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Manish Sabharwal on Budget 2018: From jobs to formal jobs

The government subsidy for the employer’s 12% provident fund contribution and the lower 8% employee contribution for women are important steps in overhauling labour laws to reduce the cost of formality. Photo: Ramesh Pathania/MintPremium
The government subsidy for the employer’s 12% provident fund contribution and the lower 8% employee contribution for women are important steps in overhauling labour laws to reduce the cost of formality. Photo: Ramesh Pathania/Mint

India's problem is not jobs, but formal jobs. And formal jobs need the productivity that comes with lower regulatory cholesterol, and infrastructure, human capital and fiscal discipline

Every doctor will tell you that treating the symptom rather than the disease is very bad for patients. The diagnosis of whether India has a jobs problem or a wages problem is an important one for budgets because if you think it is jobs, then you will junk fiscal discipline and pump up spending; this thinking converted India from a high-growth, low-inflation economy in 2004 to a low-growth, high-inflation economy in 2014. The latest budget has a clear philosophy; India’s problem is not jobs, but formal jobs. And formal jobs need the productivity that comes with lower regulatory cholesterol, and infrastructure, human capital and fiscal discipline.

The moves on lower regulatory cholesterol are broad and deep for formal employers; lower income tax for all but the biggest companies, replacing the massive paperwork of travel and medical reimbursements with a standard Rs40,000 deduction for employees, rationalizing the tax structure for bankruptcy cases and bidders, fixed-term contracts for all industries, continuing the shift in the tax regime from one that offers subsidies for investing capital to one that rewards hiring people (80JJA). But the biggest innovation of the budget is an area that breeds informal employment; tweaks to the provident fund scheme that will reduce the gap between advertised and take-home salary. The government subsidy for the employer’s 12% provident fund contribution and the lower 8% employee contribution for women are important steps in overhauling labour laws to reduce the cost of formality. Another important part of the infrastructure for entrepreneurship was the announcement of an Aadhaar-like number for enterprises. Currently most enterprises have more than 20 numbers issued by different parts of the government with consequent corruption and harassment in licensing, challans, returns, inspections, and so on. Having a unique enterprise number for enterprises is enabling infrastructure for a government-wide adoption of the India Stack; paperless, presenceless, and cashless. The e-assessment proposal for income tax is not only the first move towards paperless, cashless and presenceless but is a solid intervention in preventing companies and chartered accountants being ATM machines for tax authorities.

The National Health Protection Scheme, covering 500 million people, addresses one of the biggest reasons for people falling back into poverty. The proposal for a massive increase in medical colleges is overdue and welcome; India only produces 50,000 doctors but 1.4 million engineers a year and consequently medical education has not seen the competition, lower fees and volumes that India needs. The mention of learning outcomes is a huge move away from the obsession with inputs, but I wish there had been something more specific about revamping the current regulators in education who confuse school buildings with building schools. The proposal to invest Rs1 trillion in infrastructure and research is a good idea but we must remember you don’t repair leaky pipes by turning up the water pressure; ideally the budget would have announced this investment with the radical step of separating the regulator, policymaker and service provider in education.

Over the last few years, India’s Buy More Tunnel Club (BMTC)—every time there is light at the end of the tunnel, they go out and buy more tunnels—has focused on the very real short-term pain of structural interventions. But while they privately agreed about long-term desirability, BMTC did not believe that the goods and services tax, demonetization, bankruptcy code, real estate regulation act, shell company hunt and so on would start reinforcing each other so quickly; a 20% increase in individual taxpayers, a 50% increase in indirect tax registered enterprises, and a reduction of informal employment to 75%. Rabindranath Tagore once said that life should not be the infinite elongation of a straight line; Indians are finally starting to lose our sense of humour about the rule of law, dropping our risk-less view of cash, and feeling the macroeconomic stability that is here to stay. This budget moves that process along.

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