Court-ing Growth in India: Cut Red Tape, Create Jobs

India’s economy must create 1.1 billion well-paying jobs by 2050 before its “demographic dividend” window closes. However, neither the government’s current job-creation strategy nor a service-led approach addresses the magnitude of this problem. The fundamental solution lies in removing regulatory bottlenecks in Indian states and decongesting courts, thus creating conditions for private investment.

The consequences of stymied jobs growth: a global lens

If India fails to meet its employment needs, future government budgets will be strained by two major forces: an exponentially growing aged population and climate change.

After 2050, the dependent population will start growing exponentially. The already declining fertility rate trajectory means that the working age population will peak around 2050. If most have no formal social security, the government must step in when social security spending is already strained.

Research has shown that a 1°C rise in temperature would decrease output (and tax revenues) by about 2 percent in India. Climate change damage will also increase adaptation-related spending, without having commensurate tax-generating potential. Forecasts from the Climate Policy Initiative say that 6 out of 28 states already require about 5.5 billion USD annually, none of which accounts for the usual claims on government expenditure.

Some global dynamics will partially ameliorate the situation. The labor force in most industrialized nations is aging rapidly and not replacing its population. Indian citizens can find jobs in these countries, partially staving off the Indian jobs’ crisis.

But this path is not without its challenges. To start, the Indian population will be competing with other developing economies for these well-paid jobs. Second, India risks losing the brightest and enterprising individuals to countries that value their services more, otherwise known as the “brain drain.” Only by creating more well-paying (high-productivity) jobs can India raise tax revenues and avert the demographic crisis.

The Insufficient Approach

There is no disagreement that private enterprise will create most of India’s well-paying jobs. However, two incorrect notions have been in vogue: that job creation needs to be led by the service sector, and incentivizing the private sector through job subsidies is going to be a sustainable policy.

Services-led growth does not offer much bang for the buck— the employment elasticity of services sector growth is far lower than that of manufacturing sector growth. Additionally, research has shown that services-led growth entails far greater unequal economic outcomes. Higher productivity growth in high-end service jobs, coupled with cheaper consumer services, has meant that gains from growth have been concentrated in urban areas.

Government subsidies also lead to inefficient outcomes. The July 2024 government budget included $80 billion for “employment-linked incentives” to create a mere 8.2 million jobs annually instead of 20 million. Funds to develop jobs come at the cost of crucial welfare spending or spending that could be diverted to creating better infrastructure. These subsidies are, at best, a political compensation for failing to undertake essential reforms.

Unshackling the Right Solutions

The central strategy to accelerate job creation must be to create an environment that induces private sector investment to create manufacturing jobs. Factor market reforms have been emphasized, but the processes of implementing reforms matter even more.

There are three critical elements to this strategy:

First, labor reforms should be enacted at the state level, as undertaking these at the federal level involves massive political risk. State-level politics are more capable of handling the nationwide heterogeneous attitudes toward labor regulation. Research has causally demonstrated that states that made pro-employer changes had better employment outcomes than states that made pro-worker changes.

Second, regulations need to be cut. Senior management in big Indian firms devote 19% of their time to dealing with government regulation instead of the average 10% worldwide. More pernicious are the criminal provisions associated with business laws and compliance. For instance, India is one of the only countries that criminalizes check bounces in banks, regardless of the cause behind it. Easing India’s regulatory cholesterol requires repeal and decriminalizing laws en masse in the style of the Jan Vishwas Act of 2023, which either decriminalized or struck down 180+ minor offences across governmental departments.

Finally, having effective court systems ameliorates the problem of stringent regulations. Oddly enough, the states with the highest business regulations contribute to GDP, tax revenues, and industrial employment. This is not because regulations expand business but because these states have lower congestion in their high courts than comparable states.

The intellectual community in India has made significant strides in finding the cause of congestion; insufficient judges are not the reason. Various factors determine court efficiency, such as improving case management, reducing procedural delay, and improving the number of substantive hearings in a case. The Indian growth story, which was led by private sector investment, began slacking in 2011. India needs to revive the sentiment for private investment to create much-needed jobs. There is no dearth of any form of capital, but the state needs to roll itself back for this capital to achieve its productivity potential. It is a work in progress, but as everywhere else, time is of the essence.