economic survey ch2

7/30/2019 Economic Survey Ch2

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[Economic Survey Ch2] Demographic Dividend, Employment, Labour reforms, gist of

1. Demographic Dividend?2. Why jobs are not created?3. Problem#1: MSME

o Problem: Bureaucratic procedureso Problem: Infra bottleneckso

Problem: Getting financeo Problems in Debt (borrow) methodo Problem in Equity (partnership, IPO, shares) finance

4. Labour laws5. Case#1: downsizing6. Case #2: Shifting business7. Rigid Labour laws: Implications?8. Pro-Worker or Pro-employer?9. Apprentices10.Apprentice: Indian scenario11.Education12.School Governance13.Education: recommendations14.CONSEQUENCES AND CONCLUSION

o Approach #1: Business as usualo Approach #2: Pro-active, Reformisto Approach #3: Populist, Anti-risk

15.Mock questionsDemographic Dividend?

In next 35 years, around 70 percent of Indias population will be between the working age of 15 and 59.

By 2050 Employable people (crores)

India 100

Europe 45

USA 27

It means, India will have more number of people in the productive age groups= more incomes=moredemand of products= more growth=high GDP.

Seems plausible in theory. But hard to do in practice. A larger workforce translates into more GDP only if there are productive jobs for it.
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If people are given work of digging up wells and ponds (MNREGA), theyre employed but that doesntlead to significant rise in GDP (compared to if same number of people were given some skill training

and job in manufacturing or service sector).

So If you really want to tap the demographic dividend, then labour force must go through followingtransitions:

1. From agriculture to non-agriculture (manufacturing / service sector).2. from rural to urban3. from the unorganized sector to the organized.4. from subsistence self-employment to wage employment.

Why jobs are not created?

Problem#1: MSME

MSME= micro, small, and medium enterprises. MSME is defined as per investment in plant and machinery.

Sector-> Goods Services

Micro Upto 25 lakh 10 lakh

Small 25 lakh to 5 crore. 10lakh-2cr

Medimum 5-10 crore. 2cr-5cr

MSME sector employ 80+ million people in 30+ million units across the country. But in the MSME group, most of the firms are small, there are hardly any medium enterprises.

Why?

Because The regulatory environment plays an important role in the lifecyclebirth, growth, and deathof MSMEs

Small scale firms more receive tax benefits from various Government schemes. For example If your firm has less than annual 10 lakh Revenue= you dont need to pay service tax. Similarly, less than 1.5 crore annual turnover= you dont have to pay Central excise duty. While medium scale firms have to pay more taxes, have to obey more regulations on pollution, social

security of employees etc.

For more, check this Table:


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That means, if your firm grows from small to medium size = Government benefits reduced butGovernment regulation increased.

So most of the small scale firms dont buy expensive machinery for production. In the short run: owner makes decent profit because there is less investment (in machines) + contract

laborers are cheap.

In the long run: their productivity remains very low (compared to Chinese or American firms of samesize.)

Low productivity gives them little incentive to grow, completing the vicious circle.Problem: Bureaucratic procedures


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According to the World Banks Doing Business 2013 data, India ranks 132 out of 185 countries in easeof doing business.

Entrepreneurs have to obtain a number of clearances when applying for building/occupancy permitsand utility connections (gas, electricity, water, pollution control).

Theyve to separately visits to various Government offices and applications are not approved withoutbribes.

Problem: Infra bottlenecks

Lack of quality infrastructure (roads, railways, telecom-internet-electricity connectivity etc.) Big firms are less impacted by such bottlenecks, because they have the cash to create alternatives. For

example, if electricity is gone, a big company can install huge diesel generator/ its own thermal plant.

So, absence of quality infrastructure increases transaction costs disproportionately for small andmedium sized firm.

Ok so solution = Government should create quality infrastructure. But there is a problem there too:=land acquisition.

However it doesnt mean, Government is not doing anything to improve infrastructure. One of theprominent project is Delhi-Mumbai Industrial Corridor (DMIC).

