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View: The diminishing importance of cheap labour makes five reforms India’s need of the hour

The need is for bold and quick action, because this status quo is not only unsustainable but also wrong.

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Last Updated: Feb 21, 2020, 04.31 PM IST
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Economy---BCCL
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By Manish Sabharwal

In 1967, retired British civil servant Leonard Woolf wrote, ‘I have no doubt that if the British government had granted in 1900 what they refused in 1900 but granted in 1920; or granted in 1920 what they refused in 1920 but granted in 1940, or granted in 1940 what they refused in 1940 but granted in 1947 — then ninetenths of the misery, hatred, and violence of India’s partition would have been avoided.’

India’s inevitable but delayed Independence created needless human suffering. India’s formal job explosion is being delayed by five pending economic reforms that are, similarly, unavoidable, inevitable and overdue. The earlier they happen, the earlier India creates the 200 million new formal, private and productive jobs it needs.

Plunge into the Cold Waters
India faces a very different world in 2020 than China did in 1978. Companies are moving production closer to customers so they can respond faster to demand changes. Automation is slowing the attractiveness of lower wages. In his book, Fully Grown: Why a Stagnant Economy is a Sign of Success, economist Dietrich Vollrath suggests that a rich country’s slow growth is a good thing. Research, design and maintenance are starting to matter more than production.

Politics is having an antibiotic reaction to trade and immigration. This means that rich countries — with their skilled workforces, large capital pools, huge customer bases, better infrastructure, higher State capacity, world-leading universities and hi-tech companies — are actively authoring a globalisation different from the one China took advantage of 30 years ago — a supercycle of global growth, policy trade openness, and a deconstruction of manufacturing supply chains that made low-cost labour valuable.

This makes five Indian reforms urgent:
Labour law: India’s labour is handicapped without capital, and our capital is handicapped without labour. We need urgent reform on wages (reduce the gap between gross and take-home salary), social security — the costs and governance of Employees’ State Insurance (ESI) and Employees’ Provident Fund Organisation (EPFO) — and employment law (we should have one code instead of four, and it should be more than a word-processing exercise). Outcome: 50% formal employment.

Public sector banks (PSBs):
Raising India’s credit-to-GDP ratio needs three things — RBI raising its game in regulation and supervision; more private sector bank competition; and reform of PSB governance and human resources (HR). PSBs got Rs 2.5 lakh crore capital infusion in the last 24 months. Yet, their risk-weighted assets are lower than 24 months ago. Outcome: raising our credit-to-GDP ratio from 50% to 100%, and higher growth and productivity for our micro, small and medium enterprises (MSMEs).

Higher education: India’s low gross enrolment ratio, and variable graduate quality, mean the current licence raj in education isn’t working. This needs three things: massifying higher education (India’s gross enrolment ratio needs to rise to 50%), vocationalising higher education (link apprenticeships to higher-education and enable modularity for certificates and diplomas to degrees), and allowing innovation — and let’s not confuse university buildings with building universities, please. Outcome: lower graduate unemployability with higher wages and productivity.

Clean Up the Act
Ease-of-doing business: India’s employer regulatory cholesterol universe of 57,000-plus compliances, 3,100+ filings and 5,000-plus annual changes is painful. This needs rationalisation (more than half can be ended without compromising enforcement); digitisation (going paperless will reduce corruption and improve enforcement); and simplification (we need a single universal enterprise number for all laws). Outcome: a reduction in our 63 million total enterprises, but a rise in our social security-paying enterprises from one million to 12 million (GST registrants).

Central government:
The Indian State has too many central ministries. 52 is much more than Japan’s 8, the US’ 14 and Britain’s 22. Additionally, too many big ministries in Delhi operate in state subjects. India must devolve more funds, functions and functionaries to state capitals. Our civil services need differentiated performance management, lateral entry, specialisation and top-heaviness rationalisation (there are 250 people with the rank of secretary in Delhi!). Outcome: a State that does less so it can do more around human capital, investment and productivity-led growth.

Reforms since 1991 have radically improved the Indian economy, and reforms since 2014 have radically improved the formal Indian economy. But every doctor knows that a treatment 90% complete is incomplete. In his book, Backstage: The Story Behind India’s High Growth Years, former Planning Commission chairman Montek Singh Ahluwalia recounts a prime minister’s longing: ‘What we need is growth that falls like the rains on the mountains and flows down in streams to the valleys and plains below, not growth that is like snow, which sticks to the mountain tops.’

People like Winston Churchill believed the British empire would last a thousand years. But the British raj began declining at its peak because it stopped listening and taking risks. Nations on the rise dream big, dare greatly and see failure as a challenge to be overcome. To paraphrase economics Nobel laureate Paul Romer, the world is ‘conditionally optimistic’ about India. We have the ability to end this conditionality. We must act boldly and quickly, because the economic status quo is not only immoral or wrong, but also unsustainable.

The writer is chairman, TeamLease Services.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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