Vulnerability in jobs in India

India has been infamous for the magnitude of informal jobs in the country. Though a significant issue, informality is just a part of the bigger issue, i.e, the increase in the number of highly vulnerable jobs. Vulnerable jobs usually include own-account workers and family members working informally. Basically anyone who does not have a stable contract or flow of income, and are open to exploitation. All informal workers are vulnerable to an extent since they aren’t on any payroll or have a formal contract.

This long standing problem has become significant as the number of vulnerable employees has been increasing in the past few years. As per International Labour Organisation (ILO), 77 per cent of workers in India will have vulnerable employment by 2019. In a country where 92 per cent of the employed population is in informal sector, it is a concern if the ratio of vulnerable jobs increase.


Source: World Employment Social Outlook2018, International Labour Organisation

The ILO report also pointed out that

“a significant portion of the jobs created (in India) in the services sector over the past couple of decades have been in traditional low value added services, where informality and vulnerable forms of employment are often dominant.

It is no solace that the problem is global in nature,

Globally, the significant progress achieved in the past in reducing vulnerable employment has essentially stalled since 2012. In 2017, around 42 per cent of workers (or 1.4 billion) worldwide are estimated to be in vulnerable forms of employment, while this share is expected to remain particularly high in developing and emerging countries, at above 76 per cent and 46 per cent, respectively. Worryingly, the current projection suggests that the trend is set to reverse, with the number of people in vulnerable employment projected to increase by 17 million per year in 2018 and 2019.

This is not a surprise as 80 per cent of the casual workers and 31 per cent of the regular/salaried workers in 2016 earned less than the national minimum wage of Rs 66 / day. If looked at on the basis of gender, 95 per cent of women working as casual labour got less than the minimal wage as against 74 per cent men. Lower wages make workers more susceptible to being caught in the low income trap. With income not enough to save and invest, people earning low wages are unable to earn or multiply their money and get stuck at living at basic sustenance levels. The only way to move from the equilibrium is by earning a higher amount and saving it.

With low income levels in the country and substantial number of informal workers, India needs to look at vulnerability within jobs as a criterion in itself while assessing jobs problem. In order improve the conditions, the jobs created in the country need to assure a certain level of stability and redressal mechanisms. More than skilling, the government needs to create avenues for job creation. A good starting point would be to modify the labour laws and reduce the cost of doing business in the country.

Putting Salary Reform into Perspective

This is a guest post by Karthik Krishnan. It is a rejoinder to our guest post earlier today by Suman Joshi, ‘The Unintended Consequences of Basic Salary Reform’.

A lot is being said about the government move to cap basic income + allowances at 50% of Gross Salary.  Some are calling it an overreach, some are talking about reducing the disposable surplus, and others are calling it a method to bring in more funds into EPFO, thus reducing the social security burden of the country.

A lot of what is being said on this account does not take into consideration the actual practice on the ground. Amazingly, the cap proposed by the government is more benign that the interpretation EPFO enforcement officials have taken.

For example, consider this simple query in the forum for HR professionals where an enforcement officer has decided that 65% of Gross should be PF eligible salary. Or this news from 2014 about how the EPFO is going after firms where the Basic is below 50% . Based on my experience of managing payroll and EPFO officials across five industries and six different states, they tend to demand that the PF Wages be 60% of the Gross minimum. Sometimes they achieve this by coercion; sometimes by issuing an evasion notice: the dreaded Form 7.

Their power comes from the definition of wages itself as per PF Act:

“basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include

– (i) the cash value of any food concession;

(ii) any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

(iii) any presents made by the employer;

Now, as per any PF enforcement official, anything not mentioned above is part of Wages, their favourites being Special Allowance, Performance Allowance, Hardship Allowance and Transport Allowance.  The EPFO office is littered with such cases where the officials have issued attachment orders against top corporates of India to make them pay PF on these components from date of inception with interest.

Moreover, except for the fat cats in Information technology and some category A companies, the bulk of the country uses the PF to be capped at statutory limit method to increase take home of employees. The current cap is Rs.15,000 (for a long time, it used to be Rs 6500 and shot up to Rs 15,000 in a single day from September 2016), so even if your salary is Rs 40,000, you pay PF capped at Rs 15,000,  so change in allowance will not make a huge difference to this segment.