DMIC project worth 90 billion dollars, covering about 17 percent population and 14 percent land inIndia

It extends over Delhi, Uttar Pradesh, Haryana, Rajasthan, Madhya Pradesh, Gujarat, Maharashtra,Daman and Diu, and Dadra and Nagar Haveli

The project goals are to double employment potential in 7 years, triple industrial output in 9 years,quadruple exports from the region in 8-9 years

skill-building strategy in DMIC is based on a hub-and-spoke model. There will be one Skill DevelopmentCentre in every state with subsidiary institutions linked to it. Curricula will be based on the types of

industries located in the region and identified regional strengths.


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Other infrastructure plans include logistic hubs, feeder roads, power generation facilities, up-gradationof existing ports and airports, developing greenfield ports, environment protection mechanisms, and

social infrastructure.

Problem: Getting finance

Suppose you finished cooking/catering course and you wish to start a restaurant/cafeteria. For that,you need initial investment of lets say 30 lakh rupees.

But you dont have a single penny in your pocket. So you decide, Ill not borrow even a single rupeefrom anyone. first Ill work in some other persons hotel/restaurant. Save money and once Ive 30 lakh,

Ill open my own restaurant.

Problem?= well, depending on your salary (+family expenses), Itll 5-6-15 years to save that muchmoney and by then inflation would have increased (property rents, electricity, milk, vegetables, tea,

coffee etc.) so at that time, 30 lakh wont be sufficient to start a restaurant, youll need 50 or 70 lakhs!

Thus, most of the time you cant start business by ^above approach. Youve arrange finance fromsomeone else. And we already know there are two ways arrange cash/finance to start a business: first

is debt and second is equity. Click me

For small scale firms, arranging finance by either way (debt or equity) = headache. BecauseProblems in Debt (borrow) method

1. Many small firms have defaulted on loans in the past. Therefore bank officers are often reluctant toapprove their loan applications.

2. To prevent ^risk of loan-default, bank might ask for collateral (e.g. property/valuables that bank canattach if you dont pay EMIs) but most small scale entrepreneurs dont have such collateral.

Loan application procedures are bureaucratic in nature: theyd ask you lot of documentary proofs (like

income tax returns, account books, property papers and so on). But most small scale firms run business

informally without maintain lot of paper records.

Problem in Equity (partnership, IPO, shares)

1. Launching IPO = requires lot of paper work, team of CAs, finance experts, lawyers etc. = small scalefirms dont have it.

2. In India, Angel investors, venture funds are at a nascent stage and small compared to America. (Theirmeaning / functions already explained in Debt-Equity article.)

3. The Indian angle investors and Venture funds prefer to invest in technology and e-commerce relatedbusiness. So small scale firms (mostly concentrated in manufacturing sector) dont get finance from

them either.

Solutions?

A vibrant corporate bond market could help. Even though the MSMEs will typically not be able to issue bonds But large firms and infrastructure projects will be able to access (typically cheaper) bond financing for

their long-term projects.

So banks will get that much less loan takers from upper end of the pyramid= banks will have morespare cash lying around. Then theyll be tempted to loan that money to small and medium sized firm to

earn some profit (interest).
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Labour laws

Indias labour regulations have been criticized on many grounds including sheer size and scope. There are 45 different national- and state-level labour legislation in India. Labor laws in India = very rigid. As the size of a factory grows, it increasingly becomes subject to more and more outdated laws. This has hindered the growth of large-scale manufacturing industry. Lets understand this with an example:

Suppose youre running a firm with 500 employees, exporting diamond jewelry to USA. But due to recession in

USA, the demand of your diamond jewelry has decreased.

Case#1: downsizing

Demand of your companys products is decreased, and there is no way you can increase demandbecause Americans dont have money, so no matter how much you spend on advertisement, they

wont buy more diamond jewelry.

On the other hand, Indian consumers prefer gold jewelry instead of diamond. So you cannot increase the demand, then you have to reduce your input costs, else youll start making

losses.

One way to reduce input cost is downsizing=lay off a few workers, so youve to spent less money onwages.

