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What Modi needs to do about jobs

By T N Ninan
July 18, 2016 10:50 IST
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A man rides a motorcycle carrying six children on their way back home from school at Greater Noida, Uttar Pradesh.

If the country is to meet its jobs and income challenge, there has to be a parallel focus on jobs in the formal sector, notes T N Ninan.

Narendra Modi offered interesting glimpses of his state of mind, during the interviews that he granted to journalists in recent days.

His interlocutors saw a confident and relaxed prime minister, reflecting a sense of assured popularity and of matters well under control.

The position implicit in some of his responses to questions was that his economic strategy of not stirring any hornets' nests through root-and-branch reform of the kind advocated by reformistas, and the focus instead on painless initiatives (no broad-based subsidy reform, only voluntary abnegation), have combined with efficiency gains to deliver what he likes to talk of as transformative change.

Indeed, he suggested that much had been done already by way of policy initiatives; what was needed now was effective implementation.

Such positions beg several questions.

For instance, Mr Modi argued that getting Cabinet notes prepared faster, and ministries ceasing to work in silos, were examples of delivering on his electoral promise of 'minimum government, maximum governance'; and that loan refinancing by Micro Units Development and Refinance Agency was creating millions of jobs in the 'personal' sector, which he said was different from the public and private sector.

Also noteworthy was what was left unsaid: Though the government was now in a more comfortable position in the Rajya Sabha, no ambitious legislative agenda was laid out -- such as on the land acquisition law, on which the government had been blocked earlier.

Nor, it would seem, is the government's political capital going to be expended on potentially controversial reform measures, like selling or shutting down government companies that have no economic logic to support them, proper administrative reform, or modifying the most restrictive clauses in the law governing industrial labour.

The low-risk approach to economic issues and reform will, therefore, remain one that seeks to bring change without pain, create winners without having losers.

The most important issue that was posed related to jobs.

Mr Modi's 'personal' sector, more usually called the informal sector, has been the focus of government attention in the past as well.

After the major banks were nationalised in 1969, they were asked to achieve financial inclusion by giving highly subsidised loans at four per cent interest to micro-enterprises; bankers in the 1970s could be found seeking out credit customers among roadside bicycle-repair outfits and village retail outlets.

Financing such micro-enterprises entered mainstream thinking after the success of the Grameen Bank in Bangladesh, encouraging copycat models in India.

Typically, the Modi government has taken this to a new level, with its MUDRA initiative; in 2015-16 alone, loans refinanced under the MUDRA banner were given to some 35 million applicants.

Well over 90 per cent of these were for loans of less than Rs 50,000.

The problem, as Abhijit Banerjee and Esther Duflo demonstrated at length with multiple examples in their book, Poor Economics, is that financing the vast majority of such micro-enterprises (while undoubtedly beneficial) fails to achieve a change of scale -- and, therefore, does not lead to substantial increases in total income or employment.

Indeed, the last economic census showed that the country had 58 million economic 'establishments' that produced goods or services for the market, typically employing two people (one person in addition to the owner of the establishment).

Fewer than three million of these establishments had five or more employees.

MUDRA could refinance loans to all of them in the next couple of years, with a total credit outlay that would probably peak at barely five per cent of total bank credit.

While such institutional credit is not to be sniffed at, it is hard to argue that it will transform the national employment picture -- or raise income levels significantly, since work in the informal sector is usually low-pay.

If the country is to meet its jobs and income challenge, there has to be a parallel focus on jobs in the formal sector.

The problem with low-risk approaches often is that they tend to deliver a low level of returns.

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T N Ninan
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