April 27, 2020The IntersectionCovid-19economics

Get India back at work to secure the economy and employment

If we promote mass-employment when hundreds of millions have lost their jobs and there is a reverse exodus of migrants to the countryside, I cannot think of a time we ever will.

Mint This is from The Intersection column that appears every other Monday in Mint.

As we near the end of an extended national lockdown, our policy discourse must broaden from containing the outbreak to addressing the three R’s for the economy as well: of relief, revival and reconstruction. While the pandemic will haunt us for a few years, it is also true that complete lockdowns will harm Indian society as much—if not more—than the disease.

Unlike rich countries, India’s government simply does not have the resources to pay people to stay at home. Most businesses are staring at insolvency after having to keep and pay employees over the past four weeks. Even if they manage to stay afloat, their distress will compound our unemployment crisis. According to Mahesh Vyas of the Centre for Monitoring Indian Economy, 140 million people, or 14% of India’s working age population, have lost their jobs during the lockdown. Both urban and rural India have been hit hard.

The immediate order of the day for the Union and state governments is to prevent the permanent destruction of jobs. Monetary policy changes will take time to take effect. On the fiscal side, it is unclear if revenue-starved governments can raise enough resources in the next few weeks, even if they find ways to effectively disburse the money to those who need it. That leaves us with only one answer: get India back to work.

As we figure out innovative ways of making direct cash transfers to the needy, and provide credit, interest moratoriums, tax deferrals and wage support to businesses, we must recognize that wages are the ultimate social security for individuals, and the cash register the ultimate economic stimulus. For this, we need to allow the less affected parts of the country to increase economic activity. As I argued in my previous column, and as recommended by an informal group of industry and civil society leaders that I was part of, a risk-linked calibrated reopening plan is both necessary and doable.

Over the next two to three years, the effectiveness of fiscal and monetary policy in India has a better chance of improving. Economic reconstruction would need a booster dose of both. But they are unlikely to be sufficient without a simultaneous policy stimulus” designed to create massive employment and industrial expansion. Amid all the talk of an increased role of the state, we tend to forget that there is such a thing as economic freedom and it plays a transformative role in the country’s economic story.

It is tempting to go back to comforting old myths and declare that micro, small and medium enterprises (MSMEs) will offer us a way out, and therefore we do not need big manufacturing. This was a fiction we long told ourselves to avoid having to confront the complexity of the task and argue with our internal leftists and modernity-sceptic nativists. Yes, MSMEs are very important, but that does not mean we should deliberately prevent them from expanding into large manufacturing companies. We need MSMEs, but we also need big firms that employ tens of thousands of people per shift.

With both geopolitics and the pandemic creating incentives for foreign companies to shift their supply chains away from China, the Indian economy has a once-in-a-century window of opportunity to capture some of the business. I sound like a broken record, but such windows have appeared periodically since 2009, all of which India has missed. Vietnam and Bangladesh, on the other hand, have made good by capturing some of these. The opportunity this time is much bigger, but also open to a wider range of countries. India will need to move fast and do things that it has never done before.

One way would be to deem firms employing more than 20,000 people in one location as institutions of mass employment” and exempt them from Kafkaesque labour laws, make industrial land available at market prices, and offer international arbitration clauses. The damage done by retrospective taxation and the wholesale repudiation of contracts by state governments needs to be repaired if we have to gain the trust of domestic and foreign investors.

In India Unlimited: Reclaiming The Lost Glory, Arvind Panagariya proposes that we create Autonomous Employment Zones (AEZs) that give virtually all powers to frame the rules of economic engagement within the zone to the local administration. The zones will offer a highly flexible environment with respect to labour and land laws, allowing rapid reallocation of these factors from one activity to another. They will also allow exporters to import inputs with minimum friction, process them and export. But there will be no export requirement for firms locating in the zones.” Writing before the pandemic, he proposes that we start with no more than half a dozen of these AEZs. In the current situation, each state should be encouraged to set up at least one AEZ.

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If India’s strength is in its demographic profile, then getting hundreds of millions of people employed is the way to realize its latent potential. This is the time to jettison most of our self-imposed mental, ideological and legal barriers to boosting employment. If we don’t do it when hundreds of millions have lost their jobs and there is a reverse exodus of migrants to the countryside, I cannot think of a time we ever will.

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