Mapping India’s Economic Future: Jobs, Growth and Banking Reform

Manish Sabharwal is co-founder and executive chairman of TeamLease Services, one of India’s leading human resource service companies. He is also on the board of the Reserve Bank of India. He spoke with Knowledge@Wharton recently about a wide range of topics affecting India’s economic outlook, which is shaped by the complex forces of regulatory reforms, formalization of jobs (versus informal jobs), increasing technology and shifting traditions. Drawing from his education and experience, Sabharwal shared his view of where India is headed.

An edited transcript of the conversation follows.

Knowledge@Wharton: Does India have a jobs problem or a wage problem? Why does that distinction matter?

Manish Sabharwal: I think the diagnosis is very important because if you think the problem is jobs, you’ll throw money from helicopters and bust the fiscal system. If you think the problem is wages, then you need to think about productivity. I don’t think India has a jobs problem. I think we have a wages problem.

Most people who want a job have a job, they just don’t have the wages they want. Our official unemployment rate of 4.9% is not a fudge. If you think the problem is jobs, you’ll do that make-work program like NREGA (India’s National Rural Employment Guarantee Act), which converted a high-growth, low-inflation economy into a low-growth, high-inflation economy between 2004 and 2014. But if you think the problem is formalization, you will recognize that a 10-year plan is not 10 one-year plans and do formalization, industrialization, urbanization, financialization and human capital. The structural reform of the Indian economy was long overdue. We were stuck in a low-level equilibrium. So, I think the problem is wages. The only solution is productivity.

Knowledge@Wharton: The number of formal jobs in India is often underestimated. What’s a more realistic way for the formalization process?

Sabharwal: I think the number that goes around in people’s heads is India is 90% informal employment. I think it’s about 75% because if you take survey data and administrative data, you get different answers. But the most important thing is survey data is quite unreliable.

I just was part of a committee in India that looked at labor market data. A total of 27% of Indians say they work for an employer with more than nine employees. But only 1.5% of employers say they have more than nine employees. This is not a reconciliation problem. This is an existential sort of question. If you say that we have to get our survey data better, let’s look at social security, let’s look at health care insurance, let’s look at government employment, let’s look at pensions. That number is about 100 million to 125 million. So, 20% to 25% of the labor force, maybe, is in the formal sector.

“I don’t think India has a jobs problem. I think we have a wages problem.”

Knowledge@Wharton: How does the labor market need to be reformed to keep increasing the number of formal jobs in India?

Sabharwal: I think you have to come at it from the demand side. India has 63 million enterprises. Twelve million of them don’t have an office. Twelve million work from home. Only 8.5 million pay the mandated indirect GST (Goods and Services Tax). Only 1.3 million pay the mandated social security. Most tragically, there are only 19,000 companies in India with a paid-up capital of more than $1.5 million. Sixty-three million enterprises means nothing if it translates to 19,000.

I think this sort of sense of humor about the rule of law, which has encouraged this massive informal sector that doesn’t pay the right wages, has to go. That’s why you have to look at bankruptcy laws, which have been passed in the last year; the GST, which was passed a few months ago; the demonetization, which was done 12 months ago; the real estate law, which was passed; the ease of doing business ranking, which jumped 30 ranks recently. All of this is connected. People are not given credit for having a plan. But the only way you would formalize India is by making regulatory arbitrage difficult.

Knowledge@Wharton: You wrote an article on how demonetization was good for job creation. Can you explain your point of view?

Sabharwal: The informality of the Indian economy has been encouraged by various causes. But the excess use of cash corruption was an important part of that, and the lack of financialization. One year after demonetization, we have concluded that there’s $50 billion extra on a daily basis in the banking system. If you take a six multiplier, that could be $300 billion in new bank loans. We have about $50 billion of new financial assets…. Gold and real estate, which are really [ineffective] savings instruments from a political and an economic perspective, are down. The biggest upside of demonetization has been digitization. There were 0.1 million transactions per month on our mobile platform. Now it’s up to 73 million a month. In one year, we have gone from 0.1 million to 73 million, and we’re just getting started with that.

But I think the biggest upside for demonetization has been ending the sense of humor about the rule of law, that you can get away with [using] cash. It doesn’t matter how the law is written, how it’s interpreted, practiced and enforced. If we increase the costs of informality and reduce the costs of formality, that will put India on that trajectory for higher productivity, higher formal jobs, higher wages, and put poverty in the museum that it belongs.

