A painful reminder of India missing her tryst with destiny is that only 10% of its labour force works in manufacturing. Of the three pledges made at independence in 1947 – nation building, social justice and poverty reduction – the first has been redeemed in full, the second is work in progress, but the third represents our poorest performance. Poverty reduction is closely related to the farm to factory transition; this pulled 300 million people out of poverty in China. China is approaching what is called the Lewisian Turning point (when a country runs out of farm labour and wages rise rapidly); this is a unique opportunity for India to expand manufacturing employment. In fact, the remarkable experience of China (where the sale of iPhones recently crossed those in the US) suggests that workers can become consumers in one generation.

While it is important to acknowledge that India may not have the same global manufacturing opportunity that China got, it is hardly clear that it is already too late for India. In fact, the farm to factory transition is urgent; 50% of India’s labour force works in agriculture and generates only 15% of its GDP. The previous government spent the last decade under the delusion that individuals will be empowered by state dole and intervention; this government’s Make in India programme that targets formal manufacturing jobs, is on the right track because jobs change lives in ways that no subsidy ever can. However, this manufacturing renaissance depends on merciless execution in the following six areas.

Enterprise Geography of Work – On the surface, India’s entrepreneurship ecosystem seems healthy; 50% of the labour force is self-employed, there is one enterprise for every four non-farm workers, and the official unemployment rate of 4.2% is not a fudge. But most of our enterprises are dwarfs rather than babies (80% of manufacturing is done in enterprises with less than 50 employees), 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% of our labour force is made up of 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 creating enough enterprises and workers with the productivity to pay or deserve higher wages. Sardar 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. Of India’s 63 million enterprises, only 7.5 million have any tax registration, only 1.5 million pay the mandatory Provident Fund and ESO and a mere million are companies. Of these companies, only 55,000 post at least a single job on an online job portal on any day. Only 14,500 companies have a paid-up capital of more than Rs 100 million.

Unfortunately India has become a nation of corporate dwarfs because of regulatory cholesterol created hostility to entrepreneurship. Changing the ease of doing business could create a Cambrian explosion of new venture creation and massively increase productivity and scale among existing enterprises. This requires rebooting the thought world of the Ministry of Micro, Small and Medium Enterprises (MSME), improve access for non-collateral credit, getting rid of the labour and tax inspector raj, implementing General Sales Tax (GST), growing the venture capital industry, digitizing government interfaces, freeing foreign investment, and getting rid of outdated laws.

 

Physical Geography of Work – The big question is whether India is going to take jobs to people or people to jobs. 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. We face two very different visions of urbanization; 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 kms long and the furthest point is 125 kms from the city centre) or building a bunch of new cities. There will be strong regional disparities in the next twenty years; five states in the South and West of India (Gujarat, Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh) will see 50% of the country’s GDP growth but only 5% of population growth.

We must define urbanization carefully; it is not about shoving more people into Delhi, Mumbai or Bangalore, nor is it about well planned economic wastelands like Chandigarh. Considerable economic energy of the last decade has come from Gurgaon near Delhi, Gachibowli near Hyderabad, Magarpatta near Pune, Whitefield near Bangalore and Mohali near Chandigarh. But unfortunately these job magnets can’t be called smart cities. The problem is not only hardware; new cities need real mayors because impotent or unelected city leadership creates dumb, not smart, cities.

The plan for 100 smart cities must include real mayors for them; in 1924 Jawaharlal Nehru was the mayor of Allahabad, Rajendra Prasad was the mayor of Patna, C.R. Das was the mayor of Calcutta and Vallabhbhai Patel was the mayor of Ahmedabad. There are wonderful letters of Nehru about street lights and Patel about sanitation; mayoral elections are fought on infrastructure. Unfortunately today the only real mayor in India is the chief minister of Delhi. Besides city governance, the agenda should include low cost housing, industrial clusters, better North East rail connectivity, village roads, drinking water, warehousing capacity, and all infrastructure.

 

Sectoral Geography of Work – The key challenges for this geography are low manufacturing employment, high agricultural employment and excess self-employment. All three are closely related because the migration off farms is retarded by a lack of non-farm jobs and since the poor cannot afford to be unemployed, they are self-employed. China became the workshop of the world because of great infrastructure, low wages and high foreign investment (60% of their manufacturing exports come from multinational companies using the country as a production base). But Chinese wages have increased at 17% in dollar terms every year for the last five years and they are now at 20% of US wages, up from 5% of US wages ten years ago.

