Economic Survey 2019: Good suggestions on jobs, says expert

The Economic Survey has identified investments and in particular, private investments, as the key driver to do many things — drive demand growth, create capacity, increase labour productivity, introduce new technology, allow creative destruction, and create jobs. It does not seem to worry that introducing new technology and labour productivity can make it difficult to create jobs on a net basis. So, it may not be possible to meet all objectives equally. There may be tradeoffs.

The Survey explicitly addresses the issue of a high investment rate substituting labour. It draws comfort from the Chinese experience, which experienced highest investment growth and also created jobs. And, it also draws similar comfort from other international experiences.

This macro strategy is supported by an analysis based on Annual Survey of Industries of 2016-17. This demonstrates that firms that grow are the biggest contributors to employment and productivity and those that do not grow are the lowest contributors. It also shows that firms in India do not grow enough. It, therefore, suggests that micro, small and medium enterprises must be unshackled to help them grow. Our current policies foster the “dwarf” firms — those that are old and small and therefore have refused to grow. Instead, we should help infant firms — those that are young and small, as these have potential to grow.

Incentives that are based on the size of firms, irrespective of the age of firms combined with inflexible labour regulations is the source of the problem — that firms are unable to provide sufficient jobs. The current incentive structure creates perverse incentives for firms to remain small because if they grow, they stand to lose the incentives. But, if they remain small they fail to gain from the economies of scale possible with size and therefore fail to grow jobs.

The Survey therefore suggests that all firm size-based incentives must have a sunset clause of less than 10 years with necessary grand-fathering. Firms should be able to sustain themselves after the initial incentives and the incentives should move towards the infant firms. The sunset clause is appealing. Incentives are indeed often perverse and, as the research in the Survey demonstrates, this leads to the creation of dwarfs. The limitation is that the analysis is limited to only ASI establishments. The Survey calls these as firms thus implying enterprises. Nevertheless, these are limited to the organised sector manufacturing units. It does not cover the unorganised sector and does not cover the non-manufacturing sectors such as services. An analysis based on the Economic Survey would be more comprehensive. Possibly, the analysis was limited by the available data.

But, the Economic Survey did have access to the Periodic Labour Force Survey and it seems to have failed to put that to any meaningful use. In fact, there is very little mention of the PLFS through both volumes of the Economic Survey.

Volume II of the Economic Survey does make a brief mention of the PLFS but it quickly clarifies that the labour market estimates of the PLFS are not strictly comparable with the erstwhile Employment-Unemployment Survey of the NSSO. Nevertheless, it does make comparisons with the 2011-12 EUS. This makes the disclaimers on non-comparability appear almost comical.

But, what is surprising is that the Survey does not seem to exploit this new data source at all. It does not even try a serious cross-sectional analysis of the data given that it wanted to avoid a time-series analysis. The 6.1 per cent unemployment rate is not really discussed. More importantly, the 9-10 per cent unemployment rate in urban India shown by the quarterly estimates of the PLFS is not discussed.

The Economic Survey's suggestions regarding focussing on investments and in particular private investments and also regarding introducing a sunset clause on firm size-based incentives are welcome. We need to see how these get introduced and implemented.