The Power Of I 2020

Fixing India’s unemployment through formal job creation

COVID-19 creates a policy window to make India a fertile habitat for formal non-farm job creation 

Why did it take 1.3 billion Indians 72 years to cross the GDP of 66 million Britishers? Why does India have the same GDP as California that only has 2% of India’s population? Why does Pakistan have the same GDP as Maharashtra, a state that has only half of Pakistan’s population? Why does the country of Russia have the same GDP as the city of New York? Cultural explanations for such GDP differences are at best the soft bigotry of low expectations, and at worst, racism. Prosperity is about productivity. The productivity of India’s firms and its people has been low because the 1955 Avadi Resolution and the 1956 second five-year plan crushed competition, kneecapped entrepreneurs, and neutered capital markets and ensured that our labour is handicapped without capital, and our capital is handicapped without labour. COVID-19 offers a policy window to change this and make our nation a fertile habitat for non-farm job creation.

The pandemic’s short-term impact is ‘un-model-able’ till we have answers to three questions — around the virus, demand, and professions. The virus — because investments will be deferred till we know whether we are at the start, middle or end of the pandemic. Demand — because it is not clear whether companies and individuals will be frugal or hedonistic after this is over; will they save for a rainy day or live for today? Lower consumption may be fantastic for the environment but can be really painful for the economy. Finally, professions — because the fastest growing segments of India’s labour markets — sales, customer service, logistics, hospitality, and construction — cannot be done with social distancing.

But COVID-19 does not create conflicts. It creates trade-offs. In the short run, policy and society can ensure that disease does not lead to death, unemployment does not lead to hunger and working capital problems do not lead to bankruptcy. In the long run, we need radical reform.

The reforms of 1991 were important but incomplete, and COVID-19 has amplified five messages to the labour market: 

1. Our problem is not jobs but wages

2. The only way to help farmers is to have fewer farmers in the country

3. Cities are engines of productivity

4. MSMEs are horribly underfinanced

5. Formal enterprises pay higher and more predictable wages than informal enterprises because they have higher productivity


This evidence creates what political scientist John Kingdon calls a policy window for change: a situation when the problem, solution and timing come together. Making India a fertile habitat for job creation needs fixing our six geographies of work:

1. Physical geography: India can’t bring jobs to people; it needs to take people to jobs. China has a four-day weekend in February where 250 million people buy a train or plane ticket to head home. We have no such tradition on Diwali, Eid or Christmas because we have 600,000 poorly populated villages (of which 200,000 have less than 200 people) and we only have 52 crowded cities with more than a million people (China has 375). This poor urbanisation has created a painful divergence between real and nominal wages and we need 300 cities with more than a million people.

2. Enterprise geography: India’s enterprise stack is our biggest productivity challenge. Of our 63 million enterprises, 12 million don’t even have an office, 12 million work from home, only 12 million are registered for GST, only 1 million of them pay social security, only 1 million of them are companies, and only 22,500 of our companies have a paid-up capital of more than Rs.100 million. Of the 12 million GST registrants, only 70,000 earn revenue of more than Rs.50 million. Most Indian enterprises do not have the productivity to pay the wage premium, but they will never be productive if they don’t pay the wage premium, and therefore we are stuck in this low level equilibrium of low productivity, high informality and low wages. We need 50% of our labour force to work for wages and 50% of them to work for formal enterprises.

3. Sectoral geography: India is poor because 45% of the agricultural labour force only generates 14% of GDP. The only way to help farmers is to have less of them and that can be achieved by accelerating formal non-farm job creation. So far, the fastest growing segment of our job market is sales, customer service and logistics — all of which are driven by domestic consumption. India needs its service jobs but we need to target our manufacturing employment going from 11% of the labour force to 18%. 

4. Financial geography: India’s credit to GDP ratio is a poor 50%. This is exactly where it was 12 years ago — it equals Bangladesh and is lower than Iran. China’s 300% is the wrong target but we should raise this number to 100% of GDP by five interventions — increasing the number of banks, improving private sector governance, improving public sector governance, ending the discrimination against non-banks, and raising our supervisory and regulatory capabilities. 

5. Education geography: There is a new world of education. Lifelong learning matters more than knowing because Google knows everything, soft skills matter more than hard skills, curiosity matters more than intelligence, and Stanford psychologist Carol Dweck’s growth mindsets (people who believe that capabilities are like muscles) matter more than fixed mindsets (people who believe capabilities are like shoe size or height). It is embarrassing that only 45% of our children are in government schools. If anything should be free in a country, it should be quality education (and only 4% of kids in Japan and 15% of kids in the US are in private schools). We need to expand vocational education and deregulate higher education. Mahatma Gandhi articulated a principle called Nai Talim (or basic education) in 1938 at Wardha (Maharashtra) that articulated a vision for experiential and vocational education but that did not find mention in the 1948 Radhakrishnan Commission Report, 1968 Kothari Commission Report nor the 1986 New Policy on Education. The National Education Policy 2020 has a lot of interesting ideas that promise to revolutionize India’s human capital. The details lie in execution but we finally have a roadmap.

6. Compliance geography: The universe of compliance faced by Indian Employers included 1,536 Acts, 69,233 compliances and 6,618 filings. This problem is as much a state issue as a central one (See: Tangled web). 

India needs a 90-day compliance commission with the mandate to massively reduce this regulatory cholesterol that creates corruption, informality, and sub-scale enterprises. This commission should rationalize, decriminalize, and digitize this compliance universe in that order. 

Kingdon suggests that policy change happens when the problem, solution and timing come together to create a policy window. The global pandemic has offered India a policy window. Rich countries with their older populations, creaking health systems, and huge public debt will struggle to grow. Europe has an unsustainable combination of 7% of the world’s population, 25% of the world’s GDP, and 50% of the world’s social spending. The ‘genius’ capital of US — immigration — faces continuous and intense political challenges.

India has created the world’s largest democracy on the infertile soil of the world’s most hierarchical society. But we didn’t create the world’s largest economy. But we can overtake Germany and France in GDP in the next few years if we set off a super cycle of formal job creation. This needs fixing our enterprise, financial, educational, sectoral and compliance geography of work. Time for the hard work to begin.