This is India’s opportunity. It is also important to recognize that not everybody can be an entrepreneur; our 50% self-employment is mostly made up of the working poor who cannot find wage employment. Agriculture is not a solution to employment because of low productivity; 240 million Indians produce less food than four million Americans. This agenda includes the infrastructure of ports, roads, electricity, and de-bottlenecking land acquisition. But it will also be substantially driven by the ease of doing business initiatives.

 

Education Geography of Work – This geography has three challenges that are contradictory; quality, quantity and inclusiveness. The school quantity challenge has been licked – enrolment is more than 110% in most states – yet the Right to Education Act fights yesterday’s war of enrolment and needs to be replaced by a Right to Learning Act that focuses on outcomes. We also need to create new pathways to higher education; the 10.5 million and 0.8 million kids who fail the Class 10 and Class 12 exam every year fall off in the rigid and mostly physical 10+2+3 system of today. In pursuing the 12th plan goal of a 30% GER (gross enrolment ratio of kids between 18 and 25 in college), we must remind ourselves that college is not what it used to be; 32% of retail sales clerks in the US now have a college degree while the figure was a low 1% in 1970; 60% of taxi drivers in Korea now have a college degree while only 5% did in 1970; and 15% of high-end security guards in India now have a college degree. So we need new types of college.

In skills we confront a financing failure; employers are not willing to pay for skills nor 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 are not willing to lend for skills unless a job is guaranteed. The National Occupation Codes are 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 people are unable to get a job without experience, but it is unclear how they can get experience without a job. Though it is much more efficient to send trainers to areas with high outward migration, 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). Our skill system needs to be better aligned with what employers want. This needs vocational universities which offer academic modularity (mobility between certificates, diplomas, and associate degrees), flexible delivery, and a new apprenticeship regime.

We need to deregulate distance education because even as global MOOCs like edX, coursera, udacity, etc. cite India as one of their largest markets, yet Indian universities are not allowed to compete nationally or innovate. We also need a radical revamp of our higher education regulator that currently confuses university buildings with building universities and a medical education regulator whose corruption ensures our yearly output of 35,000 doctors is dwarfed by 1.5 million engineers. The proposed National Skill University is important to create new connectivity between skills and degrees; a skill university prays to the one god of employers, has only 5% of the kids physically on campus (the rest in apprentices and distance education), and only 5% of the kids are doing degrees (the rest are getting certificates and diplomas with modularity to go all the way to degrees).

Apprenticeships are important; if we had the same proportion of apprentices in our labour force as Germany, we would have 15 million apprentices. The recent amendments proposed in Parliament not only enable fixing current programmes (BOAT of MHRD and RDAT of Ministry of Skills), but also create the space for new employer and university-led PPP apprenticeship programmes. It is also time for MHRD to recognize 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). The 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.

 

Labour Law Geography of Work – Our labour law regime ensures that 90% of the labour force works informally. The biggest problem is a benefits regime that confiscates 49% of low wage worker salary, a toxic trade union regime because of the politicization of unions and the criminalization of politics, regulatory cholesterol that is vague, contradictory, and an employment contract that is effectively marriage without divorce. We must execute budget announcements to fix the benefits regime by giving employees three choices about how they are paid their salary – opt out of their 12% employee contribution to Provident Fund (EPFO), choose to pay their 12% employer contribution to EPFO or NPS (National Pension Scheme), and choose to pay their ESI contribution to ESIC or buy IRDA regulated health insurance.

Today ESIC and EPFO do not have clients but hostages and breed informality. The next wave of reform should be around inspections, factories act, definitions and so on, and the tricky issue of hire and fire should be deferred for now or left to the states. The changes required in labour law are clear; we need to complete the consolidation of 44 central laws into four labour codes, and employers the choice of complying under the Factory Act and the Shops and Establishments Act. But the broader theme needs to be decentralization; the use of Section 254 (2) of the Constitution that allows states to amend central laws is a critical innovation because 29 chief ministers matter more than one prime minister for entrepreneurship.

