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There is a clear and present agenda for skills: Manish Sabharwal

Independence was about getting rid of the British but freedom is about individual choices. And anybody who is unemployed or unskilled does not have choices and, therefore, freedom

By Manish Sabharwal
Published: Aug 18, 2015

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Few Indians don’t get emotional when they hear Pandit Jawaharlal Nehru’s ‘Tryst with Destiny’ speech from the night of Independence. But few people disagree that India missed its economic tryst with destiny; we have 300 million people who will never read the newspaper they deliver, sit in the car they clean, drive the tractor they unload, or send their kids to the school they helped build. I’d like to make the case that there is a difference between independence and freedom; independence was about getting rid of the British but freedom is about individual choices. And anybody who is unemployed or unskilled does not have choices and, therefore, freedom.

But let’s step back. The notion that anybody can explain why countries are poor is delusional. In fact, cultural explanations for India’s poverty are, at best, the soft bigotry of low expectations and, at worst, racism. The so-called Hindu rate of growth seemed like a reasonable explanation till reforms began; but we didn’t shoot all the Hindus after 1991 when our 2 percent growth rate spiked to 7 percent. But I’d like to make the case that the solution to poverty is job creation, entrepreneurship and skills; we made a mistake in 1991 by defining reforms as purely financial and should have fixed our factor markets (land, labour and capital). From the surface India’s entrepreneurship situation does not seem bad; fifty percent of our labour force is self-employed, we have one enterprise for every four non-farm workers, and our official unemployment rate of 4.2 percent is not a fudge. But most of our enterprises are dwarfs (small enterprises that will stay small) rather than babies (small enterprises that will grow big): Eighty percent of manufacturing is done in enterprises with less than 50 employees).

These enterprises vary considerably in productivity (there is a 22 times productivity difference between a firm at the 90th and 10th percentile by size in manufacturing), and 40 percent of our labour force comprises the working poor (people who make enough money to live but not enough money to pull out of poverty). India’s problem is not jobs but formal jobs; we are just not producing enough enterprises and workers with the productivity to pay or deserve higher wages. Sardar Vallabhai Patel once said that the best time to plant a tree was 30 years ago and the second best time is today; giving every Indian the dignity, strength and self-esteem that we define as freedom needs a radical reboot of the productivity of our enterprises and the skills of our individuals. But before we jump into what needs to be done, let’s understand where we are and what we have learnt about entrepreneurship (the demand side) and skills (the supply side) since reforms began.

India’s current enterprise stack is key to any discussion about jobs and entrepreneurship; we have 63 million enterprises of which 12 million don’t have premises and 12 million operate from home. Only 7 million enterprises have any tax registration. Only 1.2 million enterprises make contributions to employer pension and health insurance plans. Only one million enterprises have incorporated as companies. Most painfully, we only have 14,500 companies with a paid-up capital of more than
Rs 10 crore. About 80 percent of our manufacturing output comes from formal enterprises yet 80 percent of our manufacturing employment is in informal enterprises. Why? The problem often lies in India’s factor markets of land, labour and capital. The land question has got tangled with the radioactive issue of acquisition but the primary problem is urbanisation. The massive divergence between real and nominal wages in our job hubs (cities with more than a million people) is murdering migration at the bottom of the pyramid. India only has 45 cities with more than a million people; China has 375.

There is an urgent need for labour law reforms in the country
Image: Danish Siddiqui / Reuters
There is an urgent need for labour law reforms in the country

We face two very different visions of urbanisation; shoving more people into Delhi or Mumbai (not very different from the 36 million people who live in Greater Tokyo or Beijing whose ninth Ring Road is 900 km long and the furthest point is 125 km from the city centre) or building a bunch of new cities (like we have done with Gachibowli outside Hyderabad, Whitefield outside Bengaluru, Magarpatta outside Pune and Mohali outside Chandigarh). The problem is not only hardware; new cities need real mayors because impotent or unelected city leadership creates dumb not smart cities. The second variable of capital is a binding constraint; our equity and bond institutional markets are not deep and wide enough, we have offshored our bond and currency derivative markets, and we have not issued enough new private bank licences. Most importantly, we don’t have a level and predictable playing field for entry, taxation, and exit norms for foreign and domestic private equity and venture capital. The final variable is labour; 100 percent of net jobs in the last 25 years have been created informally; surely there is nothing  genetic about Indians and informality so labour law reform is important for the demand side.

On the supply side, we have three distinct problems; matching (connecting demand to supply), mismatch (repairing supply for demand) and pipeline (preparing supply for demand). In schools we may have licked the quantity problem (enrolment ratios of 110 percent mean that most kids are in school and some of the dropouts are coming back) but many of our kids are not learning much. This is a huge problem because in the new world of work, class 10 is the new class 8.

