This week, Prime Minister Narendra Modi’s government in India released its budget for FY 2016-17. Budget Day in India is met with intense scrutiny and heightened chatter among the pundits and political class in New Delhi.
Leaving job creation to the private sector
Sabina Dewan, Executive Director
As the Indian government released its 2016 budget earlier this week, a key question is whether it does enough to address one of the biggest challenges confronting the Indian economy: job creation.
This year’s budget makes a sharp pivot from an urban to a rural focus with bigger allocations for infrastructure, like irrigation projects; the Mahatma Gandhi National Rural Employment Guarantee Act, which promises 100 days of work per year for rural households; and schemes such as the Pradhan Mantri Fasal Bhima Yojana that protects farmers whose crops have been affected by natural calamities, pests or diseases.
These policies promise to relieve distress and protect livelihoods in some of the poorest parts of the country. The rural vote is, after all, critical to the upcoming state assembly elections this fiscal year. But the government’s resolve to keep fiscal consolidation on track by bringing the fiscal deficit to 3.5 percent of Gross Domestic Product in 2016/2017, means that there will be little additional spending to create new jobs. This task the government largely leaves to the private sector.
A more hands-on approach to skill development
Amanbir Singh, Research Coordinator
Finance Minister Arun Jaitley listed “education, skills and job creation” as one of his nine pillars to transform the economy. He is setting aside ₹17 billion (over US$ 250 million) for 1,500 multi-skill training institutes and an expansion of the Pradhan Mantri Kaushal Vikas Yojna, the program that offers youth a financial incentive to complete vocational training.
The funding allocation is not a surprise since “Skill India” has been a major policy plank for the government. It is interesting to note that there is a focus on creating new multi-skill training institutes, which could replace India’s Industrial Training Institutes in the skilling landscape. Over the past few years, the government has been channelling funds to training providers – NGOs and for-profit enterprises – through the National Skills Development Corporation and other programs. This move, however, could signal a more hands-on approach by the government in realizing its skill development target of 400 million trained workers by 2022.
A fresh emphasis on start-ups
Gregory Randolph, Deputy Director
The 2016 budget places special emphasis on nurturing India’s ecosystem for start-ups, especially those in the manufacturing sector, to drive job creation.
The budget definitely marks a step forward for India’s entrepreneurs, with the promise of one-day registration and a tax holiday for three of the first five years after a company is set up. What’s more, the budget holds a special allocation for start-ups run by women and lower-caste entrepreneurs; it’s great to see the government recognize the problem of access to entrepreneurship.
But questions remain: Is there any effort to change procurement and tendering practices so that young enterprises benefit from government spending? Is one-day registration just nice window dressing, or will the government streamline other hassles that new companies face, like obtaining a tax ID number?
The devil is always in the details of implementation.
Ease of doing agriculture
Atisha Kumar, Research Director
The 2016-17 budget continues the government’s emphasis on facilitating the ‘ease of doing business.’ While the government puts forth a variety of tools to lower the costs of doing business, a prominent theme is the use of technology to do so. Start-ups are the obvious candidates for technology-based solutions, but the union budget also introduces digital solutions designed for another group: farmers. The budget holds special provisions for both marketing of produce and procurement of agricultural produce.
The budget proposes a national, online marketplace for agricultural produce directed at farmers. This electronic marketplace will help provide better price information to farmers. On procurement, the Food Corporation of India will undertake an online procurement system to administer the Minimum Support Price (MSP).
These Internet-based solutions for farmers could be well timed, given that the number of rural Internet users grew 77 percent in 2015 and is on track to reach 147 million in June 2016. The poorest farmers, however, are the least likely to benefit, given that the cost of any broadband device is still out of reach.
Is it really the biggest year yet for NREGA?
Trine M. Jorgensen, Research Intern
The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) – a national program that ensures 100 days of work to rural households – is allocated ₹385 million (almost US$ 5.7 billion) in the 2016 budget. According to Finance Minister Arun Jaitley, this is the highest ever allocation of funds to MGNREGA. It’s a welcome turnaround after two years of Modi’s government criticizing the program and giving it low priority.
But looking closer, we see that in 2010-11, the government allocated ₹401 million to MGNREGA; in today’s rupees that would be ₹650 million, almost double this year’s allocation. This year’s amount is also modest considering the backlog of unpaid wages from last financial year (12 states were unable to pay due wages as of December 2015), and the promise of 50 extra days of work for people in drought-stricken areas.
Improvement in the timely release of funds and better monitoring to prevent corruption, however, could increase the percentage of funds that actually reach rural households.
Betting on the long-term dividends of infrastructure
Dhruv Jain, Research Associate
In 2016-17, infrastructure spending in India will be increased to ₹2.21 trillion (about US$ 32.5 billion). The emphasis will continue to be on railways and roads. Key highlights include the construction of 10,000 km of roads, upgrading of state highways, and the establishment of a National Investment and Infrastructure Fund (NIIF) to source off-budget funds and facilitate Public Private Partnerships (PPP).
Infrastructure spending pays big dividends in terms of economic activity, and potentially job creation, especially in a country like India where connectivity remains poor. But expenditure on railways and roads – aside from the direct jobs it creates – is a long-run investment. It holds the potential to connect markets, boost productivity and create jobs over a time horizon of five or more years. It won’t help Modi fulfill his big promises around jobs in the short run, before the next election. Nonetheless, the government’s resolve to provide this big push deserves applaud, given the limited fiscal space.
Helping companies pay for pensions
Tanvir Malik, Research Associate
Aside from the controversial removal of tax exemption on withdrawal of contributions to the Employee Provident Fund, the government made another significant announcement with regard to the EPF. The budget sets aside ₹10 billion (almost US$ 150 million) to pay 8.33 percent of new employees’ basic salary towards pension and provident fund contributions. This provision will apply to workers earning basic salaries of less than ₹15,000 (US$ 220) per month.
The government’s contribution will cover almost three-quarters of the 12 percent matching contribution required of employers. By reducing the cost of hiring, this could give a boost to job creation. It may also create an incentive for firms to hire more formal rather than casual workers, since provident fund contributions are one of the biggest expenses for employers when hiring permanent employees.
However, the move could unintentionally put a ceiling on wages at the ₹15,000 per month threshold, since any salary above it would lead to a large increase in labor costs for employers. The government should monitor wage data to make sure salaries for entry-level workers are not stagnating below the threshold.