Moreover some states like Telangana have defined their minimum wages as Basic+DA and not gross salary, so as such the entire minimum wages (the bulk of the country in the organised sector is at this grade only) is already subject to PF. There are many adventurous people in this space who are operating at PF wages of even 30% of the Gross, and those are the segments which are likely to be worst affected. This segment was brought into the organised sector by being a little lax on enforcement, with officials looking away from MSME-segment employers who keep the PF wages below 60%. There is no way this group is going to settle for a lower take-home, so the option before the employer is to go back to the unorganised sector and skip the whole process , which unfortunately is no more possible due to the massive data collation that the department does, so employers will be forced to increase the CTC to maintain the same take-home in most cases.

In all this, I haven’t yet spoken about the other major social security ESI cause. ESI always has been on Gross and is not bothered with classification of allowance.

So, in effect, this move by the government will not even touch the higher echelons of the salary bracket–aka people who can read this piece. It will affect the bottom-of-the-pyramid people, but not by much. Just as strict enforcement of PF has led to rapid increase in organised workforce, we will settle into a rhythm with the establishment bearing the cost.

In parting, I just want you guys reading this to know that the government is pegging the limit lower than what they have been on the ground, where they used brute force. So why the fuss?

Why Won’t You Accept My 10 Rupee Coin?

The 10 rupee coin seems to be out of favour with the general public. It is getting increasingly difficult to use it as a means of payments. Vendors and customers are refusing to accept it. The Business Line reports: “From roadside vendors to even beggars, people have started saying a polite ‘no’ to the Rs 10 coin”. The problem is that many people believe that the coin is no longer legal tender. The RBI has issued multiple circulars and notifications urging people to accept the coin and reaffirmed the legality of the coin. Even banks have begun to refuse the coin as they have no space to store them, reports The Hindu.

Fiat money works on trust. Trust in this case takes two forms – trust in the government that has issued the currency and trust that the others in the system will accept the currency as a payment method. With the 10 rupee coin, both forms of trust are rather low. Social media and Whatsapp have had its role to play in spreading rumours about the coin. The RBI even tackled this in one of its notifications:

It has been reported that some less-informed or uninformed persons who suspect the genuineness of such coins are creating doubts in the minds of ordinary people including traders, shop-keepers, etc., impeding the circulation of these coins in certain pockets of the country causing avoidable confusion.

The Reserve Bank has advised members of the public not to give credence to such ill-informed notions and ignore them and continue to accept these coins as legal tender in all their transactions without any hesitation.

Payment systems and currencies have huge network effects. It gains value with more number of people using it. A currency in circulation gains acceptability based on its intrinsic value and the expectation that a large number of people will accept it as a form of payment. There are known instances where cigarettes have been used as currency in prisons because everyone else agreed on its value. In today’s fiat money system, the currency has no intrinsic value; only a government mandate declaring it as legal tender. The currency gains value because everyone else uses it.

However, in the case of the Rs 10 coin, no amount of government (RBI) assurances and orders has managed to infuse trust. Wonder if this is another side effect of demonetisation?

The Unintended Consequences of Basic Salary Reform

This is a guest post by Suman Joshi.

There’s never a dull day in the political economics of the country. Recently, Business Standard carried a report which said that the Centre is planning to reform labour laws. As per the proposal, the government will mandate private companies to structure salaries in a way that basic income + allowances amount to at least 50% of total salaries  for calculating social security benefits.

The road to hell is paved with good intentions. While the intent of the government may be to increase social security cover, if this is implemented, it will have significant bearing on corporate affairs and human resources within organisations.  We can analyse this based on intended and unintended consequences .

The intended consequences could be:

  1. Social security contributions will increase and hence, the government will not need to further plan for social security of people
  2. The government will be able to mobilise more funds for social-sector spending through increased tax inflows since direct taxes take into consideration basic pay. If basic pay goes up, keeping the current rate of tax, the amount of tax will increase.

However, the unintended consequences could be disastrous.  Here are some which are top of mind.

  1. On a macro level, if the cash in hand with people reduces due to increased contribution to social security and increased taxation, it will lead to contraction in demand in the economy. At a time when private consumption is low, this move could be disastrous for the economy.
  2. Corporates, fearing higher wage bills, may actually reduce permanent hiring and resort to contractual employment which will be beneficial for both parties (companies and prospective employees) . If this happens, the primary intent of the move itself will be defeated as social security contributions will reduce with contractual employment
  3. The reduction in disposable income will also lead to reduction in investment opportunities. So an individual who otherwise would have invested in mutual funds or other instruments may stop doing so. Financial markets will not get the boost they need.
  4. From a perception point of view, the “less government, more governance” image that the government is trying to cultivate will take a hit. Corporates will see an absence of leeway to design innovative compensation packages, and will not be able to attract the best of talent from across the globe.