In skills we confront a financing failure; employers are neither willing to pay for skills nor for candidates but are willing to pay a premium for skilled candidates; candidates are not willing to pay for skills but willing to pay for a job; and banks/microfinance institutions are not willing to lend for skills unless a job is guaranteed. The National Occupation Standards form a poor framework for aligning demand (what employers want) with supply (the skills kids have) and we need to move from periodic interventions to architecting a self-healing structure. Young job seekers are unable to get a job without experience but it is unclear how they can get experience without a job. It is far more efficient to send trainers to areas with high outward migration but this is rarely possible because trainers are unwilling to move (to be fair this problem is not unique to India; even dictator Stalin was unable to get doctors to move to rural Russia). Finally, college isn’t what it used to be (60 percent of taxi drivers in Korea and 15 percent of high-end security guards in India now have a degree) but the social signalling value of a college degree matters; vocational training is usually for other people’s children, not your own.

The agenda for job creation is hardly unknown; GST, smart cities, Digital India, Make in India, ease of doing business, labour law reform and co-operative federalism. The changes required in labour law are clear; we need to execute the budget announcements for employee choices in pensions and health insurance, complete the consolidation of 44 central laws into four labour codes, and give employers the choice of complying under The Factories Act or The Shops & Establishment Act. But the broader theme needs to be decentralisation; the use of Section 254 (2) of the Constitution that allows states to amend central laws is an innovation because 29 chief ministers matter more than one prime minister for entrepreneurship. But two specific ease-of-doing business interventions could make a huge impact: One, a single Aadhaar number for enterprises to replace the 17 currently used across all state and central governments. Two, online and deadline: That is, a single electronic interface with a deadline for all government registrations and permissions. This enterprise interface will be anchored on the Aadhaar enterprise number and the processing capability created by the government or outside innovators based on the APIs (application programme interfaces) generated over the next two years by the ministries responsible for all registration/applications. Going forward, all new laws should be mandatorily born digitally native.

Employers are willing to pay a premium for skilled candidates, but not for skills
Image: Getty Images
Employers are willing to pay a premium for skilled candidates, but not for skills

The agenda for skills is clearer than it has ever been. We need to consolidate and execute on the mandates for Sector Skills Councils, National Skill Development Corporation, and National Skill Development Agency. The Pradhan Mantri Kaushal Vikas Yojana (PMKVY) scheme not only improves on the star scheme but cleverly adds ‘Recognition of Prior Learning’. The proposed National Skill Development University is important to create new connectivity between skills and degrees; a skill university prays to the one god of employers, has only 5 percent of their kids physically on campus (the rest in apprentices and distance education), and only 5 percent of their kids are doing degrees (the rest are doing certificates and diplomas with modularity to go all the way to degrees).

Apprenticeships are important; if we had the same proportion of our labour force as Germany in apprentices, we would have 15 million apprentices. The recent Parliament amendments not only enable fixing current programmes (Boards of Apprenticeship Training of the ministry of human resource development and Regional Directorate of Apprenticeship Training of the ministry of skill development and entrepreneurship) but also create the space for new employer and university-led PPP apprenticeship programmes. It is also time for the ministry of human resource development (MHRD) to recognise that massifying higher education requires separate regulatory regimes for small research universities (whose target would be global rankings) and large vocational universities (whose target is volume and employer connectivity with online delivery and blended apprentices). MHRD also needs to amend the Right to Education Act to become the Right to Learning Act because we can’t teach people in six-month skill programmes what they should have learnt in 12 years of school, and the most important vocational skills are reading, writing, and arithmetic.

Political scientist Ashutosh Varshney suggests there were three projects at Independence; nation building, social justice and poverty reduction. India has done a good job at nation building, made some progress at social justice but fared miserably at poverty reduction. For the last decade, the regime of rights was presented as the solution to India’s poverty but that converted a high growth low inflation economy into a low growth high inflation economy. The best antidote to poverty is creating the infrastructure of opportunity represented by the 3Es of education, employment and employability. Between 1820 and 1950 India grew at a pathetic 0.1 percent per year. Under the licence raj, India grew at an insufficient 2.4 percent per year. Reforms after 1991 raised growth to 7 percent but the lack of systemic changes means that we are not creating jobs at the scale needed.

The role of the government is not setting things on fire but creating the conditions for spontaneous combustion. Currently India is a hostile habitat for entrepreneurship because entrepreneurs have to generate their own power, provide their own transport, arrange their own security and sometimes manufacture their employees. This is why most of our companies are dwarfs rather than babies. Making India a fertile habitat for babies requires a radical reboot of our skill and employment regime, the agenda of which has been obvious for a long time—you will not go very wrong with higher education reforms by changing the date on the Kothari committee report of 1968 and also consider that Apprenticeship Act reforms were the 20th point in Indira Gandhi’s 20 point programme in 1975.

Why has execution failed? Reforms will always fail if approached with the technocratic approach of logic; reform is not the solving of a sum but the painting of a picture. Over the next two decades, ten lakh kids will join the labour force every month; all these kids need jobs and skills. India is better positioned than ever to give them what they want and need. And finally complete the journey from national independence to individual freedom.

(This story appears in the 21 August, 2015 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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