Whither employment?

by Mahesh Vyas

The finance minister’s speech seems to imply that there is no problem of employment in the country. And if there were any problems, then they have been solved and sufficient employment is being generated in the country’s formal sectors today.

The budget focuses on the agricultural sector (which does require a lot of attention), but it fails to recognise that there is a serious jobs problem in the country.

The finance minister listed six measures taken by the government in the past three years to boost employment generation. As a result of these measures, the government contributes 8.33 per cent of the employee provident fund for new employees for three years; for new employees in the textile, footwear and leather industries it contributes 12 per cent to EPF for three years; employers of new employees get an additional deduction of 30 per cent of the wages paid to new employees; government shares the cost of stipend and other costs under an apprenticeship scheme; introduction of fixed term employment for apparels and footwear sectors; and increased maternity leave from 12 to 26 weeks.

The government believes that these measures have started showing results as a study has shown that 7 million formal jobs will be created this year.

The finance minister has, however, extended the schemes further. The government will now provide 12 per cent of the wages of new employees in the EPF for all sectors for the next three years and it has extended the fixed term employment facility to all sectors. Further, contribution of women employees to EPF is reduced to 8 per cent for the first three years of their employment.

If we are generating 7 million formal jobs in a year then surely there should not be any employment problem. If this is so, then the government’s continuation of its jobs-creating schemes further into the future beats logic.

The extension of sops for creating employment raises an important question. With the introduction of GST and other tax rationalisations in recent years it was expected that the several tax exemptions to companies and individuals would be withdrawn. But here, we see a continuation of a scheme that gives employers an additional deduction of 30 per cent of wages paid to new employees.

The government has chosen not to look at other data sets on employment that paint a very different picture. For example, the BSE-CMIE effort at tracking employment/unemployment has shown a 1.4 million increase in overall employment during calendar year 2017. This implies a negligible 0.35 per cent increase (1.4 million on a base of 404 million) which almost contradicts the 11.7 per cent increase seen in the EPFO numbers (an increase of 7 million over a base of 60 million).

The BSE-CMIE survey is comprehensive and not just limited to the payrolls database which accounts for small portion of total employment in the country.

The government’s cherry-picking its data source can be counter-productive. Worse still, its belief that the measures are working can be misleading.

For example, the increased maternity leave may have actually reduced the incentive for employers to hire young women. The measure provides protection to women and newborns, but it does not provide an incentive for them to be hired.

Although the budget does not directly recognise the employment problem, it does make a healthy allocation of Rs.550 billion to MGNREGA. This is Rs.70 billion higher than the amount allocated in 2017-18 budget.

If we recognise that given our demographic dividend there is a serious challenge on the jobs front then, the best short-term solution to aggressively pursue is a solution such as MGNREGA. Perhaps, a little more innovation towards direct interventions for job creation would have been good. Similarly, the budget fails to usher in innovative schemes to address the problem of mismatch between skills and jobs.

The strong case made by the finance minister to farmers assuring them that the minimum support price would provide a 50 per cent margin over the cost of production could effectively retain more people in low-productivity jobs on farms. This may be a good short-term strategy till investments in the formal sectors pick up. But, this should not build long-term structural inefficiencies in agricultural price markets and in the labour markets. A sunset clause with a parallel strategic move to modernise agriculture and ensure a better play of market forces would be a good idea.

The failure to directly recognise the employment problem is also reflected in its lack of appreciation of the macroeconomic conditions that lead to the employment problem. And so, the budget does not entirely recognise the lack of sufficient investments or incentives to private sector to invest. Lack of jobs is an outcome of the investment ratio falling from 34 per cent in 2011-12 to 26.4 per cent in 2017-18. Its an outcome of new investment proposal announcements falling from around Rs.25.5 trillion to below Rs.10 trillion during these years.

The budget’s focus on a few industries such as leather, footwear and textiles is insufficient to address the larger problems of jobs in the country.

While the central government’s budget is mildly expansionary (expenses are budgeted to rise by 13.8 per cent), its capital expenditure has not been growing. During 2017-18, capital expenditure declined by 3.9 per cent and the budgeted expenditure for 2018-19 is 3 per cent lower than the budgeted expenditure for 2017-18.

An expansionary budget could raise aggregate demand which in turn could lead to an increase in private investment and employment. But, for this, government expenditure needs to grow by around 20 per cent. The 13.8 per cent envisaged may not be enough to spur demand sufficiently for private investments to follow. The jobs problem that we see may therefore persist.

First Published in The Indian Express Link

Unemployment Rate
Per cent
5.4 -0.0
Consumer Sentiments Index
Base September-December 2015
95.6 0.0
Consumer Expectations Index
Base September-December 2015
95.7 -0.3
Current Economic Conditions Index
Base September-December 2015
95.5 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.25 1.49 3.60 2.27
Completed projects 1.25 1.15 1.42 0.82
Stalled projects 0.69 0.88 3.41 0.30
Revived projects 0.34 0.22 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.03
Updated on: 17 Jul 2018 8:20PM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 10.2 18.1
 Expenses 9.0 13.0 17.0 21.4
 Net profit -18.0 -14.3 -81.9 8.4
 PAT margin (%) 5.5 4.8 1.2 17.4
 Count of Cos. 4,501 4,491 4,283 45
Non-financial Companies
 Income 8.2 13.3 11.8 18.5
 Expenses 8.1 12.3 12.7 22.7
 Net profit -6.1 13.2 -2.5 6.7
 PAT margin (%) 6.2 6.4 6.5 18.1
 Net fixed assets 9.2 11.9
 Current assets 2.9 8.0
 Current liabilities 11.0 10.3
 Borrowings 3.4 1.8
 Reserves & surplus 7.9 7.8
 Count of Cos. 3,460 3,463 3,315 32
Numbers are net of P&E
Updated on: 17 Jul 2018 8:21PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.8 12.3
 Expenses 5.7 1.9 5.8 17.9
 Net profit 0.1 -9.3 26.2 -51.0
 PAT margin (%) 3.0 2.8 3.5 3.6
 Assets 9.5 10.2 7.3 14.1
 Net worth 8.5 11.3 7.0 11.0
 RONW (%) 5.8 4.9 5.9 4.8
 Count of Cos. 26,056 24,316 21,815 218
Non-financial Companies
 Income 4.8 1.0 5.7 9.8
 Expenses 5.0 0.3 5.9 9.3
 Net profit -8.5 20.4 21.4 11.9
 PAT margin (%) 2.0 2.5 3.0 13.4
 Net fixed assets 13.3 17.4 6.5 21.2
 Net worth 7.0 12.0 5.7 5.3
 RONW (%) 4.6 5.2 6.1 17.7
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 16.0
 Net working capital cycle (days) 66 65 62 -12
 Count of Cos. 21,269 20,387 18,246 150
Numbers are net of P&E
Updated on: 04 Jul 2018 4:50PM