GST JOB CRED­ITS: A FIS­CAL MEA­SURE TO IN­CEN­TIVIZE JOB CRE­ATION

Mint ST - - VIEWS - EX­PERT VIEW VENKATESH PARTHASARATHY

There is con­sid­er­able spec­u­la­tion in the pub­lic do­main that the govern­ment may be con­tem­plat­ing fis­cal stim­uli to push the econ­omy to­wards a higher growth tra­jec­tory. Fis­cal re­lax­ation can be done in two ways—the govern­ment can ei­ther spend more than it earns, or can forgo rev­enue and hope that con­sump­tion in­creases.

The cor­pus of eco­nomic anal­y­sis ded­i­cated to the study of the mul­ti­plier ef­fect of in­creased pub­lic spend­ing is huge, and there are enough cases that are avail­able for em­u­la­tion.

How­ever, in the In­dian in­stance, sig­nif­i­cant sup­ply side con­straints ex­ist, which may mean that the true mul­ti­plier ben­e­fits of the loos­en­ing of the purse strings by the govern­ment may not ac­crue to the econ­omy.

While the mul­ti­plier works well in the­ory, in re­al­ity it is im­prac­ti­cal to as­sume that the govern­ment’s ini­tia­tives will de­liver the goods with­out caus­ing real wage in­creases in sec­tors with sup­ply-side con­straints. This may then lead to the sit­u­a­tion of stag­nant growth on one hand, and in­fla­tion­ary pres­sure due to higher wages and sup­ply con­straints on the other.

Hence, at­tempts to cor­rect the sit­u­a­tion in the next few months only by spend­ing more may end up cre­at­ing an in­fla­tion­ary sit­u­a­tion and may ag­gra­vate cur­rent tra­vails.

One novel way by which the govern­ment could have its cake and eat it too, would be to of­fer a job credit scheme for gen­er­at­ing jobs at the en­try level of wage earn­ers.

With such a scheme, the cu­mu­la­tive amount of min­i­mum wages paid out by any en­ter­prise could be in­cluded in the list of items for which GST in­put cred­its are given. This will def­i­nitely in­cen­tivize em­ploy­ment re­ten­tion, and may even in­cen­tivize em­ploy­ment gen­er­a­tion.

Il­lus­tra­tive ex­am­ples are men­tioned be­low to show how this could work:

Small shop­keep­ers/traders/fac­tory/ser­vice provider any­where in In­dia. This type of en­ter­prise is the great­est con­sis­tent gen­er­a­tor of mass em­ploy­ment in In­dia and also the one most at risk due to work­ing cap­i­tal and trade cy­cle pres­sures. The Sixth Eco­nomic Cen­sus re­leased by the min­istry of sta­tis­tics and pro­gramme im­ple­men­ta­tion (MOSPI) places the num­ber of such es­tab­lish­ments that em­ploy between 1-5 work­ers at 55.86 mil­lion, out of a to­tal of 58.49 mil­lion es­tab­lish­ments (bit.ly/2gblnlk). What­ever is paid by such an es­tab­lish­ment as the min­i­mum wage, should be el­i­gi­ble for a GST Job Credit

Any em­ployer of a large num­ber of un­skilled labour. As­sume a construction com­pany em­ploys 2,000 un­skilled labour­ers on site. The GST credit should be avail­able to the ex­tent of the wage pay­out to th­ese 2,000 work­ers. Out­sourced labour too should be brought into the am­bit of such a credit.

The key pos­i­tive spin-offs of a GST Job Credit scheme could be:

This mea­sure may lead to more en­thu­si­as­tic com­pli­ance with the min­i­mum wage struc­ture

This mea­sure has a high pos­si­bil­ity to in­cen­tivize en­ter­prises to max­i­mize hir­ing at the min­i­mum wage among the small and un­or­ga­nized en­ter­prises that seem to be the main driv­ers of em­ploy­ment for the un­skilled in our coun­try

The con­se­quent im­prove­ments to prof­itabil­ity and cash flow will have a dis­pro­por­tion­ate im­pact on morale, par­tic­u­larly among small busi­ness-own­ers

In large en­ter­prises, such a mea­sure may slow the cur­rent ten­dency to use au­to­ma­tion in place of peo­ple

This credit scheme will in­cen­tivize the small en­ter­prises to join the fis­cal main­stream

This a sim­ple trans­fer mech­a­nism. Rather than pur­sue the se­quence of tax col­lec­tion, pub­lic spend­ing and then the wait for the mul­ti­plier ef­fect, the govern­ment achieves a sim­i­lar ef­fect through the em­ployer-em­ployee trans­ac­tion

Even ad­vanced economies have used this type of job pro­tec­tion schemes to work them­selves out of a tight cor­ner. Sin­ga­pore’s ef­forts dur­ing the tough years of 2008 and 2009 of­fer us valu­able lessons and can be un­der­stood through the then Sin­ga­pore Fi­nance Min­is­ter’s Speech in 2009 (bit.ly/2wpfzbu). Sec­tion C—the job credit scheme—is par­tic­u­larly in­ter­est­ing

The pre-req­ui­sites for such a scheme are the same as what the Eco­nomic Sur­vey 2016-17 states as pre-req­ui­sites for the Uni­ver­sal Ba­sic In­come scheme- namely adop­tion of JAM (Jan Dhanaad­haar-mo­bile) and Cen­tre-state ne­go­ti­a­tions. On those two fronts:

The min­i­mum wage cred­its can be linked via the JAM mech­a­nism so that those claim­ing the set-off are able to pro­vide proof that such pay­ments have ac­tu­ally been made. The Job Cred­its can be ap­proved based on the data re­ceived on pay­ments made

The GST coun­cil—which is a lead­ing fo­rum for cen­tral-state re­la­tion­ships cur­rently—should be able to take such a de­ci­sion

While there will be rev­enue loss, the GST Job Credit scheme mer­its a se­ri­ous ef­fort to de­ter­mine the cost and ben­e­fits, and needs to en­ter the main­stream nar­ra­tive on pol­icy op­tions to boost em­ploy­ment growth.

Venkatesh Parthasarathy is an ex­ec­u­tive based in Ben­galuru. The views ex­pressed here are per­sonal.

COL­UMN

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