Manish Sabharwal: Five interventions we need to speed up formal and non-farm jobs

This is part of a special series of articles by the country's foremost voices, ahead of Union Budget 2024, aiming to draw attention to the critical reforms that can help India in its journey to become a developed nation by 2047.

India’s economic transformation of the last decade is impressive, earned and unfinished. As we await the next Union budget, we must resist incomplete explanations for recent election results by picking faulty paths like greatly expanding spending from last year’s ₹45 trillion (if fiscal deficits could make countries rich, then no country would be poor), reversing the shift from revenue spending to capital expenditure (improving productivity requires allocating even more than last year’s high of ₹10 trillion), or crowding out defence and police spending (about ₹8 trillion) with welfarism. The next budget should pray to the one god of formal non-farm jobs with five non-fiscal interventions that will raise the productivity of formal, non-farm employers.

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The budget must ignore unhelpful, dated and self-serving notions—curiously peddled by offshore economists who chose exit over voice—that a large country like India must choose between manufacturing or services, exports or domestic consumption, and rising tax collections or improving ease of doing business. More importantly, most thoughtful economists now acknowledge their tribe has oversold monetary and fiscal policy as tools for sustainable mass prosperity. The damage is done; it’s unclear that global public debt, deficit financing and central bank balance sheets will return to levels that make our generation good ancestors.

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India has avoided this economic narcissism and targeted our challenge of employed poverty by raising the population of productive non-farm jobs while ensuring a targeted welfare state and macroeconomic stability. The next budget should accelerate this mission by putting its weight behind five changes:

Jan Vishwas 2.0

The Jan Vishwas bill kicked off removing the excessive jail provisions in employer compliances last year by boldly recognizing that criminalization of civil offences hurts small employers, enables corruption and rewards informality (a sense of humour with the rule of law). It was a small start —only 113 employer jail provisions from over 25,000 were removed—and the budget must announce Jan Vishwas 2.0 with a new methodology.

A committee of judges, lawyers, economists, and academics should articulate a “philosophy of punishment” and list the economic offences (harm to others, fraud, etc.,) that should be criminal. Subsequently, central government ministries and departments must eliminate all jail provisions that do not meet this criterion. Jan Vishwas 2.0, eliminating thousands of corruption-enabling provisions, would accelerate investments, compliance, and productivity.

Raising net wages

Our mandatory payroll deductions (EPFO, EPS, ESI, EDLI, bonus, gratuity) are bafflingly regressive, with employers required to confiscate 35% for employees with up to ₹21,000 monthly salary and only 5% for new employees with monthly salaries above that. This massive wedge makes informal employers whose net wages equals gross wages attractive to low-wage employees.

The budget must give employees (not employers) a choice by making employee contributions to the provident fund optional while raising employer contributions from 12% to 13%. We must stop mandating lower take-home salaries for formal employers whose better technology, training and human capital create the productivity that enables higher wages.

Social security portability and competition

Employment has shifted from being a lifetime contract to a taxicab relationship, yet our work social security programmes have not reviewed their design defect in linking payment and balances to employers rather than employees.

This mistake explains the millions of dormant EPFO accounts with over ₹48,000 crore in unclaimed balances and the unexplainable ESI yearly premium surplus. This budget must allow employees (not employers) to pay their retirement savings to EPFO or NPS and their health insurance premiums to ESI, CGHS or buy IRDA-approved insurance. The monopolies of EPFO and ESI are rude, expensive and inefficient. Competition will improve employer coverage, employee enrolment and lifetime balance portability.

Compliance with digital public infrastructure

India’s revolution in payments, identity and vaccination certificates enabled by DPI has not been replicated in government plumbing.

The budget must announce a digitization deadline for all central government and central regulator compliances that will replicate the open and stacked architecture of payments by creating a non-profit National Compliance Corporation that will use a Unique Enterprise Number (to be identified) to house the API/interface layer for all employer filings, compliance and workflows, and enable private sector innovation in straight-through processing for employers. Adding compliance to DPI will be a global first, save thousands of trees, and improve enforcement by enabling a single view of employers.

One labour code

It is impossible for employers to comply with all of India’s labour laws without violating some of them. Given the delay in implementing previously drafted multiple labour codes, the budget must announce their consolidation into a single labour code for implementation before the next budget for all 97 industries notified under the central list.

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Some state governments may resist implementation immediately, but many are independently competing in reforms that recognize job preservation is not a form of job creation. The budget announcing a single labour code will be a powerful signal of our policy intent to protect employees while creating more formal employers. Informality is the slavery of the 21st century, and most Indian employer informality is a child of regulatory cholesterol in labour laws.

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Rajasthan has a folk tale about a soldier who stops feeding his horse in peacetime only to find it lame when war comes. This soldier represents political ideas that peddle welfarism funded by fiscal deficits as substitutes for millions in productive private sector work. We humans get much more than income from work; it gives us confidence, self-esteem, identity, purpose, networks and ladders. The biggest gift the budget can give India is enabling the sustainable explosion of productive, private, formal, non-farm jobs.

Manish Sabharwal is co-founder of Teamlease Services. Views are personal.

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