But according to Industrial Disputes Act (IDA), if a firm with more than 100 workers, wants lay offworkers, it must get permission of state governments (via Labour Commissioner).

While the Industrial dispute act does not prohibit laying off workers but State Governments are oftenunwilling to grant permission because opposition parties will make an issue out of it saying This

Government is anti-worker, anti-poor.

Case #2: Shifting business

Since you cannot lay off workers easily (case#1), you decide to shift the business and use thoseworkers.

Instead of diamond jewelry, you decide to make gold jewelry, stop the export oriented business, andconcentrate on domestic Indian consumers.

But according to the same Industrial disputes Act, if the employer (boss) wants to change the termsand conditions /salary/ job description of workers or if he wants to move workers from one plant to

another, then he must get (written) consent of workers.

This again increases rigidity. The trade union type leaders will blackmail the employer, Give xyzamount of money else we will not sign the consent papers.

Rigid Labour laws: Implications?

Because of the rigid labor laws, It is very difficult for the sick industry to either shut down, downsize or shift

business arena. So Indian businessmen try to bypass such laws by

buying some expensive machinery to do to the production. =Industries turn capital intensive ratherthan labour intensive= less jobs created.

hiring contractual labour without doing paper work (so industrial disputes act doesnt apply in the firstplace!) and if there is any raid, theyll simply bribe the officials.


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+ outsourcing non-core activities to even smaller firm and those smaller firms also hire contractuallabour without doing paper work. Ultimately these things lead to

Roughly 85 per cent of the workforce is engaged in the informal sector. = They dont receive socialsecurity benefits, pension, insurance, provident fund disability /maternity benefits, paid leave etc.

informal workers are also more vulnerable to violations of basic human rights such as reasonableworking conditions and safety at work.

With little job security and limited access to safety nets, most of the informally employed remainextremely vulnerable to shocks such as illnesses and loss of income.

Workers in informal sector are usually poor and hence they have neither the time, money orknowledge to approach courts to seek justice.

Thus informality and poverty are directly linked with each other.Pro-Worker or Pro-employer?

From above examples, it is clear the Government needs to make labour laws flexible. But whenGovernment tries to reform labour laws, opposition parties and trade unions create lot of hue and cry.

Besides, there is always some state Government election after every few months so the ruling party inunion Government doesnt want to lose any vote bank. Thats why labour reforms are always put on

backburner. Anyways, if and when Government decides to reform labour laws, what should be its form? should it

be pro-worker or should it be pro-employer?

In most countries, there is a middle path in labour laws= not too pro-worker and not too pro-employer either. Such laws provide for

1. Employer can terminate a worker in case of business distress or for poor worker performance.2. At the same workers are provided a redressal mechanisms if theyre fired without cause3. Compensation for severance and unemployment benefits.

Apprentices

Apprentice = Someone who works for an expert in order to learn a trade. For example hawala operator, cricket bookie, running your own liquor and gambling dens etc. Such trades cannot be learned by reading theory from books. Youve to work under a masterfor many

months and years to learn the actual skills. That is called Apprenticeship.

The syllabus taught in Indian schools, colleges and polytechnics =outdated. The present Indian education system doesnt produce Work-ready labour force. That gap is filled by

the system of Apprenticeship.

Apprenticeships are an effective way of ensuring that entry-level workers have the skills required tojoin the formal workforce by learning on the job and even earning while learning.

Several countries have benefited greatly from focused programmes Apprenticeship. For exampleJapan, US, UK, and Germany.

Germany, in particular, has a well-known dual education system that combines classroom/onlinecourses at a vocational school with workplace experience at a company.

More than 75 per cent of Germans below the age of 22 have attended an apprenticeship programme.Apprentice: Indian scenario

Years ago, Government had enacted Apprenticeship Act. But it is outdated and rigid from both employers

and workers point of view.


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Problem#1: Apprentice ratio

The statutory limit on (regular) worker : apprentice ratio is very strict. Implication: suppose the rules say for a drug company, worker : apprentice ratio cannot be more than

20:1.

