NEW DELHI: Finance Minister Nirmala Sitharaman, in the Budget 2024 put forth nine priorities including skilling youth and job creation. Karthik Muralidharan, Tata Chancellor’s Professor of Economics at the University of California San Diego (UCSD) points out key areas where the focus should have been.
Karthik stressed the need to focus more on productivity than employment per se. He argued that the government should design policies to remove constraints on productivity, one of which he called the “misallocation of factors of production.” To illustrate this, he provided an example: “Over time, we’ve significantly increased rice productivity. However, people don’t consume double the rice just because their income increases, once they’ve met their basic calorie needs. So, the economy needs farmers to produce less rice and move into other things. But because that process is disruptive, you often have policies designed to protect farmers with subsidies and procurement and free electricity. These measures keep factors of production in highly suboptimal uses, ultimately hurting both farmers’ incomes and the overall economy by not allocating our resources to their most productive uses.”
Karthik added that the state’s tendency to try and protect workers from vulnerability in the economy misfires because “instead of protecting workers, we try to protect jobs, which is the fundamental source of misallocation because economies are dynamic creatures. Companies will come, companies will go; sectors will come, sectors will go; that reflects changes in both technology and taste. This is why a well-functioning social protection system can support job creation and economic dynamism, because it allows governments to design policies that protect workers from the costs and disruptions of job loss, as opposed to trying to protect economically unviable jobs.”
“Because these reforms were politically risky, China localized their areas of experimentation,” Karthik explained. “They designated special economic zones (SEZs) where certain laws were relaxed, allowing these areas to operate differently from the rest of the country. They essentially said, ‘Let’s see what happens.’ The success of these experimental zones was so great that other regions wanted to replicate them.”
He continued, “The purpose of a special economic zone isn’t just about tax incentives; it’s about removing these constraints and using the zone as a regulatory and legal testing ground. The idea was to see if they could recreate the success of places like Hong Kong or Shenzhen.”
“Everybody wants Apple, Foxconn, etc. These companies know they’re marquee investors and that they bring supply chains, so they can extract a certain value. If we must provide incentives, we should do so in a way that incentivises labour instead of capital. Because fundamentally, we need jobs. Historically, our policies have favoured the few skilled rather than the large numbers of unskilled. So, how would you incentivise labour? One practical way of doing this is to give skilling subsidies. These companies will need to bring in their in-house training and train these many workers to employ them. What we will do is cover the cost of that skilling. Tomorrow, if that company goes away, you’ll still have skills, and the labour force can join new companies or start their enterprises and employ people. Focusing on incentivising labour would be a big mindset shift.”