Here’s what the government should do: Anticipate the unintended consequences and get out of the way! Allow companies to design a compensation structure that suits their industry best, and just give a minimum contribution rate so that each industry comes up with its own best practices. The government needs to focus on making the market for financial planning robust so that the consumer is presented with the best options to plan for her social security, and stop adopting a paternalistic attitude towards an individual’s personal finance planning.

Market Microstructure and Monetary Policy

Conventional wisdom holds that the monetary transmission mechanism (MTM)– a collection of pathways that connect the central bank actions such as increasing repo rate to real economic decisions such as taking a home loan–is quite weak in India. In theory, MTM is supposed to act in two separate legs. After the monetary policy committee decides to change policy rate, the RBI conducts liquidity management operations to bring overnight interest rate which happens to be operating target–the weighted average call rate (WACR)–within the policy rate corridor.

Since WACR, at the margin, determines the funding cost to the banking sector, it should ultimately change banks’ benchmark lending rates and affect economic variables like investment and savings etc.

But there is theory and there is practice. Recent repo rate hike by the RBI has been a very different story altogether. After the hike, there seems to be plenty of liquidity in the system. RBI is still conducting reverse repo operations to mop up excessive liquidity.

On the other hand, even before the hike was announced, a number of banks led by the State Bank of India and ICICI, had already increased their lending rates, increasing the borrowing cost both for prospective and existing borrowers.

Rather than the textbook monetary mechanism, interest rates seem determined by the market leader and imitated by other banks. There are striking similarities with  the Stackelberg market leadership model. The bottom line is that market microstructure is an important part of the price formation in Indian banking sector.

In this respect, Urjit Patel committee’s observations about the India-specific peculiarities of the MTM may be recalled:

Significant asymmetry is observed in the transmission of policy rates changes between surplus and deficit modes suggesting that maintaining suitable liquidity environment is critical to yielding improved pass-through.

Could it be that the ‘significant asymmetry’ is less due to liquidity environment and more due to market structure? The hypothesis can not be ruled out.


US should get more tough on China!

The United States struck a deal with ZTE with a penalty of $1 billion and $400 million in an escrow account to end the sanctions imposed against them. The deal also includes a putting in a new compliance department in the company which will report directly to the new chairman.

The consensus is that United States is letting ZTE, go away without getting too much in return. At least they could have imposed a larger penalty to send signals to companies looking to do business with North Korea, Iran, and Russia about the costs of doing so.

Moreover, this will not only harm long-term US interests in the technological space but also give a signal to the Chinese that the United States is willing to compromise on any future conflicts including trade if token solutions are provided directly to President Trump.

Not only that, the US government has mixed in different fields of trade, domestic law enforcement, and national security, without giving clear details on what are the national security risks of letting in ZTE back into the US.

The larger picture is of China challenging the United States in each and every sphere for global dominance and will lie, cheat and steal its way to essential technology, Intellectual Property to further strengthen itself. It’s upon the United States to take more proactive measures to curb this while it still has time, otherwise, it will be too little too less.


Consumer Confidence in the Economy has Diminished

The Reserve Bank of India recently released the consumer confidence survey, which had some interesting insights. The survey was conducted in May with a sample drawn from the 6 major cities of New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad. So, we must be aware of the extreme urban bias of the survey. Nonetheless, consumer perception about their current state and their expectations about the future can sometimes capture what the statistical data cannot.

In short, 48% of the population believe that the overall economic condition has worsened from a year ago, while 32% believe that their situation has improved. The rest believe that there is no significant change.

These tables from an article in Mint captures the summary of the consumer confidence survey.

Similarly, nearly 44% believe that their job situation has worsened and a majority of people believe that their incomes have remained constant in the last one year. This should ring alarm bells for the ruling government. In a fast growing economy, it should be worrying if a majority of people believe that there is a worsening or even a status quo of their income, job prospects and overall economic conditions.

The perception of those surveyed are contrary to the data. While GDP growth in the latest quarter has been the highest in the past two years, people believe that the economy is siding. Inflation perception does not correlate with the data as well. People largely believe that the inflation situation has improved in the past year, though CPI has been rising continuously.