You recently finished final year exam and now you need an apprenticeship certificate otherwiseuniversity wont give you degree for B.Pharm.

But the factory nearest to your home already got another apprentice and factory owner cannot takeyou because his quota is over according to that ratio.

Ratios are strict because Government feared that businessmen will show their regular workers asapprentice on paper, in order to pay them very low salary.

Even for small violations of Apprentice rules, the penalty provisions for companies, are very severe. Sono matter how much you beg or request, the factory owner wont take you as apprentice once his

quota is over.

Thus the whole purpose of apprenticeship system is defeated because of that outdated law.Problem#2: coverage

Apprentices are only allowed in specified trades: for example Pharmacist, Engineers etc. But majority of graduates are not currently covered under formal Apprenticeships.

Some recommendations

Simpler regulation: A single window mechanism is needed to clear company applications for pan-Indiaapprenticeship programmes.

Wider reach: Add more graduation fields in Apprentice Act. company-led apprenticeship programmes, that place employers at the heart of education, can play a

powerful role in imparting job-relevant skills and also repairing, preparing, and upgrading the labour

force. For example, the duration of apprenticeship training can be allowed to vary across trades and

companies.

Short-duration programmes (less than 12 months) can be freed from much of the oversight providedthey pay minimum wages.

Relaxing the rigid requirements on the ratio of apprentices to workers could also accelerate capacitycreation

Dual system of training: Partnerships between companies and educational institutions should beencouraged

Active exchanges: There should be active exchanges and portals, matching prospective apprentices toemployers.

Education

Government measures its success in education sector mainly by two numbers:

1. School enrollment.2. Money spent in mid-day meal scheme

If we just look at those two numbers, then everything looks hunky-dory. But does it mean all Indian children

are getting quality education? But does it mean all Indian children are getting quality education?


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According to ASER Survey-2012 (by NGO Pratham)

1. Among all children enrolled in Std. 8, only 47% could read English sentences. And Of those who couldread English words or sentences, barely 60% could convey its meaning in their own language.

2. In class 5, more than 50% students cannot read a class 2 level textbook.3. In class 5, almost 50% students cannot solve two-digit substraction (e.g. 49-23)4. In class 5, almost 75% students cannot do division. In rural India as a whole, 75% of kids cannot do

simple division. (e.g. 25/5)

Interestingly, Mohan has declared the year 2012 as the NationalYear Of Mathematics to mark the birth

anniversary of Indian mathematical geniusSrinivasa Ramanujan.

Anyways, point is Indian children are bad at maths, English and comprehension (especially inGovernment school).

But There are no bad students, only badteachers. (says Jackie Chan in Karate Kid) There is no positive relationship between teachers possessing formal teacher training credentials (B.Ed

M.Ed) vs. their teaching caliber.

Besides, State Governments treat teachers as contract laborers, paying extremely low salaries to thoseteaching assistants / vidhya sahayak.

Hence there is no incentive for teachers to pour their hearts and minds into child-education. On the other hand, since money is low, it doesnt attract brilliant minds into teaching profession in

Government schools.

Pedagogy

The default Indian pedagogy (method of teaching) = complete the syllabus of textbook. But it does not reflect the learning levels of children in the classroom, who are considerably further

behind where the textbook expects them to be.

School Governance

In Government run schools, there is high rate of teacher absence . The fiscal cost of teacher absence was estimated at around Rs 7,500 crore per year. There is evidence that even modest improvements in governance can yield significant returns.

Education: recommendations

1. If Government improves the monitoring and supervision of its schools, then teacher absence willreduce significantly.

2. Government should make learning outcomes an explicit goal of primary education policy (rather thanfinishing textbook syllabus).

3. Government should invest in regular and independent high-quality measurement of learningoutcomes.

4. Government should motivate teachers by rewarding good performance.5. Government should Launch a national campaign of supplemental instruction targeted to the current

level of learning of children (as opposed to teaching to the textbook) delivered by locally hired teacher

assistants, with a goal of reaching minimum absolute standards of learning for all children: There is

urgent need for a mission-like focus on delivering universal functional literacy and numeracy that allow

children to read to learn.


