Tough job: Govt’s new scheme to incentivise jobs creation is unlikely to trigger hiring
Anurag Sharma (name changed) runs a logistics company in Delhi that owns five trucks and employs 22 workers. He keeps only eight employees on the company rolls to avoid hitting the threshold of higher compliance, which will inflate his costs. “I pay eight of them from the current account. The rest I pay in cash,” Sharma adds.
The government is now hoping to lure entrepreneurs like Sharma into hiring more people and putting them on the company rolls by promising to pay the new workers and employers’ contribution to the provident fund. For this, Finance Minister Nirmala Sitaraman on November 12 announced the Atmanirbhar Bharat Rozgar Yojana (ABRY) as part of a Rs 2.65-lakh-crore stimulus package. The announcements promised a total support of nearly Rs 30 lakh crore, including moratoriums on loan repayments, credit guarantee for MSMEs, support for the construction industry and home finance, free rations, and production-linked incentives. The government hopes these will revive the economy that has officially slipped into recession.
“The 100% government guarantee for MSMEs is a good step. The performance linked incentive is a great idea,” says Pronab Sen, chairman of the Ministry of Statistics and Programme Implementation’s Standing Committee on Economic Statistics. The former chief statistician also points out that the guarantee is meant to avoid loan default, and companies have to perform first to get the promised incentive. “But is performance in the companies’ hands?”
Companies’ performance, which will lead to more hiring, depends on revival of the domestic and international markets. And that rests on job creation and income restoration. Can the scheme kick-start that cycle?
A Mumbai-based entrepreneur who let go 65 employees after his staffing services firm was crushed by the pandemic says he was a beneficiary of the Prime Minister’s Rozgar Protsahan Yojana, a predecessor of ABRY, launched in 2016 to incentivise hiring by employers. “I had availed of the benefits, but it never influenced my hiring decisions. In other words, it never made business sense to hire or fire one person because of the scheme.”
There are 630 million MSMEs in India, according to government data. Almost 90% of these are microenterprises, making them more vulnerable to economic shocks. The Sixth Economic Census of 2013-14 says only about 1.3% establishments employed more than 10 workers, the staffing threshold for mandatory insurance. Provident fund payments must start when a firm’s headcount touches 20. These companies’ finances are sometimes so precarious that their profit comprises evaded taxes and avoided welfare payments, say multiple promoters. That doesn’t bode well for workers in a country where 70% of salaried workers do not have written contracts, according to the Periodic Labour Force Survey 2018-19.
The Centre for Monitoring Indian Economy (CMIE) reported that unemployment inched up to 7% in October from 6.7% in September. October was the first month since May, when the lockdown was lifted, that employment fell, it said. Provisional EPFO data for September, announced on November 20, showed a net addition of 1.4 million.
Large firms have been cutting costs to preserve profits but that takes a toll on B2B demand and has a cascading effect. CMIE reported that in the second quarter of the financial year, 1,897 companies made a record profit of Rs 1.3 lakh crore despite their top line shrinking by 5.7%. That reveals heavy cost cutting, mainly by slashing jobs and wages and squeezing suppliers amid falling sales.
While exports from Asia have been rising, MSMEs in India have not been able to participate in the trend due to a peculiar hurdle: shortage of containers. A sharp drop in imports due to the pandemic and India’s reluctance to import from China has meant fewer ships calling on Indian ports. This has disrupted the flow of containers. Merchandise imports fell over 36% between April and October, while exports declined 19% in that period.
Indore-based handicrafts exporter Suber Rampurwalla says he does 40% of his business between June and September, mainly catering to Christmas demand. Those consignments, about 25 containers, have to be shipped latest by October. “That is down about 40% this year,” he adds.
Khalid Khan, director of Mumbai-based auto parts exporter GEECO Trading Corporation, says consignments that were to be shipped in July and August had been rolled over for lack of containers. “Freight costs have more than doubled and we also have to pay rollover charges,” Khan adds.
Some hope rests on the rural economy, which has been propped up by heavy stimulus from the Centre and state governments. India is also reaping a bumper harvest even as bad weather in affected crops in some countries. “International prices of many commodities are at 3-4 year highs and so export parity has set in,” says Prerana Desai, head of research at Edelweiss Agri Services and Credit. “Edible oils are at record levels because of high import tariffs.” Good prices for a bountiful harvest is likely to raise rural incomes. The question is whether rural incomes would help boost consumption or savings.
“In uncertain times, the tendency is to save rather than spend,” says economist Sen. He says the government should do something to provide reassurance and there should be a clear recognition of what needs to be done and articulation of what it will do. “State governments that have been spending all these months will soon run out of money. Will the Centre continue its own stimulus and also fill in for the states? That is uncertain.”