 

Legislative Geography of Work – An important priority for the new government is improving the ease of doing business. There are many specific interventions:

1. Creating an Aadhar number for enterprises; every company currently has multiple numbers that include Corporate Identity Number (21 digit alphanumeric) from ROC, Tax Payer Identification Number for Commercial Taxes (11 digit numeric), Service Tax Number (15 digit alphanumeric), PAN Number (10 digit alphanumeric), Central Excise (PAN Number +2 characters), Provident Fund Number (11 digit alphanumeric), Profession Tax Registration Certificate (9 digit numeric), Profession Tax Enrolment Certificate (9 digit numeric), Tax Deduction and Calculation Number (10 digit alphanumeric), ESIC number (17 digit numeric), Labour Department Registration Number (13 digit alphanumeric but varies from state to state), Importer Exporter Code (10 digit numeric), Shops and Establishments Act Registration (20+ digits alphanumeric), CLRA Registration (15+ digits alphanumeric), Labour Welfare Board (5 digit numeric), and so on.

2. We need government departments to have all registrations, permissions and licenses to be online with open APIs within two years. States must be given incentives and ranked based on electronic, single window compliance within a deadline. All new laws should be mandatorily born digitally native.

3. We must revisit the Companies Act because it has stopped distinguishing between closely held private companies, widely held public companies, and publicly listed companies. The current lack of nuance not only hinders entrepreneurship (most enterprises in early stages are not financed by formal venture capital but loans and equity investments from friends, family and self) but creates a trail of compliance or structuring that needs expensive lawyers and accountants. The regulation of listed companies should be left to stock exchanges and SEBI norms. Revisit the more than 15 filings required and remove the ones for ordinary course of business (management appointments, etc.). Revisit the liabilities of key management personnel or raise the threshold to Rs 500 million. Revisit the provision that bans ESOPS to promoters and directors for unlisted companies. Revisit the process of preferential allotment for private companies. Remove Section 62 subsection C that fiddles with valuation of private companies.

4. We must revisit tax compliance to become transparent, consistent and honest; any tax law that cannot be codified into a piece of software code should be reviewed because the current discretion is being badly misused. Tax compliance should be raised by massive doses of technology, analytics and big data. This will require a radical review of the organization structure, culture and incentives of the CBDT.

5. We must revisit service tax to becoming due when payments are received rather than when they are invoiced. The current system has created a huge cash flow problem for all enterprises but particularly the small ones. This not only amounts to working capital funding for the government from small entrepreneurs, but also creates huge accounting and actual tax losses in the case of bad debts.

 

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 manufacturing entrepreneurship because entrepreneurs have to generate their own power, provide their own transport, arrange their own security and sometimes manufacture their employees. My parents retired to Kanpur; the four fastest growing industries in Kanpur are private bottled water, private security, private generators and private schools. This is wrong; the private sector cannot substitute for the state and the playing field will never be level between big and small companies unless we massively review our regulatory cholesterol. The time for patience with the status quo is now past; we must take an axe through regulations that currently torture our entrepreneurs and companies.

India has a unique opportunity. When I landed in the US after my MBA in 1994, there was a front page article in The Wall Street Journal which said that India was more interesting than important. I hope that journalist is eating the newspaper on which she wrote that, what is happening in India is not once in a decade or once in millennium but once in the lifetime of a country. India’s demographics, democracy and demand make it a very interesting bet for multinationals and the world’s capital over the next couple of decades because it is one of the few places in the world where genuine growth is possible. Europe has the unsustainable combination of 7% of the world’s population, 25% of the world’s GDP and 50% of the world’s social spending. The sale of adult diapers crossed baby diapers in Japan this year. The genius of US – immigration – faces real political challenges. India is not only the only game is town but is also a beneficiary of low oil prices and a reverse commodity cycle that may not change while the world is healing itself.

 

Over the last ten years of the previous government we had forgotten that policy is a child of politics and politics is a contact sport. This government has done the right thing by setting an ambitious vision that includes Skill India, Make in India, Digital India, Clean India and much else. These initiatives are all connected; to paraphrase Harvard historian Samuel Huntington, the gap between India’s ideals and our reality is not a lie but a disappointment. And it is only a disappointment because our ideals were very high; India was a reckless experiment in 1947 because poor, diverse, large, linguistically diverse and religiously complex countries were not supposed to survive as democracies. Yet India and Pakistan born on the same night have had very different destinies because 30 million people win an election. But our political democracy (one person one vote) has not always been accompanied by a social democracy (one man one value) or economic democracy (one man one opportunity). Changing this needs manufacturing jobs. Manufacturing jobs need aggressively and massively removing regulatory cholesterol.