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6. Government should pay urgent attention to issues of teacher attendance, teacher performancemeasurement, better monitoring and supervision.

CONSEQUENCES AND CONCLUSION

Recent economic history is replete with examples of economies that were supposed to have greatpotential but ultimately did not achieve rapid economic growth and improvements in standards of

living. India could become the next example of it.

In India reforms are typically implemented only after there is really big crisis (for example 26/11, orDelhi rape). And that too after long debate and after some sort of political consensus is reached on

them.

Lets check the possible scenarios:Approach #1: Business as usual

If Government continues on the current path then effects on Indian society and economy will be as following

1. Some improvement in infrastructure but only slow improvement in education, and no change ininstitutional structure such as business regulation and labour laws.2. Some movement from agriculture to low skill services such as construction and household work, but

very few quality jobs.

3. GDP growth settles into a comfortable 6-7 per cent, the new normal. Achieving 9-10% will beimpossible.

Approach #2: Pro-active, Reformist

If Government seriously implements the necessary reforms then effects on Indian society and economy will be

as following

1. The manufacturing sector becomes a training ground for workers, absorbing more students with amiddle or high school education.

2. India moves into niches vacated by China such as semi-skilled manufacturing, even while enhancing itsadvantage in skilled manufacturing and services

3. India experiences faster and more equitable growth.4. Social frictions are minimized as both agriculture and manufacturing create better livelihoods.

Approach #3: Populist, Anti-risk

In order to win election, if Government spends all money on populist schemes. It doesnt implement reforms

for the fear of opposition (like FDI, labour laws, land acquisition etc.) then effects on Indian society and

economy will be as following

1. There will be no improvement in infrastructure, education, or institutions2. Very few jobs are created outside of agriculture.3. ^because of that, more people stay in agriculture= Pressure on land will increase + Per capita income

will decrease.

4. Small agricultural plots do not provide enough income, nor can they be leased out.


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5. When things go really worse (a point is reached where monsoon is bad, farmplots are becomeextremely small, heavy inflation)villagers will start large-scale migration to overburdened cities.

(=problems of slums=unhygienic living conditions=outbreak of some contagious disease, increase in

crime etc.)

6. Then Government will come up with some scheme to prevent this large scale migration e.g. RajivGandhi Village mein raho yojana under this scheme, whoever goes back to live in village, will be given

monthly Rs.500 and 5 kilos of wheat. Thus strain on government finances increases. (=fiscal

deficit=even more problems.)

7. The Income inequality between good service jobs in cities and marginal agricultural jobs in rural areasincreases tremendously= rich and poor divide grows even further=social unrest, breeding ground for

Naxal elements.

Mock questions

Q1. Which of the following are correct about ASER Survey-2012?

1. It is related to status of University education in India.2. It is an official survey conducted by Ministry of Human resources and Development.a. Only 1b. Only 2c. Bothd. None

Q2. Governments classification for Micro, Small or medium enterprise (MSME) is based on:

a. Number of workers employed in a firm.b. Annual profit earned by a firm.c. Annual taxes paid to Government.d. Investment in plant and machinery.

Mains

GS1 Discuss the contribution of workers and trade unions in freedom struggle.

GS21. Write a note on National Child Labour Policy.2. Write a note on National Policy on Skill Development

GS3 Examine the need for labour reforms in India.

Essay Tapping the demographic dividend

Interview

1. ASER survey has highlighted the pathetic status of Indian primary school education. As a districtcollector, what will you do to improve the situation?


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2. Suppose youre the PM of a country whose demographic dividend phase has passed (number of peoplein working age are very low compared to aged). So what new policies, laws will you launch to keep

your economy booming?

3. What do you understand by the term Industrial unrest. Can you cite any recent examples of Industrialunrest?

4. Last year a Maruti General manager died following a labour unrest at the factory. Some companydecided to leave operations due to labour unrest in Kolkata Port Trust. should trade unions be banned

to prevent recurrence of such episodes?

economic survey ch2

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