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Why Has Job Growth Slowed In India? Research Team | Posted On Monday, June 17,2019, 02:44 PM

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Why Has Job Growth Slowed In India?



India is enjoying low international crude oil prices, a decent monsoon and a stable rupee. In spite of all this jobs and growth are slowing down? So why is this happening?

After the IL&FS fiasco and the DHFL debt downgrade to default by credit rating agencies, the NBFC sector is going through severe turmoil. NBFCs have no choice but to manage liquidity by slowing down on loan disbursements. They are also selling assets.  DHFL sold its stake in Aadhar Housing Finance to Blackstone for Rs 800 Crore. The liquidity crisis in the NBFC sector has resulted in a slowdown in the auto sector and also the real estate sector in India.

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Why Has Job Growth Slowed In India?

How is NBFC Slowdown Affecting India?

The problem with the NBFC crisis is the inter-linkage effect. Most industries are inter-connected with each other. HUL and Maruti Suzuki may not borrow from NBFCs, but the raw material suppliers, distributors, wholesalers, retailers and even the transporters borrow from these NBFCs. Many people avail car loans from NBFCs to buy cars. The NBFC crisis has resulted in a slowdown in private consumption, and this has impacted demand for manufacturers.

Small businesses borrow from NBFCs to meet working capital needs. In this inter-connected economy, large corporates depend on MSMEs and if they fail; well the big guys feel the pinch.

Large exporters have access to funds from banks. Sadly, their suppliers and ancillary units depend heavily on NBFCs for funds. HFCs have slowed down loan disbursement and this has led to defaults by several builders and developers. This has led to a slowdown in new housing projects in India.

See Also: What is NBFC?

Heavy Taxes on Corporates

In an ideal World, there’s no inequality in income and wealth. Sadly, this doesn’t hold true. Aggressive taxation of the super-rich and large corporates with the intention of distributing wealth among the poor, rarely works.

Let’s say a businessman earns massive profits. He invests this money for growth and expansion of the business. This means more jobs. If heavy taxation eats up all the profits of these businesses, it pours cold water on the dream of getting a good job for crores of Indians.

Take the case of the USA. Donald Trump pushed for a dramatic tax cut on US Federal Corporate Tax Rate from 35% to 15%. He may not have succeeded in this endeavor, but the top corporate tax rate was cut from 35% to a flat rate of 21%. This has strengthened the US Dollar, reduced unemployment and boosted the economy by creating lots of new jobs.

Take the case of India where large corporates with turnover exceeding Rs 250 Crores are taxed at 30%. There’s income tax on profits and dividend distribution tax on distributed profits. This has resulted in corporate earnings lagging analyst’s estimates. If the private sector doesn’t see fresh investments, it can’t retain existing employees leave alone hire new ones. The youth in India look at Government Jobs which are hard to come by. (Too many people, too few jobs). Adding to all this, the super-rich in India are emigrating to foreign countries. Nearly 23,000 dollar-millionaires have left India since 2014. A whopping 7,000 dollar-millionaires left in 2017, alone.

Take a look at MNREGA which has put money in the hands of the rural households in India. These people spend on umbrellas, plastic buckets and Chinese mobiles. There isn’t much investment in Capital Expenditure (CapEx) by Companies. Capital Expenditure is used to start new projects or increase investments by firms.

See Also: Should You Avail A Home Loan From Banks Or NBFC?

It’s a Wage Problem, Not a Job Problem:

There’s lots of talk on job slowdown in India. NSSO data says unemployment is at a 45-year high of 6.1%. Former Infosys CFO Mohandas Pai says India doesn’t have a job problem, it’s a wage problem. There are a lot of low paid jobs which don’t find favour with degree holders. A lot of people are earning Rs 10,000 or Rs 15,000 a month, which is not what a fancy degree holder expects. This is definitely a wage problem.

The solution could be the Chinese model of opening up the labor-intensive industries and building infrastructure near the coast.

This is what the Chinese did. They started labor intensive industries. They then opened up their industry to the rest of the World, inviting them to use their labor and started an export industry. They also invested in hitech R&D to help the job-seeking youth. This created chip creation and electronic assembly in China. The Chinese built coastal infrastructure, bringing down infrastructure and supply chain costs.

India must incentivize the labor intensive industries. We need proper policies to use the surplus labor.

See Also: Post Complaint On IndianMoney If NBFC Cheats You

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