India needs more ‘productive’ jobs and higher wages to address its demand problem

• Job creation will not just help solve widening inequalities but also help the Indian economy address the problem of weak domestic demand.
• A big part of this is in creating better paying employment for those at the bottom of the pyramid who are engaged in low paid informal work arrangements.
• This can be done by boosting MNREGA allocation, creating productive job opportunities in the manufacturing sector by leveraging the PLI scheme and providing support to micro and small enterprises.

It is now abundantly clear that a disproportionate burden of the COVID-19 shock has been borne by those at the lower end of the income distribution. Especially for those engaged in informal work arrangements.

As we lay out a roadmap of revival and recovery for the Indian economy in the budget, we need to focus on creating productive employment opportunities that provide decent wages and offer some degree of job security for wage earners and self-employed.


This is important, not just to address widening inequalities, but also to overcome the problem of inadequate aggregate demand. Reviving domestic demand emanating from those at the lower end of the income distribution — who have a higher marginal propensity to consume — will play a vital role in spurring private investment which has been steadily declining over the last decade and has fallen to 27.6% of GDP.

Much of the focus thus far has been on addressing supply-side bottlenecks and structural factors that have impeded private investment, but now greater attention needs to be paid to the demand side factors. This will require a mix of various strategies.

MNREGA needs more funds and higher wages
To begin with, there is a need to increase the budgetary allocation for National Rural Employment Guarantee Act (MNREGA), the one programme which has worked as an effective countercyclical automatic stabilizer during the COVID-19 crisis. In 2020-21, the budgetary allocation for MNREGA was ₹61,500 crores. Subsequently, an additional ₹40,000 crores were allocated under the Atma Nirbhar Bharat programme.


This allocation needs to be significantly enhanced as demand for MNREGA works is rising rapidly and several states are falling short of funds to provide work. Additionally, the government would do well to increase the number of working days offered under the programme from 100 to 150 days — as permitted under the architecture of the programme.

Further, given that MNREGA wage rates of at least 17 of the 21 major states are even lower than the state minimum wage for agriculture, there is a need to bring the former in line with the latter. This will help fuel rural demand, from those at the bottom of the distribution.


Government needs to create more productive job opportunities
Concomitantly, the imperative of accelerating the pace of productive job opportunities, in particular, in the manufacturing sector cannot be overemphasized. The government has announced a production-linked incentive (PLI) scheme amounting to ₹ 2 lakh crores — approximately 1% of GDP — over the next five years covering 14 sectors.

To get the maximum bang for the buck, it might be worth considering linking these incentives not just to firms' production but also to employment creation on the firms’ payroll. This could potentially give a huge boost to productive job creation.


However, it needs to be recognized that such incentives alone cannot give an impetus to manufacturing production and employment.

As India returns to a strategy of import substitution, many of the firms availing these incentives are likely to find it difficult to integrate in global value chains and procure reasonably priced imported inputs, thereby hurting their competitiveness. For the success of PLI and for an export promotion strategy, there needs to be serious rethink on the increase in import duties which we have witnessed in the budget over the last three years.

Smaller businesses should not be ignored
While the PLI scheme focuses on large formal enterprises, it is important to note that the firm landscape is dominated by micro and small enterprises which have struggled to remain afloat during this period.

Several of these enterprises are in the informal sector and have been unable to access the credit support offered by the government thus far. It would be worthwhile putting in place an enterprise support scheme for informal sector firms that can provide them some immediate relief.


Undeniably, this is a challenging task given that these firms are not registered. We would need to find creative ways of supporting informal enterprises through financial and monetary measures such as reducing their operating costs by offering waivers or deferred payments for public services such as electricity, water or rent.

In the medium term, however, it is important to focus on enhancing productivity of informal enterprises which will in turn enable an organic process of formalization. This will require providing customized technical and business skills, financial services, enterprise support and training to better compete in the markets.


The provision of local infrastructure facilities that cater to the specific needs of the local enterprises and clusters also plays a vital role in not just enhancing the productive capacity of informal enterprises but also in boosting employment creation in local communities in the short-term.

While the budget is likely to focus on infrastructure creation to boost employment, it is important to note that big ticket infrastructural projects have a long gestation period and are capital intensive. They alone may not generate the desired employment benefits in the short run. Therefore, it would be prudent to also pursue more modest smaller projects at the local level to generate stronger multiplier effects in the local economy.

The budget will expectedly lay out several measures to boost growth. However, it is imperative that maximisation of employment, and not just maximisation of GDP take centre stage in the budget. Growth estimates from the second quarter for FY 2020-21 suggest that the recovery witnessed by the Indian economy is being led by profits and not wages.

However, this incipient recovery cannot be sustained unless higher profits lead to higher investment demand. The state of the labour market, both in the formal and informal sector, will play a crucial role in driving domestic demand and thereby private investment.

*The author is a Senior Fellow at ICRIER. Views expressed here are personal.

SEE ALSO:
Glee.S.T! January 2021 GST collection may have beat the December record

India’s Prime Minister Narendra Modi may just have signalled a big allocation for defence equipment manufacturing, 3 days before the budget

India needs to add massive amount of solar and wind power capacity this year to meet its first target