Indian Economy, 5th edition (98 page)

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Contrast this picture with China’s where the share of value added in industry has always been very high relative to its share of employment, or Indonesia’s and Korea’s where the share of value added has kept increasing as the share of employment has increased (e.g. for Indonesia) or even decreased (e.g for Korea).

•
The alarming conclusion is that while workers are being added to industry in India, the productivity of the jobs they are going into has not been high. In part, this is because the data we work with treats low-productivity construction as a part of industry, and the booming construction sector has accounted for a large share of the jobs created in industry.

•
However, an additional problem is that few of the jobs in industry are formal or being created by the comparatively more productive large firms.

The
Services
sector show another typical trait-

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While the share of employment in services has been growing very slowly, the share of value added is significantly higher than in other Asian economies.

•
China has a similar share of employment in services at a similar time from takeoff even though its share of value added is much lower.

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A big factor in India’s larger services share is that services started out at the time of take-off with a much larger share, but growth has also been strong.

Several finer points suggested by these sectoralpictures across countries :

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Unlike the conventional wisdom, India does not have more people in agriculture than other Asian countries at similar stages of development and the share of workers dependent on agriculture has been shrinking at a similar pace.

•
However, the pace of shrinkage is set to increase if India is to follow the trajectory of these other countries.

•
One problem is that while industry is creating jobs, these have been relatively low-productivity jobs. As a result, per capita income in India has not benefited as much from inter-sectoral migration of workers out of agriculture as other Asian countries have.

•
A second problem is that the high-productivity services sector is not able to create employment commensurate with its growth in value added.

Chances of Missing Jobs

There is a clear transition of workers out of agriculture if we follow the path of other Asian countries. In addition, the demographic dividend will ensure more workers joining the labour force. How many workers will industry and services have to absorb in the next decade? How many will they absorb if they continue creating jobs as they have in the past? Could the demographic dividend turn into a demographic curse as some have argued? These questions may be answered taking clues from World Bank’s
World Development Indicators-2012
and UN Population Division’s
Revision of World Population Prospects-2010:

i.
Assuming that employment in industry and services will grow during 2010-20 at the same rate as during the previous decade the share of employment in agriculture will fall to 40 per cent by 2020 (the same level as that of China in 2010). Population in the working age group will grow based on projections by the UN Population Division.

ii.
Assuming the labour force participation rate and the unemployment rate to be unchanged at 2010 levels, 2.8 million jobs will be missing by 2020.

iii.
To put this in perspective, this will only be 0.5 per cent of the labour force. While any shortfall in jobs is problematic, there does not seem an immediate cause for alarm.

There are a large number of assumptions which go into this estimate. For instance, labour force participation is pegged at the 56 per cent rate, the same as in 2010. If instead, more women enter the labour force, reversing the declining trend since 2000, the labour force participation rate could plausibly increase to 58 per cent by 2020. This is lower than the 60 per cent rate in 2000, but even with this conservative assumption, the number of missing jobs increases to 16.7 million, roughly six times that in the baseline scenario, and 3.7 per cent of overall employment in 2010. Finally, if the official unemployment is projected to decrease, say by 2 percentage points, over the next decade, again that would imply the need to employ a larger number of workers. The number of
missing jobs
in 2020 under this higher expected employment scenario is estimated at 11.8 million or four times that in the baseline scenario.

The back-of-the-envelope calculations done above should be taken as just starting point for more careful investigation. While a simple extrapolation of existing trends suggests India can absorb the labour exiting agriculture even if exits increase to the level experienced by China, there is no room for complacency. Minor changes in assumptions lead to tens of millions of additional jobs needed. So even while policymakers focus on making jobs more productive, India also needs more jobs than suggested by current trends so as to have a sufficient buffer.

REASONS BEHIND LESS
CREATIVE JOBS

India’s policies have created such a situation that too many small firms stay small and unproductive and are not allowed graceful close down.
Too many large profitable firms/bisinesses prefer relying on temporary contract labour and machines than on
training workers for longer-term jobs. We may visit the problem through two routes:

i.
Impediments to Business Growth

ii.
Labour Regulations

I. IMPEDIMENTS TO BUSINESS
GROWTH

As a group, it is estimated that micro, small, and medium enterprises (MSMEs)
9
employ 81 million people in 36 million units across the country.
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Yet, many of these firms are unable to grow and/or even shut down. As per a recent study
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, as compared to surviving small firms in the United States which grow spectacularly, surviving small firms in Mexico grow moderately, while surviving small firms in India shrink.
Productivity is commensurately lower in India. Indeed, within the MSME group, there is a strong concentration of small enterprises and near non-existence of medium enterprises. And that is the real challenge of the MSME sector—to be able to not just start up, but also continue to grow, thereby becoming a source of sustainable jobs and value creation.

Too many firms in India stay small, unregistered, unincorporated, largely informal, or in the unorganised sector because they can avoid regulations and taxes. These firms have little incentive to invest in upgrading skills of largely temporary workers or in investing in capital equipment that could bring them into the tax net, so their productivity stays low. Low productivity gives them little incentive to grow, completing the vicious circle. These firms face some of the key challenges while starting up and at every level of growth.