In political imagination, it’s easier to think about fiscal policy or monetary policy. But I think structural reform was so overdue in India. We’ve had a lot of disruption. This is a short-term pain, we will acknowledge. But I think it’s worth the long-term gain.

Knowledge@Wharton: When demonetization happened, there was a piece in The Economist titled “The Dire Consequences of India’s Demonetisation Initiative.” They described it as a bad idea, badly executed. One year on, how do you and others in India feel about demonetization? What could have been done differently?

Sabharwal: The Economist has not been not a great friend of India in the last few years. I don’t think they have found anything right about what’s going on in India. I’ve chatted with them about it. But my sense is that the Indian state’s capability of execution is quite low. Traditionally, the brain was not connected to the backbone. That has been fixed. But now the backbones are not connected to the hands and legs. The last mile of the Indian state, whether it is the taxation system or the inspectors or the banks, have human capital that has diminished so much over the last 10 years. They have so underinvested in technology. India’s scale means their processes have not kept up. If you traditionally take an operations view of any company, people, process and technology are all lacking in the Indian state.

“The informality of the Indian economy has been encouraged by various causes.”

My sense is the biggest lessons of demonetization are we need civil service reform. We cannot have these permanent, generalist civil service. They are unspecialized. They’re not ready for India’s scale while the country is already moving faster than them. The private sector’s moving faster than them. The government has an execution deficit, the private sector has a trust deficit, and non-for-profits have a scale deficit. But the government execution deficit showed up in both the GST transition and the demonetization, which doesn’t attack the reasons that it should be done. It just tells us that we need to move much faster on civil service reform than we thought we did.

Knowledge@Wharton: What kind of civil service reform is most urgent?

Sabharwal: Oh, just a fear of falling and a hope of rising. There is no performance management. Today, 98% of Indian civil servants are ranked outstanding. That’s mathematically impossible for everybody to be above average. I think we need punishment and reward, more specialization, younger people getting top jobs. Right now, you can’t be secretary in the government unless you’re 58 years old. Adopting the colonel threshold of the army, where if you’re not shortlisted for promotion, you retire at 50. I think a forced curve, so you can’t rank 98%, is needed. RBI is the first public institution that has now adopted a forced curve. It’s 20/20/60, so you can’t rank everybody outstanding. I think civil service reform is largely around performance management, specialization and tenure.

Knowledge@Wharton: The other thing one often hears in the context of demonetization is the impact it has had on digital payments. How do you see the future of digital payments in India?

Sabharwal: We all have China envy, right? I think what China has done in the last 10 years is remarkable. It would have been a huge gift to India’s poor if we had figured that out. Because now there is the JAM trinity — the Jan-Dhan millions of accounts that were opened up; Aadhaar, which is India’s biometric program; and mobile penetration is now reaching almost 700 million. India is finally getting to critical mass with the plumbing for digital payments

Demonetization was a shock to the system of cash and a huge rocket for digitization. I think that the real time gross settlement, or the real time debit/credit, which most advanced economies don’t have, is possible because of biometrics Aadhaar and the mobile phone. I think India can skip the learning, and I think that that will happen over the next six months.

I think Visa, MasterCard and Discover will not be around five years from now in India because we are moving payments to marginal cost. The [way these] guys have built their business, their costs do not reflect the cost of a digital transaction. Given our vision that payments is a very important part of reducing poverty, financial inclusion, financial literacy and the stuff that you’re doing at Knowledge@Wharton also, it’s heavily needed in India. But the first stage of that is just bringing payments down to marginal cost.

Knowledge@Wharton: The other aspect of digital currencies that people are talking about is the rise of cryptocurrencies. From the RBI’s perspective, how does the emergence of cryptocurrencies affect the central bank’s ability to direct monetary policy? Does the RBI have a perspective on this?

Sabharwal: I think we’re still forming the view on it. It’s still early to say what the impact of Bitcoin is, especially after it was 30% down in one week. For many of the people who were so extrapolating its growth as a store of value, something that can go down 30% is not going to work. It can then be viewed as a commodity. It can be viewed as a speculative instrument. But there was a lot of marketing going on of Bitcoin as a store of value. You can’t have 30% down in a week for a store of value. So, I think it’s probably early for us.

I think all of us recognize that cryptocurrencies matter, or some form of digitization of currencies will happen. I guess we just don’t know how right now. Central banks must be conservative institutions. The challenge is being open to innovation, competition and the upsides of that while still maintaining stability. We are experimenting, thinking about our own cryptocurrency, which may or may not be the right thing to do. But I just say it’s probably early to have big winners or losers.

