India does not create 55 lakh new jobs every year, as claimed by a new report
A recent research report titled “Towards a Payroll Reporting in India” authored by the Group Chief Economic Adviser of the State Bank of India and a professor from the Indian Institute of Management, Bangalore has caught the media’s and the Prime Minister’s fancy. Ostensibly, the main objective of the report was to make a case for a better payroll reporting system in India, which is perfectly justified and needed. But, along the way, it also made an extravagant claim that 55 lakh new jobs are created every year in India. Unsurprisingly, the Prime Minister ignored the case for a better payroll system but pounced on the 55 lakh new jobs number, citing it to claim in an interview that his government is doing a splendid job in creating new jobs. Unfortunately, it is a case of data analysis gone berserk. The celebrations are completely unjustified.
Flaws in analysis
How did the report arrive at the 55 lakh new jobs number? It used data from the Employees’ Provident Fund Organisation (EPFO) which registers employees from the formal sector for provident fund benefits. It found that as of November 2017, there were 36.8 lakh new members in the age group of 18-25 years who registered with the EPFO vis-à-vis the previous year. It assumed that any 18- to 25-year-old registering with the EPFO implies that he or she found a new job in the organised sector. It then extrapolated this November 2017 data to the full year of FY-2018 and boldly claimed that 55.2 lakh new jobs were created in FY-2018.
It doesn’t take much to realise the flaws in this analysis: New 18- to 25-year-old EPFO members do not automatically mean net new jobs in the economy; an informal job that turns formal with an EPFO registration does not mean it is a new job; cherry-picking an EPFO data point and post-demonetisation/Goods and Services Tax (GST) time frames lead to these grossly misleading conclusions.
The Indian economy was subjected to massive external forces of formalisation by the twin forces of demonetisation in FY-2017 and the GST in FY-2018. As we know through numerous surveys, demonetisation resulted in thousands of employers retrenching a large part of their informal workforce paid in cash and registering the remaining employees as formal workers with benefits such as provident fund. This upheaval will show up as new formal jobs in the EPFO data set but it does not mean net new jobs were created. The study does not adjust for these effects. This was the phenomenon that played out post-demonetisation in FY-2017.
Next came the GST-induced formalisation in FY-2018. The GST by design was a policy of formalisation of the Indian economy through a networked system of tax credits which could be claimed only if the business was formally registered under the GST. It is likely then that the GST coerced thousands of small and medium businesses in the country to transition at least a part of their workforce from informal to formal employment. The costs of formalisation may have resulted in many firms cutting costs or even shutting down. The EPFO methodology does not capture any of these costs of forced formalisation but merely showcases the new formal employees as new jobs. In other words, if, say, for every five informal employees, four lost their jobs due to the GST and demonetisation and one became formal, this study will count it as one new job created. Instead, the truth would be that four jobs were lost and one job turned formal from informal, not new. Thus, the study conflates what could be formalisation gains with new jobs.
It is well-known that when an employee loses her job or stops working, her membership from the EPFO database is not removed automatically. So, the EPFO data set may reflect new additions accurately but not deletions, i.e. job losses. When we talk of new jobs in the economy, we usually mean net new jobs, not gross jobs. So, it is somewhat misleading to claim that the economy has “created 55 lakh new jobs” when we do not know how many lost their existing jobs.
If one had to truly separate GST- and demonetisation-induced formalisation effects, then the study should have compared the EPFO numbers of FY-2016 and FY-2015. We did exactly that. And what did we find? In FY-2015, the total number of contributing EPFO members grew 7%. In FY-2016, it grew 8%. But after demonetisation, in FY-2017, it grew 20% and by December 2017, it had grown a further 23%. Are we then saying that the Modi government did not produce enough jobs in the first two years but, miraculously, after demonetisation and the GST, there were jobs galore, as per the same EPFO data set? Cherry-picking data points (EPFO data) and time periods (FY-2017 and FY-2018) are old, time-tested statistical tricks to arrive at fallacious conclusions.
Accumulated deposits in banks
Let us understand this with another example. It is generally agreed that growth in total accumulated deposits in banks is an indicator of the robustness of the economy. The total number of deposits in all banks in India was Rs. 6.22 lakh crore at the end of FY-2016. By the end of FY-2017, bank deposits had grown to nearly Rs. 11 lakh crore, a 76% increase of Rs. 4.8 lakh crore. Can we then infer that Indians grew substantially richer in FY-2017 and the overall economy is very robust? Obviously not because demonetisation forced people to deposit their currency into banks which is why bank deposits grew in FY-2017. Instead, if we combine the value of currency and bank deposits and compare, we find that there is actually a 5% decline in FY-2017, not a 76% increase! So, if we cherry-picked just bank deposits as a data point and chose the time frame as FY-2017, we could have shown that Indians had become inordinately richer. That does not mean it is true. This is what the EPFO study does in making a case for 55 lakh new jobs in FY-2018. It neither accounts for job losses nor adjusts for induced formalisation. It is patently false and misleading.
India’s jobs situation is a very grim challenge that must be acknowledged, confronted and for which we must debate solutions. All evidence, confirmed by both governmental agencies and analysis by independent organisations like the Centre for Monitoring of Indian Economy and well-known labour economists, have clearly demonstrated how growth in new jobs (formal and informal) has slowed down dramatically. A serious issue such as lack of jobs for millions of youth cannot be wished away by hiding behind misleading data analysis and a media spin.
Published on 22 January, 2018 in The Hindu