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Eco Survey’s job maths: Focus on export-led growth; cut incentives for firms to stay small.


Date: 05-07-2019
Subject: Eco Survey’s job maths: Focus on export-led growth; cut incentives for firms to stay small
Economic Survey 2019 has advocated an export-led growth model to create jobs in the economy. 

Lack of employment opportunities was identified one big failure of the Modi government during its first term and opposition parties tried to corner the incumbent party during the general elections 2019 over this issue. The topic is engaged economists in a debate as to why a high growth phase of the economy failed to create jobs in the country and the best approach to create jobs in a nation of largely young population. 

The survey, which Chief Economic Adviser KV Subramanian presented to Parliament on Thursday, said capital and labour are complementary when high investment rate drives growth and a general apprehension that high investment rate will substitute labour is not true. 

The survey illustrated the Chinese experience to show how a country with the highest investment rates has also created most jobs. “What matters most is whether or not investment enhances productivity and thereby international competitiveness. When examined in the full value chain, capital investment fosters job creation as capital goods production, research and development, and supply chains also generate jobs,” it said. 

It cited instances from East Asia and Pacific to say unemployment rates decrease with greater gross capital formation in the economy, “thereby providing additional evidence that labour and investment complement each other. Therefore, job creation can indeed be fostered by encouraging investment,” it said. 

The survey repeatedly cited the China model of growth, saying the overwhelming evidence across the globe, especially from China and East Asia, is that high growth rates have only been sustained by a growth model driven by a virtuous cycle of savings, investment and exports catalysed and supported by a favourable demographic phase. 

“Investment, especially private investment, is the key driver that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs. Exports must form an integral part of the growth model because higher savings preclude domestic consumption as the driver of final demand,” the survey said. 

It said the traditional view often attempts to solve job creation, demand, exports and economic growth as separate problems. “In contrast, these macro-economic phenomena exhibit significant complementarities. Therefore, understanding the key driver and enhancing the same enables simultaneous growth in each of the other macro phenomena,” the survey said. 

The survey said the MSME sector has been holding back job creation in the economy because of restrictive labour regulations. It blamed it on the perverse incentives for firms to remain significantly smaller in the Indian economic landscape. 

It further said, firms in India do not grow enough to create the necessary jobs and productivity in the economy. “Dwarfs, which we define as small firms that never grow beyond their small size, dominate the Indian economy and hold back job creation and productivity. Firms employing less than 100 workers are categorised as small and firms employing 100 or more workers as relatively large. Though a firm employing 100 workers is definitely not large in the global context, they are relatively large in the Indian context. Firms that are both small and older than 10 years are categorised as dwarfs as these firms have continued to be stunted in their growth despite surviving for more than 10 years,” it said. 

While dwarfs account for half of all the firms in organized manufacturing by number, their share in employment is only 13.3 per cent. In fact, their share in net value addition (NVA) is a miniscule 4.7 per cent despite them dominating half the economic landscape. 

In contrast, young, large firms (firms that have more than 100 employees and are not more than 10 years old) account for only 6.2 per cent of firms by number, but contribute only a quarter of the employment and 38 per cent of the NVA. Large, but old firms (firms that have more than 100 employees and are more than 10 years old) account for only 9.5 per cent of firms by number but contribute half of the employment as well as the NVA. Thus, firms that are able to grow over time to become large are  .. 

It said an average firm in the US employs more than seven times as many workers when it is 40 years of age compared with the average workers it employed when it was less than five years of age. An average firm in Mexico doubles its employment when it is 40 years of age compared with when it was less than five years of age. In contrast, an average firm in India employs only 40 per cent more workers when it is 40 years of age compared with when it was less than five years of age.. 

It said restrictive labour regulations, which exempt small firms from such regulations, and other size-based incentives, which provide benefits to MSMEs irrespective of their age, have played a crucial role in providing perverse incentives for firms to remain significantly smaller in the Indian economic landscape. 

Source: economictimes.indiatimes.com

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