“You don’t have to be Western to be modern … and technology is home turf for India.”

Knowledge@Wharton: Are you thinking about something like what’s happening in Japan, where some of the leading Japanese banks have come together to create the J Coin?

Sabharwal: Yes. We’ve only done that in cards. We’ve RuPay, which is a competition to Visa, but it’s a purely domestic card with much lower cost of transactions. Yes, it’s the same way that Japan is thinking about it. But I think it’s early to decide whether that’s the right path to take. I think one big change in India over the last few years is we don’t have to do it ourselves. But we also recognize you don’t have to be Western to be modern. I think we can figure out some things. And technology is home turf for India. There’s a lot of fintech for the world that is coming out of India, which hopefully we can use for India.

Knowledge@Wharton: I wanted to end with a couple of questions about TeamLease. A few years ago, you said the big challenge in India was not so much unemployment as employability. How has TeamLease progressed along those lines, especially since you went public about a year ago?

Sabharwal: We’ve hired somebody every five minutes for the last five years, but we’ve only hired 5% of the kids who came to us for a job. That is not only bad business, it breaks my heart. That’s why we started the industry’s first skill university. Two years ago is when it fully went live. Now we have 40,000 students because it prays to one god, which is employers.

Only 5% of my kids are on campus. The balance are in apprenticeship or online. And only 5% do a degree. But 100% have the ability to take that three-month certificate as an opening balance for a two-year associate degree. And I think degrees matter. The option to go all the way to there. Wharton is a good place to be at. It’s a better place to be from. The fundamental value is being from Wharton. I think it’s patronizing to say vocational training is usually for other people’s children, it’s not for our children. We have to give people the option. I think India has made a lot of progress in education and skills by allowing things like TeamLease Skills University, which were not allowed a few years ago, to create the space for innovation and thinks like that.

About TeamLease as a public company, everybody had scared me. “You’ll become quarter to quarter. You’ll start thinking short term.” But so far, it’s been an interesting experience with some upsides. It’s much easier to attract talent as a listed company. It’s much easier to do mergers and acquisitions as a listed company. And most interestingly, it’s much easier to hold my internal people accountable because the market tells us what our goals are and what we’re being measured by, as opposed to, for the last 15 years, just me crowing about, “We need to do 25% growth.” Now the market tells us they want 25% growth.

I think being public has been an interesting experience. People [complain] about the problems of being a big, public company but I’ve never met a small company that doesn’t want to be big. And I’ve never met a private company that, some day, doesn’t want to be public if you want to really scale. TeamLease has a real shot at being three things. We can be India’s largest private-sector employer, India’s largest private university, and maybe even the world’s largest staffing company by number of employees. If I have 5% of India’s market, I’ll be larger than Adecco just because we have 1.3 billion people in India. I think India already has more people than China.

Knowledge@Wharton: Where do you think the biggest growth opportunities for TeamLease will come from in the next two years? And what are the biggest risks you see in following that strategy?

Sabharwal: We are a child of domestic consumption. The fastest-growing segment of India’s jobs are sales, customer service and logistics. China’s farm-to-nonfarm transition happened to factories. India’s farm to nonfarm is happening to sales, not even to services. Domestic consumption is reaching critical mass. India doesn’t have the same manufacturing opportunity that China had in 1978. They got a 30-year super cycle of global growth, global openness to trade and global deconstruction of manufacturing supply chains. That doesn’t mean we should give up on manufacturing. But I think services, sales and customer service is our biggest focus. The biggest risk for us is just execution. My branding constraint is not market or product, it is just not being able to keep up with growth.

You know, my favorite quote is from American politician Mario Cuomo. He says, “We politicians campaign in poetry, but we govern in prose.” For entrepreneurs, our business plan is in poetry, and we execute in prose. Our biggest planning constraint is prose. It is IT systems that scale up to handle 300,000 calls and emails a month, which we get. It is processes that allow huge amounts of money to come in and leave every month. Just the technology to keep up with that is going to be our challenge.

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Mapping India’s Economic Future: Jobs, Growth and Banking Reform. Knowledge@Wharton (2017, December 08). Retrieved from http://knowledge.wharton.upenn.edu/article/mapping-indias-economic-future-jobs-productivity-and-banking-reform/

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