and break us out of a low-level equilibrium with informal enterprises that can’t or don’t pay the wage premium. This budget shows that it knows without employers there are no employees. But it signals that it knows more: Without formal enterprises there is no wage premium.
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