New Dehli: Carnegie Endowment for International Peace, 2019. — 47 p.The Indian economy is riding the wave of a youth bulge, with two-thirds of the country’s population below age thirty-five. The 2011 census estimated that India’s 10–15 and 10–35 age groups comprise 158 million and 583 million people, respectively.1 By 2020, India is expected to be the youngest country in the world, with a median age of twenty-nine, compared to thirty-seven for the most populous country, China.2 In the 2019 general elections, the estimated number of first-time voters was 133 million.3 Predictably, political parties scrambled to attract youth voters.4 It is therefore not surprising that, according to several surveys, the parties’ primary concern was job creation.5 The burgeoning youth population has led to an estimated 10–12 million people entering the workforce each year.6 In addition, the rapidly growing economy is transitioning away from the agricultural sector, with many workers moving into secondary and tertiary sectors. Employing this massive supply of labor is, perhaps, the biggest challenge facing India—at the very least, it requires high economic growth for the next three decades. Further, this growth must be sustainable, broad-based, and focused on creating new jobs. In the years following independence, India believed that economic growth and job creation were best achieved through the construction of large factories. Believing that large industrial firms create the majority of new jobs over time, successive Indian governments have tailored their policies to meet the requirements of these firms. Consequently, India’s traditional industry policy was built around three pillars—concessional credit, fiscal incentives, and input subsidies. A growing body of research work, however, has upended this conventional wisdom and shown that the predominant source of job creation is firms that start small and formal and eventually grow into medium-scale enterprises. This is a problematic finding given that the vast majority of enterprises in India begin as small and informal and remain so.7 Further, comparative data from developing and developed countries demonstrate that there is a “missing middle”—a lack of medium-sized enterprises.8 In fact, recent research shows that, even among smaller firms, start-ups and young firms are the primary job creators.9 Despite this knowledge, the policy levers for promoting economic growth and job creation continue to remain the same. Worldwide, governments, especially at the provincial and local levels, have been locked in a destructive race to undercut each other in offering concessions to attract large investments.10 For example, in the United States, local governments offered huge concessions to bring Amazon’s second headquarters to their area.11 In India, states have been offering unsustainable fiscal incentives and input subsidies to attract large companies such as Foxconn.12 This enthusiasm may be misplaced, however, as research indicates that job creation may be best achieved by encouraging the educated to become entrepreneurs and by creating favorable conditions for their enterprises to grow. Additionally, educated entrepreneurs and managers have a large positive impact on firm productivity.13 Formulating the right strategy for industrial development and employment generation is particularly important for India, which is undergoing a demographic transition. The number of youths entering the workforce each year (10–12 million) is equivalent to the entire population of Belgium or half that of Australia. This change in population offers a potential demographic dividend—a great opportunity to boost the country’s growth, provided that the economy can generate productive jobs for these new entrants. For fiscally strapped governments, supporting the growth of large corporations at the expense of job-creating start-ups and young firms is evidence of an unproductive distribution of scant resources. Research findings related to entrepreneurship, business growth, and job creation—as well as a comparison of India’s private sector with those of other countries—reveal an alternative path forward for generating productive jobs in India. Seven findings are particularly relevant: - Although micro businesses dominate most countries’ economies, India’s economy has an excessive proportion of less productive, informal micro businesses. - Employment in India is concentrated in the micro businesses, whereas in developed countries, it is concentrated in formal small and medium-sized firms. - Productive jobs are created by firms that start out as formal. - New and young firms create more jobs than older, established firms. - Growing and efficient firms are founded and run by educated entrepreneurs. - Older firms in India exhibit lower productivity than firms of similar ages in developed countries. - India has a deficit of productive, job-creating entrepreneurs and an excess of informal entrepreneurs focused on surviving. - Based on the findings, it is clear that policies aimed at creating jobs should support, first and foremost, the establishment and growth of new and young formal firms. These policies should make it easier and less costly for entrepreneurs to start and grow a firm.
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