The Economic Survey that Union Finance Minister Nirmala Sitharaman presented on Monday in the Lok Sabha banks heavily on employment generation in the private sector. It describes it as the key to achieving the aim of making India a developed country by 2047, when the nation will celebrate 100 years of Independence.

The Economic Survey 2024 says that “job creation happens mainly in the private sector. Second, many (not all) of the issues that influence economic growth, job creation and productivity and the actions to be taken therein are in the domain of state governments”.

“So, in other words, India needs a tripartite compact, more than ever before, to deliver on the higher and rising aspirations of Indians and complete the journey to Viksit Bharat by 2047. In more than one respect, the action lies with the private sector. In terms of financial performance, the corporate sector has never had it so good.”

Private sector is flourishing, but…

The report refers to a survey of companies conducted between 2020 and 2023. “Results of a sample of over 33,000 companies show that, in the three years between FY20 and FY23, the profit before taxes of the Indian corporate sector nearly quadrupled. Further, newspaper headlines told us that the corporate profits-to-GDP ratio rose to a 15-year high in FY24. BusinessLine reported, “The corporate profit for the Nifty-500 universe was up 30 per cent last fiscal to ?14.11-lakh crore against ?10.88 lakh crore in FY23. The nominal GDP grew 9.6 per cent y-o-y to ?295-lakh crore (?269-lakh crore)1, ” it said.

However, the report points out that hiring and compensation growth hardly kept up with it. But, it is in the interest of the companies to step up hiring and worker compensation. The Union government cut taxes in September 2019 to facilitate capital formation.

Has the corporate sector responded?

Between FY19 and FY23, the cumulative growth in private sector non-financial Gross Fixed Capital Formation (GFCF) is 52% at current prices.

During the same period, the cumulative growth in general government (which includes states) is 64%. The gap does not appear to be too wide. However, when we break it down, a different picture emerges.

Private sector GFCF in machinery and equipment and intellectual property products has grown cumulatively by only 35% in the four years to FY23. Meanwhile, its GFCF in ‘Dwellings, other buildings and structures’ has increased by 105%. This is not a healthy mix.

Slow pace of investment

Second, the slow pace of investment in M&E and IP Products will delay India’s quest to raise the manufacturing share of GDP, delay the improvement in India’s manufacturing competitiveness, and create only a smaller number of higher-quality formal jobs than otherwise.

Nonetheless, there is a silver lining in the data. In the two years since FY21, GFCF by the private sector has grown faster. General government GFCF rose a cumulative 42% between FY21 and FY23.

Non-Financial Private Sector’s overall GFCF increased by 51%; investment in Machinery and Equipment and Intellectual Property Products increased by 38%. So, the growth in these two critical sub-components of Private Sector GFCF is similar to that of the overall GFCF by the General Government. This is a statistic that bears watching. They should continue to invest. To do so, they need demand visibility. That comes from employment and income growth.

What happens to services exports

In a recent article, the Economist cites independent research that predicted a slow demise of India’s services exports over the next decade. While the boom in telecommunications and the rise of the internet facilitated business process outsourcing, the next wave of technological evolution might bring the curtains down on it.

In this milieu, the corporate sector has a responsibility, as much to itself as it is to society, to think harder about ways AI will augment labour rather than displace workers. Hiring in the IT sector has slowed significantly in the last two years. We do not have a full picture of overall corporate hiring in the country on a regular basis.

The impact of AI

In any case, deploying capital-intensive and energy-intensive AI is probably one of the last things a growing, lower-middle-income economy needs. A Staff Discussion Note of the International Monetary Fund published in June 20243 notes that Generative Artificial Intelligence raised profound concerns about massive labour disruptions and inequality.

The IMF SDN goes on to recommend well-designed excess corporate profit taxes and high personal income taxes on capital through better enforcement of automatic information exchange between countries and enhanced taxation of capital gains.

What employment means

However, employment is about dignity, self-worth, self-esteem, self-respect, and standing in the family and community, not just about the income it brings, the Economic Survey says. That is why it is in the enlightened self interest of the Indian corporate sector, swimming in excess profits, to take its responsibility to create jobs seriously. Of course, it must find people with the right attitude and skills, it says.

“That requires another tripartite compact – between the government, the private sector and academia. This compact is to reboot the mission to skill and equip Indians to catch up with and get ahead of technological evolution. To succeed in the mission, governments must unshackle the industry and academic institutions to play their respective roles in that mammoth task.”

For example, despite several amendments over the years, the Apprenticeship Act remains a work in progress, at best, in encouraging large-scale apprenticeships in the country. The New Education Policy 2020 proposes freeing India’s higher education from regulatory oversight to market oversight.

The real corporate responsibility

The Economic Survey says that a corporate sector that helps shape the design of higher education with inputs to curriculum, evaluation standards, and faculty will pave the way for a high-quality higher education that market competition brings, replacing regulatory oversight.

The report says, “If anything, another article in The Economist that hails the arrival of China as a superpower in science should be sufficient inspiration for the corporate sector and academia to get their act together on scientific research and development. The real corporate social responsibility.”

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Economic Survey 2024: How govt banks on private sector for job creation