Having correctly identified the need for innovation to bolster employment, this budget has sowed the seeds for the transition towards a people-centric growth
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This essay is part of the series "Budget 2024-25"
The Union Budget for 2024-25 was presented today, the 23rd of July 2024, after Narendra Modi was sworn in as the Prime Minister of India for his third term in June 2024. There is a cloud of uncertainty over how the world’s most approved leader will determine the trajectory of growth of the most populous economy. While his previous terms saw robust growth, significant infrastructural development, an array of welfare schemes, greater financial inclusion and strategic foreign diplomacy, there are more complex problems to be addressed now. Despite being the third largest economy, per capita income lags at around only US$ 2800, with more than half the population belonging to the working age group. The Modi-led Bharatiya Janata Party’s (BJP) election manifesto laid emphasis on turning India into a global manufacturing hub, and to make it a trusted global value chain partner, both of which were reflected in the Interim Budget. However, this overt reliance on manufacturing might get in the way of generating sufficient employment and lead to widening of inequality.
In 2023-24, manufacturing contributed around 17.3 percent of the Gross Value Added (GVA). The share has remained stagnant at around this level since 2011-12. During the same period, the share of services has gone up from 49 to 55 percent. Manufacturing’s stasis does not necessarily imply a failure of the Production Linked Incentive (PLI) schemes introduced in 2020, designed to financially incentivise high-potential manufacturing sectors. These incentives are rolled out over a 5-year period, based on incremental sales, which indicates that a longer observation period is required for an ex-post assessment of their efficacy.
However, the PLI scheme quite accurately demonstrates the government’s priorities of expanding domestic manufacturing by drawing in foreign investment and boosting exports through enhanced global competitiveness. While the government anticipates this will provide India a hold over Global Value Chains (GVC), and bolster economic growth, this East Asia model of growth is now outdated. Countries like Japan and South Korea made the switch from agriculture to manufacturing in a world where there was sufficiently excess demand for industrial goods. While the demand persists, the supply side is dominated by developed economies and, in particular, China.
As of 2020, China contributed 30 percent of the global manufacturing GVA, while India’s share was limited to 3 percent. Despite having the second-fastest growing manufacturing sector since 1995, India’s presence in the market is minuscule. To capitalise on a manufacturing-driven economic boom, the country will need a reshuffling of the entire economic status quo. This paraphernalia of exogenous interventions will only hinder the potential for growth, by overlooking the existing key performance indicators (KPI) of the economy.
India has a dominant services export sector, which not only keeps the current account deficit under control but has also been the driver of productivity. Thus, some basic economic inconsistencies arise when manufacturing is given precedence over services in a labour-abundant economy.
India has a dominant services export sector, which not only keeps the current account deficit under control but has also been the driver of productivity. Thus, some basic economic inconsistencies arise when manufacturing is given precedence over services in a labour-abundant economy.
First, manufacturing is a relatively capital-intensive sector, i.e., it employs less workers per unit of physical capital. It will not be able to generate the required level of employment for a growing working population. Second, given India’s abundant stock of human capital, it has a comparative advantage in labour-intensive industries, i.e., services. Ricardian law would dictate topmost priority to expanding services, conditional on the fact that free trade prevails. Third, the aspirational middle class addressed in the Union Budget is more educated now (the employability concern notwithstanding), and will tend to prefer white-collar jobs usually associated with the service sector.
These problems can be addressed with a singular shift in policy towards service-orientation of the economy. However, it will be ignorant and untrue to claim that the Modi government has not taken measures to promote services or enhance human capital. The BPO promotion schemes are directed towards employment of youth and women, in addition to drawing investment towards Information Technology enabled Services (ITeS). Service exports are rewarded through the Services Exports from India Scheme (SEIS). Plenty of employment generation and training/apprenticeship schemes have been launched in the last decade. With these in place, it would be prudent to direct future resources towards their greater implementation, instead of long-drawn subsidies and incentives in the manufacturing sector. The latter’s return on investment will not only take time to be realised, but also be socioeconomically insignificant in comparison to the former.
A higher share of labour income, i.e., income earned by workers can mitigate the long-run levels of inequality. Similarly, a lower capital income share ensures that the gross return on capital is limited and does not translate into copious amounts of wealth in the hands of a limited few.
Income earned by workers can mitigate the long-run levels of inequality. Similarly, a lower capital income share ensures that the gross return on capital is limited and does not translate into copious amounts of wealth in the hands of a limited few.
If the share of labour income rises faster than the workforce, each worker is better-off, able to save more and amass their own income-generating wealth stock. These arguments are usually prone to the class conflict debate, ignoring that there is room for a Pareto improvement. Greater service-orientation will generate more jobs, increase export competitiveness, boost domestic demand—all of which collectively bolster national income. Thus, as long as the GDP grows more than the rise in labour income, capital owners can be better off, despite a lower share in national income. This shift towards higher labour income share can be stimulated through a services-based growth outlook.
A services-centric growth approach can, therefore, generate more jobs, while also ameliorating inequality in the economy. It has the capacity to absorb the highly-differentiated skill base of Indian workers, and offer a better standard of living. However, this needs massive policy restructuring with increased focus on the human capital aspect of development. Greater investment in health, education, skilling, and employability can create a global workforce in India.
This Union Budget has presented a package of three Employment Linked Incentive schemes that can enhance employability and enable greater employment among the youth. The schemes include one-month wage, both employee and employer incentives for provident fund (PF) contributions, and reimbursement of PF contribution to employers for new hires. Further, a five-year skilling programme to train over 2 million youth has been designed, in addition to upgradation of existing Industrial Training Institutes (ITIs).
This Union Budget has presented a package of three Employment Linked Incentive schemes that can enhance employability and enable greater employment among the youth.
The increase in allocation of funds to the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) from INR 600 billion to INR 860 billion highlights the government’s focus on employment generation. The concomitant increase in Research and Development funding from INR 8.4 billion to INR 12 billion depicts the synergy between employment and academia. Having correctly identified the need for innovation to bolster employment, this budget has sowed the seeds for the transition towards a people-centric growth. This transition, if implemented and executed correctly, can set the track for the much sought after Viksit Bharat.
Arya Roy Bardhan is a Research Assistant at the Centre for New Economic Diplomacy, Observer Research Foundation.
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Arya Roy Bardhan is a Research Assistant at the Centre for New Economic Diplomacy, Observer Research Foundation. His research interests lie in the fields of ...
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