Union Budget 2024: Govts have limited impact on jobs

Policy reforms would work better than programmes or projects

The Budget announcements involve numerous elements aimed at the labour market, and it is indeed a major concern in India. Some of the new announcements might disappoint over the medium term. As we know from the production-linked incentive (PLI) scheme, the Indian state is not big enough to directly impact the economy. The path to potency for policymakers lies in improving the environment in which private firms create growth and employment; it involves more of policy and less of programmes or projects.
 

Consider the internship programme in the top 500 companies. The government desires that this will process 10 million persons over a five-year period. On page 34, the sentence “Participation of companies is voluntary” is pitch perfect. The government proposes a centralised online portal, numerous rules about eligibility for the applicants, and Rs 60,000 per intern for a year of the Prime Minister's Internship. This will be funded out of money from the government (Rs 54,000) and by corporate social responsibility or CSR contributions coerced from firms in 2013.
 

Would many firms go down this route? Firms are rational agents and have been building internship programmes (often with payments of over Rs 5,000 a month). The prospect of interacting with the state in centralised application portals, subsidy payments, etc would be daunting to many. It is, then, not clear how the precise number (10 million persons in five years) would materialise.
 

We would hope that this fully voluntary initiation in 2024 will not morph into government coercion of the top 500 companies in the future. If such coercion arises in the future, it would further deter investment by firms, and thus exacerbate the employment problem. In the mildest scenario, if firms are coerced, they could set up processing centres that pay out Rs 60,000 to interns in the style of a welfare programme. This, in turn, may lead officials to retaliate with more rules and centralised IT systems that intrude upon the life of the firm.
 

Even if everything works out as intended, and no coercion is applied other than that involved in CSR and raising tax resources, 10 million internships is a small number compared with the magnitudes in the Indian labour market.
 

There are two alternative ways to achieve growth and employment in India. The first is to reshape state power in ways that create conditions for private persons to want to invest in India. This is the path to growth, and has unlimited potential. The second is to proceed with the unreconstructed Indian state, and try to directly reach for a desired outcome (such as employment). The Indian minimum wage is roughly Rs 160,000 per year. If the entire expenditure in the Union Budget for bolstering employment, of Rs 2 trillion, were paid out to employees by private firms, this yields a direct employment of 12.5 million. This is not enough to move the needle on employment. The state is more potent when it undertakes actions that reshape the desire of private firms, as opposed to applying the philosophy of welfare programmes.
 

There is an analogy with the idea of the PLI as a path to success in exporting. There are disabilities of operating in India, with policy mistakes in goods and services tax, Customs duties, cesses, taxation, capital controls, and the like. If the disabilities are sought to be overcome through fiscal transfers, the required outlays are daunting. If a PLI of 5 per cent is paid on $1 trillion of exports, this is a payment of $50 billion or Rs 4 trillion. The Indian state is not rich enough to subsidise exports in this fashion on a meaningful scale. It is cheaper to solve these disabilities at the root through policy analysis and reform, after which private entities (domestic or foreign, large or small) would re-evaluate the case for producing in India.
 

Economic growth is made out of the investment decisions of private firms. Business building for an individual is a long-term journey. It takes many years of investment and emotional commitment to create high-productivity firms. Private individuals respond to the long-term outlook on expropriation, the rule of law and central planning. They do not respond to year-to-year changes in policy; in fact, such fluctuations by policymakers increase perceived uncertainty and hamper investment.
 

The growth episode of 1991-2011 illuminates Indian development strategy. We should have no illusions about the working of the Indian state during that period. But policymakers adopted a philosophy that led private individuals to believe that things were getting better. The central planning gradually declined and the rule of law gradually went up. There was an intellectual discourse, and criticism of the status quo, which helped show the paths to progress. The promise made and then delivered by Yashwant Sinha, of cutting the peak customs duty by 5 percentage points every year, stabilised expectations and triggered an investment boom. Policymakers delivered regular instalments of progress, and reforms were generally not reversed. There was elite social capital through which specific problems could bubble up into exception handling.
 

This environment enabled private individuals to take the leap of faith required for long-term investment in 1991-2011, which, in turn, delivered large gains in exports and employment. The motive force was a collaboration between the intelligentsia and the political leadership, which brought about new ideas about the Indian state. It was not muscular state power being deployed to create incentives or coercion in favour of exporting or recruiting.

The writer is a researcher at XKDR Forum