An Inclusive Budget

The last two quarters have seen a substantive recovery in the Indian economy. As growth has rebounded, so too has every indicator of the formal economy. The corporate profitability of our largest firms has hit a new record this year. So have GST collections, another indicator of the formal economy, with an average monthly collection of Rs 1.2 Trillion in Q2 and Q3. The budget deficit is expected to be well under what we forecast last year. All of this is good news.

The glass, though, is half-full. As many commentators have pointed out, the informal economy was particularly hard hit by COVID and its associated lockdowns. Small enterprises, retail, hospitality and construction were all hammered. These were our main source of recent employment growth. Agricultural employment has risen in the last year and a half, while manufacturing and service sector employment has fallen – this is the opposite of development. Informal urban employment has led to first-time buyers of everything from toothpaste to two-wheelers. This consumption story has driven our economic growth for the last thirty years. Informal service sector jobs may not seem like great jobs to us, but they are greatly prized relative to eking out a marginal existence in agriculture.

Covid and its associated restrictions have been a perfect storm for the informally employed. A study by the Azim Premji University tells us that both earnings and employment fell for those at the bottom of the urban employment pyramid. We need to insure the most vulnerable against such shocks, but even more we need to create good job opportunities for the unskilled, equip people at all levels to participate more fully in the modern economy, and systemically promote wider policies of inclusion. What can the budget do?

Creating good jobs for the unskilled: The single way a budget can directly create jobs is through accelerating spending on infrastructure. The National Infrastructure Pipeline has identified a good set of projects. The government should be complimented for its intention and ambition; what we need now is implementation. To have a bigger impact on the economy, we need to invest quickly and at scale. A credible time-bound implementation plan is what we should hear in our budget.

Most countries developed by putting millions to work in labour-intensive manufacturing. Millions of the unskilled and less-educated can be employed in good manufacturing jobs, where average productivity is fifteen times the national average. We do not have the huge firms in export-oriented labour-intensive sectors that employ millions in China, Vietnam and Bangladesh. Foxconn's largest factory in China, making iPhones among other products, reportedly employs 400,000 people. It employs over 1 million in the country overall. Compare that 1 million in a single company with 15 million employed in all larger manufacturing companies in India. Samsung employs 100,000 people in its largest phone assembly plant in Vietnam. These giant factories are simply missing in India.

Take another labour-intensive example: A company we met in Vietnam manufactures Agarbattis. They learnt how by sending ten workers to a factory near Chennai for training. They today employ 10,000 people making Agarbattis, which they mainly export to India. Even when the technology is Indian and the market is India, mass manufacture seems to be more efficient 4,000 km away. The economics must be fixed – we need labour reform so employing people is less expensive and improved logistics to move goods around more cheaply.

We need not look too far to learn how. In 2020, Bangladesh overtook India in per capita GDP. Bangladesh has thrived by putting millions to work in manufacturing. A booming garment sector employs 4.4 million. A large garment factory in Bangladesh employs 30,000-50,000 people, ten times what you’d find in India. As 80 percent of those employed in garment factories are women, Bangladesh has twice the female labour force participation ratio of India. In June and September 2020, the government passed four labour laws that are a major step forward in helping balance flexibility with protection for all labour, formal and informal. These laws have since been left dormant. The budget should announce a time-frame for implementation: notification by the Union government and then by the states.

Investment in Education and Skilling: In the absence of massive employment in unskilled occupations, we must depend on education and skills. India has among the least skilled workforces in the world. Under 5 percent of our workforce is formally skilled, compared to 96 percent in South Korea, 75 percent in Germany and 52 percent in the US. That is why the work of the National Skills Development Corporation is so important, and must go much further and faster. Can the budget specify how it will be empowered to function as originally designed: an independent entity controlled and run by the private sector, that is then held accountable for delivering on our skilling targets?

Education is even more important, especially primary education. Pratham’s Annual Status of Education Reports make for sobering reading. Their last comprehensive report says that just 44 percent of children in class five can read a text meant for class two. And just 23 percent of children in class five can do division. With schools closed for the last year and a half in most states, education outcomes have fallen further. The New Education Policy has the key proposal that every second standard child read and do arithmetic at the second standard level, as a foundation for further education. This welcome initiative must receive greater dedication and focus from both government and industry. School education is a state subject under our constitution, so the Union budget can at best incentivise states to do the right things – say by linking the flow of additional funds to those that demonstrate improved second standard learning outcomes as independently assessed.

Industry can help too. As a part of CSR, many companies work actively with schools around the country. Education is already the largest single area for CSR spending, accounting for one-third of the 9000 Cr spent by the top 100 companies. My best estimate is that the top 1000 firms in the CII membership work with around 30,000 schools in the country. Assuming an average second standard student body of 50 per school, if every CII company worked on this one goal of ensuring a child entering Standard III can read and do arithmetic at the Standard II level, we could improve education outcomes for 1,500,000 children a year. Can the budget incentivise companies to go beyond their mandated 2 percent CSR spend by deducting the increment from profit before tax?

Other policies for economic inclusion must go beyond social inclusion. These include such measures as reducing tariffs, to benefit millions of consumers instead of thousands of firms. And industrial policies that help all firms, such as the ease of doing business, instead of incentivising a selected few. For more on these and other examples, I would refer the reader to my book, The Struggle and the Promise: Restoring India’s Potential, published this month. A good budget would be an inclusive budget.