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Is India moving towards Lewis Turning Point fast?

Most of the ongoing debates on job-creation are predominantly revolved around the reigning Modi government. This debate fuelled after two independent experts, who got access to Employees’ Provident Fund’s data and released their report on the payroll data of around 80 million workers earlier this year. They estimated in the report that 7 million jobs will be added in 2017-18. However, the report has been widely criticised on various grounds such as duplication of payroll member’s accounts, inactive accounts and payrolls added due to companies moving above threshed of more than 20 employees. The government should conduct a national survey-based employment-underemploymen data than relying on fragmented data to determine critical economic indicator.  Further, the Ministry of Labour has also released six monthly payroll additions for September, 2017 and February, 2018, saying that 3.1 million new jobs were created during the period.

The government has claimed that revised data has removed duplicates by linking the accounts with Aadhar and deleted inactive accounts but threshold issue remains the same. So, the debate is once again alive – whether these new additions to payrolls are a reflection of formalisation of jobs, which may have already existed or a creation of new jobs. This needs to be comprehended by analysing the historical prospective from the obtainable facts and figures. 

Arther Lewis (1954) defines that developing economies like India are characterised by dual economy with surplus labour – formal sector and informal sector. As economy developed or grows at a higher rate the surplus labour move from informal to formal sector. This sustained process of increase in the share of the formal sector is called Lewis process of structural change and led to what is known as the Lewis Turning Points, the point at which there is no more surplus labour left in the informal sector. At this point, dualism also disappears and a developed economy emerges.

In India, the Lewis process was at work during the last one decade from 1999-00 and 2011-12 with employment in the formal sector increased much faster than total employment.

If we take the annual net addition in formal workers or net additions to regular formal jobs was 0.97 million (9.7 lakhs) annually during 2004/5-2011/12, 0.73 million (7.3 lakhs) annually during 2011/12-15/16, while 5 million (50 lakhs) annually during 2015/16-17/18 (Figure 2). Accepting the limitations of EPFO data, the net annual addition of regular formal jobs between 2015/16 to 2017/18 are seems to be unrealistic even if we discount 20 per cent considering the above mentioned limitations and far higher than the past trend. Hence, this is necessarily formalisation of jobs a large part with an increase in the number of people who are signing up for relatively more secure and regular formal jobs. 

This may have an outcome of government several recent initiatives to promote formalisation of the economy such as GST, demonetisation and regulations on compulsory joining of EPFO.

Overall, the recent trend of movement of workers form informal to formal sector also confirms the swift pace of Lewis structural process, which was not witnessed in a long time.

The new Economic Survey written by the team of finance ministry economists led by Subramanian provides compelling evidence of how the Indian economy is becoming more formalised. The reason for this shift is important as it is not just because of the possibility of higher tax revenues for the government to spend; it is also about a profoundly different social contract between citizens and the state. There are four key shifts that are mentioned in different parts of the Economic Survey.

First, the introduction of the goods and services tax (GST) has brought more firms into the tax net. The number of enterprises paying indirect taxes has gone up by 3.4 million, an increase of 50 per cent. The bulk of the new entrants are enterprises that are in the business-to-business or export sectors, or what economists would call the production of intermediates.

Second, only around a quarter of the 240 million Indian working outside farms file their income tax returns. The controversial demonetisation decision taken in November 2016 seems to have led to a statistically significant increase in the number of new income tax filers, after controlling for obvious problems such as the previous trend as well as seasonal patterns of change.

Third, the Indian workforce is more formalised than most people believed till recently. Nearly a third of the non-farm Indian workforce of 240 million has some social security coverage. And more than half of the non-farm workforce is employed in firms that now pay taxes.

Fourth, the demonetisation shock is one reason—and perhaps not the only reason—why Indians are putting a greater proportion of their savings in the formal financial sector. Bank deposits swelled after November 2016, though the booming stock market has also made financial savings through mutual funds more attractive compared to gold or real estate.

So, more firms paying indirect taxes, more individual filing income tax returns, a big increase in the proportion of formal jobs and the increase in savings in the formal financial sector.

Is the country really moving towards Lewis Turning Point at a swifter pace? That is surely an intriguing matter. But, it will inexorably take the nation towards the next round of evolvement as a developed nation sooner or later.

(Mehta is a fellow with Institute for Human Development. Singh is founding editor of Rural Connect and a senior consultant with IHD)