Regulatory Environment

The regulatory environment plays an important role in the lifecycle (birth, growth, and death) of MSMEs. We may cite few glaring comparative examples from some sources:

1.
As per the
World Bank’s
‘Doing Business: Measuring Business Regulations’, 2013’
–

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India ranks 132 out of 185 countries in ease of doing business,

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Starting a business where India ranks 173, takes about 12 procedures, 27 days, and a paid up capital of 140 per cent of per capita income.

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By contrast, it takes only 7 procedures, 19 days, and 18 per cent of per capita income on average for our neighbours in South Asia.

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After getting done with the
initial procedures
, entrepreneurs have to obtain a number of clearances when applying for building/occupancy permits and utility connections. These require separate visits to various authorities whose employees often inspect the site.

-
It takes as long as 1.5 months to obtain an electricity connection in 7 out of the 17 benchmarked Indian cities. Many processes especially at state level remain complex, forcing companies to hire a consultant, thereby adding to the costs.

2.
An easier
process of exit
is needed for the MSME, which can quicken and simplify the process of resolving the claims of workers and financiers so that the assets of the failed firm can be put to better use. According to
World Bank’s ‘Doing Business in India, 2009’ –

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Across 17 Indian cities, the insolvency process takes on average 7.9 years, costs 8.6 per cent of the estate value (mostly due to attorney fees, newspaper publication costs, liquidator’s fees, and preservation costs), and the recovery rate is only 13.7 per cent.

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The process is slower even than in other South Asian countries where, in the same year, it took on average five years and creditors could expect to recover on average 19.9 per cent.

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Low asset recovery in failed firms feeds into lower levels of financing for Indian MSMEs.

The government has tried to compensate for some of these impediments by offering MSMEs incentives and concessions. But schemes and interventions based on tightly defined classifications create an incentive structure that might prevent firms from growing. Service tax exemptions for firms with less than Rs 10 lakh revenue and exemption from central excise duty for firms with an annual turnover of less than Rs 1.5 crore are examples of these schemes. The jump from ‘small’ to ‘medium’ enterprise especially entails loss of several perks.

3.
However, there are, also many good practices and regulations strewn over different cities of India, which, if standardised and adopted across the country, can improve the business climate enormously. The
World Bank’s ‘Doing Business in India, 2009’
has shown that if a hypothetical city called ‘Indiana’ were to adopt best practices found in several benchmarked cities (e.g. lowering number of procedures to start business to Patna levels, days to start a business to Mumbai levels, procedures around construction permits to Ahmedabad levels, days to enforce a contract to Guwahati levels, and recovery rate for closing a business to Hyderabad levels), it would rank a much improved 67 out of the 181 economies measured.

Difficult Funding

Indian banks and financial institutions are wary of lending to MSMEs because they lack adequate credit histories or collateral. A cluster-centric approach is one way of addressing this because it reduces transactions costs for the lender, while repeated interactions for a lender with cluster members increases the scope for building trust. While there have been efforts to facilitate these, their coverage is still small. Schemes such as credit guarantees by the Small Industry Development Board of India (SIDBI) have been useful, but there are gaps.

The presence of
Angel investors
,
venture capital funds
, and
impact investors
are still at a nascent stage and small compared to global peers. Most of these investments are biased towards services, especially technology and e-commerce. Government funds (through grants and seed funding programmes such as Technopreneur Promotion Programme and Technology Development Board) are often available after extensive paperwork and slow processing. Moreover, the experience from other countries is that new venture finance is often an activity better left to the private sector, with the government facilitating the way or piggy-backing on private funding rather than actually taking the lead.

To the extent large banks are concerned, with remote central offices they tend to have bureaucratic procedures for loan approvals, and limit discretionary authority for branch officers. As a result, small and medium enterprises, which tend to have short and largely informal track records, find it hard to fulfil the norms for obtaining credit.
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Moreover, conversations with bankers and business people suggest that large banks exert less effort in trying to help a small troubled firm than they would a larger client. As a result, in countries with more varied banking systems, small firms tend to migrate to smaller banks for assistance.
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Better funding to MSMEs can happen with the presence of more small local banks in India.

A vibrant
corporate bond market
could serve more in this scenario. Even then the MSMEs will not be able to issue bonds, but as large firms will migrate to the ‘bond route’ (as they are typically cheaper) it will make space on the bank balance sheets for MSME loans.

Lack of Quality Infrastructure

The lack of quality infrastructure (roads, utilities, real estate, logistics ) increases transaction costs disproportionately for MSMEs which typically cannot create customised alternatives such as access roads and captive power plants which larger firms can. Absence of this supporting infrastructure causes
greater cash burn
and distraction of management from core business operations. One constraint in creating infrastructure or setting up businesses is
land acquisition
. A number of reforms are needed or are on the anvil (see the next sub-title
‘Land Reforms’
) to ensure that land is less of an impediment to growth.

Land Reforms

Land is probably the single most valuable asset in the country today. Not only could greater liquidity for land allow more resources to be redeployed efficiently in agriculture, it could ease the way for land-utilising businesses to set up. Perhaps as important, it could allow land to serve as collateral for credit. Three important steps are needed regarding it
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:

i.
to map land carefully and assign conclusive title,

ii.
to facilitate land leasing, and

iii.
to create a fair but speedy process of land acquisition for public purposes.