The question, then, is whether we can take the results of this survey seriously. The answer is yes. People make decisions based on their perception and expectations of the future. They do not necessarily follow data released by the Central Statistical Office. Those decisions can result in a self-fulfilling prophecy. If enough people believe that the economic situation will worsen, they will postpone investment and big consumption decisions, and will choose to save instead. This will result in reduced demand and slack in the economy.

On that note, it is slightly reassuring to note that people are quite optimistic about the future. A majority of the people believe that all 4 of the parameters spoken above will improve in the coming year. However, the article also points out that the numbers were higher in 2014.

Women: The Unpaid Workers

“With an increase of 22.3 million in the male workforce between 2004-05 and 2009-10 being virtually cancelled out by a fall of more than 21 million in the female workforce, the need to understand the gender dimensions of employment trends in India has acquired a new urgency.”

Let the statistic sink in. The paper on ‘Gender Dimensions: Employment Trends in India, 1993-94 to 2009-10’ by Indrani Mazumdar, Neetha N, drives home the magnitude of the problem in front of us. The authors highlight that “the most striking revelation of the National Sample Survey Office’s (NSSO) 66th round survey is a significant fall in the Female Labour Force Participation Rate (FWPR )between 2004-05 and 2009-10.” The paper expands on how the liberalisation, unlike the popular opinion, did not lead to an increase in the female labour force participation.

One of the key insights of the paper is the drastic increase in the number of unpaid women helpers. As per the NSSO, the employment activity categories have been segregated as self-employed, regular salaried and casual labour. Out of all the three segments, the highest proportion of female workforce is in the self-employed group. However within the self-employed group, the largest proportion of women are employed as unpaid women helpers. From 2004-2009, the total number of employed women rose from 61 to 72.5 per cent, while the regular salaried women only accounted for 9 per cent of the total number. These numbers clearly show that the increase in the FLFPR was mostly due to the increase in the unpaid job rather than the formal jobs.

The paper also shows how the characteristics of the unpaid jobs also varied between rural and urban regions. In rural regions, unpaid workers vary from peasant to supervisors. The jobs are also significantly dependent on the economic background of the household. For instances, the women are usually supervisors only if the land is owned by either their husbands or in-laws or fathers or parents. In urban spaces, the nature of the job is largely different as 43 per cent of the women are engaged in community and personal services which includes domestic workers, teachers, launderers, beauticians, and so on. The second biggest sector that hires unpaid women in urban region is the manufacturing sector (primarily home-based, piece-rated work). 

This disparity in the type of jobs and the variety of them is an indicator of how most of the women work at minimal wages and how vulnerable their jobs are. While in rural regions the family income defines their jobs, in the urban spaces they are mostly engaged in low wage and high risk jobs. With the large segment of women working in the informal spaces like domestic help and agriculture, one of the keys solutions to look at can be to formalise these sectors. A good example would be the increase in the number of online platforms like BookMyBai.

Payment Chaos After Visa Card Crashes

The Visa payment system had crashed on 2nd June due to a network error. This resulted in chaos in the UK and some other parts of Europe. Quite a few people were unable to make the necessary payments or make purchases.

This led to customers being stuck at long queues in departmental stores and even in front of ATMs while attempting to withdraw cash. Retailers were left unable to take payments in shops, bars and other outlets, forcing them to resort to only taking cash or not making sales at all. Petrol stations and toll booths were unable to process the payments, leading to huge queues again.

Apart from customers who use Visa cards, many other financial systems who have built products on top of the Visa infrastructure or retail stores who used Visa card machines were also affected by the network outage.

While the issue was resolved in a day and a half, this incident should give pause to the blind race towards a cashless society. Electronic systems can fail or be hacked, which can leave thousands stranded. Always good to have cash as an option.

Government should divest 100%, not 51% of bank shares

The government plans to merge four state run banks and then sell 51% of its stake in the new merged bank.  Why not sell 100% stake and divest all bank shares? The banks are a drain on government funds, and the government does not need to be present in the banking sector except as a regulator. Even the PM’s Jan Dhan Yojana does not require you to open an account with a state run bank. A private bank will do the job nicely.

The four banks in question are bleeding money. Their combined net losses were over Rs. 21,000 crore (> US $3 Billion) in the year ending March 31, 2018. If the losses keep piling up and divestment is not done quickly, we will end up in with a situation similar to what’s happening with the Air India sale – no buyers!

