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View: What this Budget can offer to fix India's unemployment problem

Ram Singh quote 123
In the interim, the government should fill the large number of vacant posts. Estimates suggest that there are more than 22 lakh vacancies in government departments. The country can ill afford this neglect while the unemployment rates remain very high.
By Ram Singh

India’s employment situation is bad. The current unemployment rate is the highest in the last 45 years. The unemployment among urban youth (age 15-29 years) is alarmingly high at 22.5 per cent. The high unemployment rates is but just one of the problems with India’s employment scenario. The labour force participation rate has come down to 46.5 per cent for those who are 15 years and above. A large proportion of the employed workers get low wage and are stuck in ‘employed poverty’ trap.

While structural factors are responsible for the high unemployment rate, the current slowdown has made things worse. There is enough evidence to show that the economic slowdown is a result of the decline in demand (investment and consumption). Aggregate investment has fallen below 30 per cent of the GDP, a rate much lower than the 15-year average of 35 %. More recently, private consumption has also declined. Unsurprisingly, capacity utilisation in the private sector is down to 70%.

Therefore, as a first thing, the budget should focus on reviving demand. Rural India — especially the small and marginal farmers, the landless labour — spends most of its income on a wide range of goods and services. So, an increase in disbursements through PM-KISAN and MNREGA can provide much needed boost to demand. In the medium term, rural unemployment can be reduced through enhanced government spending on irrigation, rural roads, cold storage, and logistical chains crucial for integrating farms with mandis. These facilities along with an extensive crop insurance can drastically raise agricultural productivity and income.

Another major reason behind the unemployment situation is GST-caused distress among small and medium enterprises (SMEs) who employ more than 11 crore people. GST has generated inverted duty structure (IDS) for many products whereby the tax on raw materials is higher than on the finished product. Such an imbalance reduces competitiveness of SMEs and increases cost of capital for them. Annually, around Rs 20,000 crore gets stuck with the government in the form of input tax credit. The tax has raised the cost of doing business for SMEs that act as agents of other businesses. In addition, GST on exports of intermediary services reduces their competitiveness. These anomalies in GST need to be addressed without delay.

Decline in construction and related activities in urban areas is a serious concern. These activities employ more than 5 crore people. The budget should aim to revive construction activities in real estate and infrastructure sectors. These sectors directly or indirectly support economic activities in another 200 odd sectors.

In this regard, the National Infrastructure Pipeline (NIP) programme is a welcome step. It aims to boost aggregate investment to the tune of 2-2.5 % of GDP by investing Rs 102 lakh crore in infrastructure over next five years. As much as 39 per cent of the funding is expected from the states and another 22% from the private sector. However, when state finances have taken a hit due to low GST collection and the private sector has very little appetite for risk, the Centre will have to do the heavy lifting, at least for now. Therefore, budgetary support to infrastructure should be much more than the NIP projections (at 1.11% of GDP).

Moreover, the investment should be front loaded. Bidding and contracting for roads, highway, railway tracks and urban development projects is a lengthy process. Therefore, rather than rolling out new projects, for now the focus should be on raising funding for the awarded projects so as to complete them as soon as possible. The multiplier effects of infrastructure investment on growth and employment are large and extensive.

Unfortunately, many projects are stuck due to various regulatory hurdles, and many others are mired in legal disputes. Regulatory uncertainty makes private investment unnecessarily risky and is the major reason behind non-availability of capital for infrastructure and other projects. The government should realise that for private investment, the regulatory certainty is as important as the cost of capital.

Another important source of employment is housing projects. Here, too many projects are caught up in disputes — contractual ones between homebuyers and developers, and legal ones between lenders and developers. To make things worse, such disputes are simultaneously taken to multiple authorities — the RERA, NCLT and Consumer courts. Consequently, restructuring and liquidation processes have got delayed. Unsurprisingly, there is a large stock of unsold houses. Indeed, the abandoned or disputed real estate projects are a major source of problem for the NBFCs.

A single legal authority should adjudicate all disputes arising from the real estate. The Rs 25,000-crore bailout fund for the sector should be put to use immediately to salvage all projects that are 80 per cent completed and are not under the NCLT process. To boost demand, the budget can raise limit for affordable housing for the purpose of tax exemption on housing loans.

Finally, to reap the demographic dividend, there is a need to invest in skilling of the youth. In future most jobs will come from the private sector that prefers candidates with practical skills and work experience. However, a common perception is that it takes a college or university degree to get a good job. This misperception is the result of lack of an adequate and affordable vocational and education training program in the country.

The budget can incentivise companies and industrial units to provide internship and on site vocational training to unemployed youth. This experience can be combined with distance education to teach the trainees relevant theories and concepts.

In the interim, the government should fill the large number of vacant posts. Estimates suggest that there are more than 22 lakh vacancies in government departments. The country can ill-afford this neglect at a time when the unemployment rates remain very high.

(The writer is Professor, Delhi School of Economics. Views expressed are personal)
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