(AFP file)
(AFP file)

Opinion | Focus on reforms that could help the poor earn more

Small ventures provide more employment and will continue to provide most incomes

Prime Minister Narendra Modi has declared that the era of caste-based appeasement politics is over. According to him, there will be only two castes now: those who are poor and those who want to free them from poverty. Readers of national economic newspapers, such as this one, are not poor. They belong to the other caste that should want to free the poor from poverty.

Many economists are urging the Prime Minister to use his renewed mandate and make bold reforms to the economy. Though all would agree that a principal objective of the reforms must be faster alleviation of poverty, there are ideological differences among them. One side says that first, the size of the overall pie must be increased with the poor benefitting from the operation of an “invisible hand" in the market and the trickle-down effect. They advocate lower taxes and more incentives for private investment. The other side says that the invisible hand in the market is being manipulated by vested interests, the rich are getting richer, and the trickle-down is too slow.

Both sides of the ideological divide agree that incomes at the bottom are inadequate. Whereas “capitalists" propose a universal basic income given by the state, “socialists" say a better solution is state-provided public services and targeted subsidies. Both solutions require the state to have more resources. Which are hard to come by if, as the capitalist side demands, taxes cannot be increased, and the government must also reduce its fiscal deficit.

People are poor because they do not have adequate incomes. They do not have adequate incomes because they do not earn enough from the jobs they have, over 90% of which are in the informal sector, or from their tiny enterprises if they are self-employed entrepreneurs. Moreover, their earnings are uncertain, and with very little wealth to fall back on, they easily slip back into poverty. This is the plight of small farmers, small entrepreneurs and workers in the informal sector of India.

The problem with the Indian economy is not “jobless" growth. It is the inadequacy and instability of incomes for millions. The government cannot afford to put more people on its own payroll; and large factories, with more investments in machines and automation, will employ even fewer people in future. Therefore, the government is urging India’s youth to be job creators, not job seekers—to “stand up and start up". The vision is to have many more small enterprises. This is a good vision of democratic capitalism—a Gandhian vision—with more wealth being generated and accumulated at the bottom, rather than at the top. Small enterprises provide more employment than large ones and will continue to provide most jobs and incomes in the economy.

Those who want to free the poor from poverty must free themselves from ideological biases and focus on reforms that will help enterprises and workers at the bottom of the pyramid. Labour laws must be reformed for faster and more inclusive growth. The question is what reforms are required.

The most important is provision of universal social security. In a dynamic, market-based economy, in which enterprises will wax and wane and jobs will be insecure, citizens must have adequate social security to provide for various emergent requirements, especially breaks in income, health emergencies, and old-age pensions.

Second, the political economy must be reformed with stronger associations at the bottom, such as collectives of small producers and unions of workers. Collectives can provide resources that individual enterprises cannot afford, and associations and unions can give more bargaining power to people at the bottom to improve the terms of trade in their favour—the prices they get, and the wages they are paid.

Third, laws applying to small enterprises must be simplified and their implementation made easier. The burden of complicated and badly administered regulations is highest for small enterprises. However, excusing small enterprises from all regulations is not an ethical solution. Human beings who work in them must have decent wages, physical safety and channels for their needs to be heard. Therefore, labour laws and regulations are necessary, and their content improved and implementation eased.

Small enterprises do not require more freedom to hire and fire to become more competitive. Of the 44 million or so small enterprises in the country, 40 million employ less than five workers. They are well below the levels at which current “hire and fire" laws apply. Increasing these levels upwards to 100 or more employees, as some states have “courageously" done, does not make any difference to small enterprises.

Those who want to free the poor from poverty with reforms to help them earn more should listen to what tiny enterprises and workers at the bottom really need. In no survey of constraints on the growth and profits of small enterprises does a need for relaxing labour laws on hiring and firing workers appear among the top constraints. Access to finance, access to markets, access to technology, fair prices, and reduction of harassment from authorities are their principal problems.

The government will be wise to use the political capital it has earned in this election to carry out difficult reforms that really matter to poorer people, rather than waste it on the ideological preferences of others.

Arun Maira was a member of the erstwhile Planning Commission

Close