The Indefatigable Chinese

The US, worried about its increasing trade deficit with China, the decreasing number of jobs created at home, and the ailing steel sector in the US, decided to import a tariff of 25% tariff on all steel imports. It also decided to levy a special 200% import duty on import of Chinese steel and justified it by using the dumping argument.

Briefly, according to the WTO rules, a country cannot impose selective tariffs on goods based on geographical origin. Thus, in case a country is worried about increasing amount of steel being imported from China, it cannot selective put tariffs on only Chinese steel. Thus, the US imposed a tariff on all steel imports, which left many of its trading partners livid. It then made a few exceptions to Canada and Mexico, only to withdraw those later. However, there is one clause in the WTO, which allows you to target a country for tariffs – by showing that the country is involved in a process called dumping. Dumping is a case of price discrimination, where the producer is charging a different price to different customers. This is generally believed to be anti-competitive.

In China’s case, the allegation of dumping is based on the differential pricing of Chinese steel for consumers in China and the rest of the world. Since most Chinese steel companies are state funded, they charge a higher price at home and subsidises the export of steel, in order to conquer the other markets. China denies this, of course.

What is really interesting here though is that the Chinese have found a way to circumvent the additional dumping duties imposed by the US. China state-owned steel manufacturers are buying steel plants in other countries and then, shipping to the US, as reported in this WSJ article.

By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. But their factories outside China face few so-called antidumping tariffs.

“China is just moving whole industrial clusters to external geographies and then continuing to overproduce steel, aluminum, cement, plate glass, textiles, etc.,” says Tristan Kenderdine, research director at Future Risk, a consulting firm that tracks China’s overseas investments.

Hesteel, a Chinese state-owned manufacturer, purchased a dying steel mill in Serbia, invested millions of dollars, ramped up production and has started exporting to the US. Not only that, it also gets to circumvent the high tariff on steel by the EU. By producing within the EU common market area, it can export to the rest of the European Union, without any tariffs or customs. Similarly, China is already investing in steel plants in India, Pakistan, Indonesia, Brazil, and many other emerging economies.

What China has managed to do is put US in a very peculiar position. If it wants to stop import of Chinese steel, it would now have to impose higher duties on a whole host of countries. If it does this, it will face severe backlash from these countries, which would end up severely hurting the US.

The cleverest move perhaps is that China has now forged a joint venture with Pittsburgh-based stainless-steel producer Allegheny Technologies Inc. The joint venture is restarting a stainless-steel rolling plant in western Pennsylvania and is importing 300,000 metric tons of semifinished stainless-steel slabs from an Indonesian plant owned by Chinese state-owned companies. This puts the US in a real pickle.


The Art of Letting Go

It shouldn’t be a surprise that Air India, one of the most beloved public enterprises, is not finding any buyers. The government owned enterprise has been a cause for major concern for the union government with the size of its losses increasing over the past few years. Although, the proposal to sell the government owned airline has been put into action, it is evident that the appropriate desire has not followed.

The airline had opened up the offers for two months and did not see a single buyer concert. As per the reports,

“While the Rs 33,000-crore debt that was to be bundled with the airline was initially seen to be a major hurdle, industry analysts believe it was the government’s decision to retain 24% stake that ultimately proved to be the big deterrent.”

This is not the first time the proposal to sell the government enterprise has been brought to notice. Twice before, in 1996 and again in 2000, much more feasible plans to sell the airline, then in much better health than now, were scuttled. The problem is much deeper than this non-viable auction. The problem lies at the core strategy towards divestment.

Government with all its units and resources is still a limited body that has various responsibilities to fulfil with scare resources. Keeping this in mind, it is important to consider the sectors or firms in which the government invests, in order to ensure that the resources are being put to the best use. On of the first litmus test for this would be to see if the good or service being provided can be provided more viably by a private body. If yes, there is no reason for the government to enter the sector as the player. If not, government can either regulate it to make it feasible or provide the good or service itself to ensure their provision. This simple test helps limiting the number resources being directed to ineffective causes.

If we put Air India into this consideration, it is evident that in the current set-up there are enough players in the sector to ensure competition and air travel is increasingly becoming viable. Hence, there is no role for a government enterprise to exist in this space. Knowing this, it would be best for the government to sell all its ownership claims towards the loss making government unit. Government needs to instead invest more in strategic sectors such as defence, healthcare and education.

Even though the argument for strategic divestment have been made in previous occasions, it is quite clear that the lack of focus has made it difficult for the union government to let go of the age old air line.